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Re: Doom and gloom SWR based on 1965-1982
Old 07-19-2004, 06:11 PM   #21
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Re: Doom and gloom SWR based on 1965-1982

I'm frankly surprised that he hasnt gone blind yet. Or gotten that hairy hand thing.
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Re: Doom and gloom SWR based on 1965-1982
Old 07-19-2004, 06:23 PM   #22
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Re: Doom and gloom SWR based on 1965-1982

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I don't consider myself one of the older guys, but I remember several computers from the late 70's. What did you spend thousands on? My dad gave me a hand-me-down HP-65 in 1977 that got me started (probably around $700 new), and then I got a real computer in the form of an Apple ][ in 1979 (around $1000). The rest is history
I was a kid, but I seem to recall my (well, my dad's) Apple ][+ setup cost $2000 in 1979. Maybe the $2k includes the later upgrades from 8k or 16k RAM to 48k RAM and the dual floppy disk drives?
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Re: Doom and gloom SWR based on 1965-1982
Old 07-19-2004, 06:33 PM   #23
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Re: Doom and gloom SWR based on 1965-1982

I used to sell 'em when they first came out. One of the first machines to use dynamic ram and whoooo were those babies hot!
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Re: Doom and gloom SWR based on 1965-1982
Old 07-19-2004, 08:44 PM   #24
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Re: Doom and gloom SWR based on 1965-1982

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Mikey, I'm curious how your multi-millionaire kid is affected by the money. * I know several in that situation that just keep on working on essentially the same stuff they were before they won the software lottery. * Personally, I got burnt out on bit-diddling after 20 years, but I still get an occasional itch....
Wabmester,
My son spends money freely; I think he had enough of frugality growing up. Other than that, he still works 12-16 hour days, and he is never happier than when he is up to his eyeballs in deadlines, with a bunch of team members pulling their hair out. I believe he is still much more motivated by the challenge and the interest of the work than by the money. Burnout has sure been a frequent event among his friends, many of whom are very early ERs. But so far at least not with him.

My other boy was a bit too young to get the big grants of the early days. So he is working for good money, and intellectual stimulation. But I don't think he expects to win the lottery at it.

Re the computers- first was an Altair, then a little Mostek board with a cassette player used to save the machine language or assembly language programs, then a TI 99 with it's own very nice Basic with sprites for animation. That cost the most. I think with a couple of disk drives and some extra memory, which I think we had to buy a board for, that one was around $2500. Our next was a Dell 286, then a 386 etc etc.

I remember buying a math co-processor for the 286. I could finally recalculate spreadsheets in less than 10 minutes. I think our development software was mostly Borland C. It's been a while.

Mikey
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Re: Doom and gloom SWR based on 1965-1982
Old 07-19-2004, 09:31 PM   #25
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Re: Doom and gloom SWR based on 1965-1982

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Given that some people have brought up the idea of SWR in the range of 2%, I tried to use http://www.gummy-stuff.org/sensible_withdrawals.htm to see what the Monte Carlo based SWR could be if we use data from bad years from our recent past (1965-1982). *I believe almost everyone here agrees that those yrs are some of the worst in our history in terms of inflation and bad returns sequence combined.

Using 75% s&p and 25% treasuries, the survival rate at 3% for 40 yrs is about 91% and for 30 yrs is 97%. *Personally, I believe that's plenty safe.
Author Dr. William J. Bernstein ( the guy ***** continually misquotes) thinks 80% to 90% survivability using Monte Carlo analysis is plenty safe, too. See link:

http://www.efficientfrontier.com/ef/901/hell3.htm

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Re: Doom and gloom SWR based on 1965-1982
Old 07-19-2004, 10:24 PM   #26
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Re: Doom and gloom SWR based on 1965-1982

As long as you look at the 10-20% times it failed, the economic conditions that prevailed at those times, and you're pretty comfortable that such a set of conditions, or ones equally unpleasant, dont occur.

99% isnt "safe" if we hit the set of conditions that invokes that 1%...
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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 12:15 AM   #27
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Re: Doom and gloom SWR based on 1965-1982

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. . . I am a believer in valuation.
Hi Mikey,

I'll just kinda ignore the ***** issue, and talk about valuation and SWR . . .

Of course one of the problems with valuation is that you can't develop a metric that quantifies the valuation you really care about (ie. the ratio of current price to futureearnings). Backward looking metrics like PE or PE10 are reasonable approximations of the desired valuation provided price and earnings are not changing rapidly. But it is exactly during rapidly changing financial times when we would most like to have a valuation metric.

Valuation is not an independent variable. SWR is affected by valuation but is also affected by many other financial metrics such as inflation, employment rate, fed borrowing rates, productivity, demographics . . . It is naive to think we might be able to modify SWR based only on valuation without considering all the other factors that might have an impact on the result.

True valuation (current price to futureearnings) is, of course, already considered in FIRECALC or any other historical simulator. These simulators simply find the worst case SWR over all time. The results that calculated consider all valuations that have been observed in the past. Such an analysis considers not only valuation, but how valuation was correlated to all other important economic indicators of the past. Of course today's PE and PE10 values are very high compared even to the worst historical values. But we should remember that PE and PE10 are only poor approximations for the valuations we really care about (current price to futureearnings).

JWR did do some nice work culminating in an interesting plot of SWR vs PE10(valuation). The correlation between SWR and PE10 is easily observed in the plot. But the amount of variation in SWR that is not accounted for (historically) by PE10 is also clear. Error bars for any curve through the historical data are greater than + or - 1% for the range of data represented by history. The correlation is also clearly non-linear so that any attempt to extrapolate the historical data to PE10 ranges outside of the historical range are highly suspicious.

So, you start with a poor approximation for valuation, ignore the correlation between your poor approximation and all other factors that effect SWR, ignore uncertainties (errors) evident in the historical data and you can come up with a modified SWR -- which was only a rule-of-thumb estimate to begin with.
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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 03:06 AM   #28
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Re: Doom and gloom SWR based on 1965-1982

Author Dr. William J. Bernstein ( the guy ***** continually misquotes)...

Here's a link to an article by William Bernstein from his Efficient Frontier site that sums up some of the important points made in Chapter Two of his book "The Four Pillars of Investing."

http://www.efficientfrontier.com/ef/403/fairy.htm

William Bernstein: "I’m going to discuss the single most important issue in finance—future stock market returns—in the clearest, most descriptive, least mathematical terms possible.

"....Nobody knows what the market is going to do tomorrow, next month, or even in the next five years. And in the final analysis, what the market does over such relatively short periods is irrelevant to the average investor. What is important is return over the next few decades, and we do have a pretty good idea of what’s going to happen over such long time periods.

"The biggest area of confusion among the investing public concerns just where stock returns come from. The most popular misconception is that future stock returns somehow derive from past stock returns—that is, from the Stock-Returns Fairy. In the past few decades, the packaging of historical financial returns has become an industry bigger than the GDP of some South American nations. The silliness of this approach is obvious: if you pay twice as much for an asset as you should have, that increases the return of the guy who sold it to you, just as surely as it reduces your future return.

"So just where do stock returns come from? In order to answer this question, first ask yourself this: how much would you be willing to pay for a business that distributes $10,000 each and every year?...Thus, in the very long term, stock price increases come from only one source: increases in dividend income.

"....The value of the stock market almost exactly tracks the dividends and earnings it produces; in short, it behaves just like any other business."

The methodology used by JWR1945 to calculate SWRs takes account of the earnings they produce. The approach used in the REHP study does not; the REHP study reports the same SWR regardless of whether valuation levels are low, medium, high, or extremely high. It is not possible to accurately determine the SWR without taking the valuation factor into account. It is a factor critical to the question being examined (What withdrawal rate is safe?).
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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 03:37 AM   #29
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Re: Doom and gloom SWR based on 1965-1982

It is naive to think we might be able to modify SWR based only on valuation without considering all the other factors that might have an impact on the result.

All of the other factors are taken into account both in the William Bernstein analysis and in the JWR1945 analysis. Bernstein says on Page 73 of "The Four Pillars of Investing" that "Although the discounted dividends model (DDM) informs us well about expected returns, it tells us nothing about future risk. We are dependent on the pattern of past returns to inform us of the potential risks of an asset. And in this regard, I believe that the historical data serve us well."

These simulators simply find the worst case SWR over all time.

There are only two data points in the historical record at which we experienced the level of valuation experienced in 1929. In both of these cases, an investor taking a 4 percent withdrawal barely avoided going bust. The data is showing that a 4 percent withdrawal is not safe at that valuation level. But the studies are saying the opposite, that a 4 percent withdrawal is "100 percent safe" at that valuation level. Why?

The reason is that the conventional methodology studies do not even examine the question of what withdrawal rate is safe. All that they are determining is what withdrawal rate survived.

Someone who smokes in bed and survives the experience one or two times is not thereby justified in claiming that this activity is a "100 percent safe" one. The activity is a risky activity that in any one or two particular instances may or may not result in disaster. The same is true of the activity of taking a 4 percent withdrawal at the valuation level that applied in 1929. That withdrawal rate survived twice at that valuation level, but it was not a safe withdrawal rate in either case.
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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 05:01 AM   #30
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Re: Doom and gloom SWR based on 1965-1982

Life is not 100% safe, especially if you get killed.
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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 05:19 AM   #31
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Re: Doom and gloom SWR based on 1965-1982

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We raised and home-schooled 2 kids. Both are college graduates, and one has a net worth closer to 8 figures than 7. Neither is yet 30 years old.

Mikey,
My hat's off to you -- the true sign of success in my book is raising happy, successful, well-adjusted kids. I'll bet a big part of their success is that you and their Mom were around for them a lot. How people think their kids will turn out fine when they are abandoned to TV and video games is beyond me...

But on your other points, it sounds like you pulled together an intuitive blend of investing (financial, real estate, liquid/illiquid, systematic/opportunistic) along and leisure and family time. You had to make regular investment decisions -- when to buy and when to sell. At that time, (in the 70s) the concept of indexing, asset allocation or SWR either didn't exist or was not supported mathematically. Curious whether we have 'quantified the way things always have been' or 'made ourselves a new false god that won't stand the test of time', but I guess time will tell. I think Bernstein's admonition on his site that success rates over 80% are meaningless in an unknowable future resonates for me.

Just curious -- were you raising your kids in California? I am an east-coaster now, being a bit of a freak for doing ER in NY, but I reflect that lots of Dads in suburban SF where I grew up seemed to be doing much the same program you describe. I wonder if this might be another case where Californians might have been blazing the trail.

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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 05:31 AM   #32
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Re: Doom and gloom SWR based on 1965-1982

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*I wonder if this might be another case where Californians might have been *blazing the trail.

ESRBob
I meant to say West Coasters, but then again, people were probably doing this in Greek and Roman times,too, and a certain group in every generation just has to re-discover how to create a reasonable work-life balance.

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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 10:10 AM   #33
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Re: Doom and gloom SWR based on 1965-1982

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As long as you look at the 10-20% times it failed, the economic conditions that prevailed at those times, and you're pretty comfortable that such a set of conditions, or ones equally unpleasant, dont occur.

99% isnt "safe" if we hit the set of conditions that invokes that 1%...
Please note that intercst is saying that 80-90% safe is probably plenty safe USING MONTE CARLO. *Based on historical calculator, the SWR that was 80-90% safe under Monte Carlo, would most likely be 100% safe. *IOW, those sets of conditions that you were mentioning had never occurred in history. *Since the probability of economic and political stability of this country and the civilization for the next 40 yrs is only in the range of 80-90% per Bernstein, if you shoot for your SWR to achieve higher safety than that, you may not gain that extra safety. *IOW, even if your withdrawal rate is 0%, your chance of making it for the next 40 yrs is still 80-90%, since there might be 10-20% chance that the government may confiscate everything, or North Korea may bomb many US cities, driving everything into chaos, etc.

In the article intercst quoted, Bernstein clearly favors the withdrawal rates around 3 to 4% range. *The following is quoting Bernstein:

"Mind you, this is not a call for wild abandon. The above table constrains the retiree desiring a theoretical 97% success rate (of portfolio survival) from spending more than 3% per year of the initial real amount of his nest egg. Taking the accident propensity of the species into account would allow him to spend about 4%. But if you believe that we're about to encounter a bad returns sequence or simply wish to leave a few baubles to your heirs, you're right back to 3% again.


So live a little, and enjoy your money, for tomorrow we may be consumed by the ghosts of Hitler, Lenin, and Attila the Hun. And at withdrawals of 3% to 4% of your nest egg, don't spend it all in one place."


From *http://www.efficientfrontier.com/ef/901/hell3.htm *
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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 10:17 AM   #34
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Re: Doom and gloom SWR based on 1965-1982

Please also note that the 3% SWR I mentioned in my initial post (91% success for 40 yrs and 97% for 30yrs) was based on the data from only 1965-1982, no other years; i.e., even if EVERY YEAR of the next 30 to 40 yrs will be like the years 1965-1982, at 3%, you still have 91-97% chance of making it. *To me, that's pretty reassuring, especially if you can live at 3%.
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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 11:04 AM   #35
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Re: Doom and gloom SWR based on 1965-1982

Speaking of which, where is Chuck and his bazooka right now?
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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 11:22 AM   #36
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Re: Doom and gloom SWR based on 1965-1982

In the article intercst quoted, Bernstein clearly favors the withdrawal rates around 3 to 4% range.

It is true that there is language in this article and elsewhere in which Bernstein indicates that he considers a 3 percent withdrawal or a 4 percent withdrawal as acceptable for some retirees. Those statements do not necessarily contradict either Bernstein's or JWR1945's analyses finding that the historical data shows the SWR for recent years to generally be a good bit lower than that.

In an earlier post in this thread, I noted JWR1945's finding that the historical data shows that a 4 percent withdrawal has a 50 percent chance of working out at today's valuations. No one is saying that a 4 percent withdrawal absolutely will not work. It depends on what sort of returns sequence happens to pop up beginning with the retirement start date.

When Bernstein says on Page 234 of "The Four Pillars of Investing" that the SWR for a high-percentage-stock portfolio is 2 percent, he is not saying that no higher withdrawal rate will work out in actual fact. He is saying that if a returns sequence as bad as any we have seen in history (but no worse) turns up, the highest withdrawal rate that will work is 2 percent. He is not predicting that the worst-case scenario will turn up; he is telling us what will happen in the event that it does.

The REHP study reports that a 4 percent withdrawal will work even in the event that a worst-case scenario turns up. This is simply not so. The reason why the REHP number is so far off from the number that Bernstein comes up with as the number that will work in a worst-case scenario is that the Bernstein analysis includes an adjustment for changes in valuation levels and the REHP study does not.

Please take note of the language in any earlier post of mine in this thread in which I quote Bernstein as drawing a distinction between the "expected returns" question and "future risk" question. He says that the conventional methodlogy studies "serve us well" in providing valuable information re the "future risk" question. JWR1945 and I agree with Bernstein on this point.

The flaw in the REHP study is not that it does not deal adequately with the "future risk" question. It is that it does not deal at all with the "expected returns" question. You can accurately determine the historical surviving withdrawal rate (HSWR) without taking the "expected returns" question into account. You cannot accurately determine the SWR without taking the "expected returns" question into account.
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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 02:53 PM   #37
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Re: Doom and gloom SWR based on 1965-1982

Don't you think the world would be a better place without the blether of percentage points of withdrawal rates?

arrete
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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 02:55 PM   #38
 
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Re: Doom and gloom SWR based on 1965-1982

Personally, I would prefer to debate the merits
and multiple uses of dryer sheets.

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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 05:16 PM   #39
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Re: Doom and gloom SWR based on 1965-1982

I vote we abandon this thread and let *****, amt and
salaryguru hash it out to their heart's content.

I misplaced my bazooka, TH, just like I misplace everything else ....... such is the life of a senile old
phart.

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Re: Doom and gloom SWR based on 1965-1982
Old 07-20-2004, 06:42 PM   #40
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Re: Doom and gloom SWR based on 1965-1982

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I vote we abandon this thread and let *****, amt and
salaryguru hash it out to their heart's content.

I misplaced my bazooka, TH, just like I misplace everything else ....... such is the life of a senile old
phart. *

Charlie
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