ER & Gloom and Doom forecasts

[Nords]

Perhaps, but time and again I see early market crashes identified as the primary cause of busted retirements (based on the worst periods defined by FireCalc).

If you're talking about in the media, I think it's very easy for journalists to find people who'll admit to busted retirements. It's a bit harder to find people who've been retired 40-50 years who'll understand that their retirement is jeopardized by inflation.

If you're referring to FIRECalc, well, that uses historical returns & inflation. You can crank inflation a bit higher by selecting the PPI or by raising your expense ratio. You might also want to consider periods of 40-50 years, especially if you're in your 40s. Personally I'd rather plan an ER to age 120 and be proven wrong than to plan an ER to age 97 and find out that I'm healthier than my portfolio.

My post adressed the idea of risk management only during the vulnerable early years...not for the duration of ones retirement.

I understand that. My response is pointing out that there may be worse things to focus on and that managing risk during only the early years is a short-term approach.

If FireCalc accepted time variant asset allocations we could test this concept, instead of just speculating

If you haven't done it already, Dory will be more likely to see this suggestion if you PM him or put it in the FIRECalc section of the board.

Expenses fall as we age, or so they say. If this is true, it would help counterbalance the effects of inflation long term.

I'd love to believe that, but I suspect that healthcare & long-term care will prove to be more expensive than advisors realize. Again, none of us are willing to wait until our 90s to find out whether the anecdotal evidence is correct.

 

[Cb]

My post adressed the idea of risk management only during the vulnerable early years...not for the duration of ones retirement.

I gave that some thought a while back also. Here are my thoughts on such a scheme:

- average (or better) returns in the early years will swell your portfolio so that you're no longer taking 4%...if that goes on for a while it's smooth sailing...

- if you alter your allocation to avoid losses in the early years, you're also pretty much ensuring that you won't see any of the growth that gradually lowers your ER, so you remain in that vulnerable period where your WR is sitting at 4% year after year...

I feel the same way about the "portfolio resetting" schemes you read about where if your portfolio grows after a few years you "restart the clock" and take 4% of the new higher portfolio balance. If you do repeatedly you're systematically hunting for that rough patch in the early years.

My plan is to keep a high growth allocation (~80/20) with very broad diversification, and use a variable withdrawal rate so that my portfolio has a reasonable chance of growing away from the 4% WR in the first 5-10 years.

I've been ER'd since July but my wife is still working, so I've been mostly hanging around the house, riding motorcycles, reading, playing guitar, and exercising since quitting. If we're faced with crummy returns for a few years after my wife hangs it up I could very easily continue this low-budget life-style with zero regrets.

Cb

 

[yakers]

Market Timing Strategies That Worked

Interesting site. I do not trust it enough to go forward with implementing one of the formulas myself but I do have my Roth IRA in the Vanguard Asset Allocation (VAAPX) for some six years now. They use some kind of switching formula based on 10 year Treasury rates. Over the time I have had the fund it less voltitlity which is the primary reason I chose it and it has slightly outperformed the S&P500. Will it continue to work going forward? I don't know but it seems a reasonable approach for part of my funds. More importantly, to me, I have an AA I can live with and various streams of money (pension, 401k $, DRIP stocks & cash; taxable, tax defered and tax free) to draw on.
I am wary of inflation but got out of my small amount of ibonds because of the lowered return. Although stocks are initially hurt by inflation, over time they seem to recover just fine.

 

[donheff]

Interesting site. I do not trust it enough to go forward with implementing one of the formulas myself but I do have my Roth IRA in the Vanguard Asset Allocation (VAAPX) for some six years now. They use some kind of switching formula based on 10 year Treasury rates. Over the time I have had the fund it less voltitlity which is the primary reason I chose it and it has slightly outperformed the S&P500.

One of the things I don't like about some of those timing models is that - at best - they may beat some index by a small amount and they *may* reduce volatility a little bit. But that is small compensation for the fun you will miss. Think of those heady, irrational surges during which the rest of us get to argue about whether everything is different this time. And you won't be able to participate as fully in the crash when the rest of us get to commiserate with each other and share simplification recipes.

Variety is the spice of life

 

[RockMiner]

- if you alter your allocation to avoid losses in the early years, you're also pretty much ensuring that you won't see any of the growth that gradually lowers your ER, so you remain in that vulnerable period where your WR is sitting at 4% year after year...

I suspect you are right, trying to avoid risk in the early years may just push it furthur out rather than actually reducing it...unless you happen to be very lucky and sell down just before a bear market. I didn't think it through very well.

I think it might make more sense if you don't need to draw on your portfolio yet. Even a 1 or 2% real ROR would grow your assets in that situation whereas a bad bear mkt might delay full ER? Hope springs eternal

 

[Cb]

I actually think I'm using one of the better methods, one that I first read about here:

- Get yourself to the point were a 4% WR will cover your expenses

- Diversify much more broadly than the S&P / FI portfolios so frequently modeled in the various studies

- Plan on using some type of variable withdrawal for an added margin of safety

- and most importantly, keep your SO working in the early going so you can use a slightly negative WR.

Cb

 

[youbet]

- and most importantly, keep your SO working in the early going so you can use a slightly negative WR.

Or course, your SO plans on keeping you working.........!

 

[JohnEyles]

Here are some suggestions from a federal reserve economist:

Market Timing Strategies That Worked

Wow, what could be simpler - take the reciprocal of the P/E ratio of the S&P500 index
and subtract the 3-month T-Bill yield. If it's greater than some threshold "buy", if it's
less than "sell". It's a little squirelly about how the threshold is determined, looks like
it's kinda a moving average and is roughly minus 1 or 2%.

What's an easy way to find the P/E of S&P500 ? Thus look at the quote for SPY ?

 

[wabmester]

What's an easy way to find the P/E of S&P500 ? Thus look at the quote for SPY ?

Sure, or any S&P mutual fund. It looks like the current P/E is around 15, which gives an "earnings yield" of over 6%, so stocks are in BUY! territory according to this simple metric.

Now, this kind of simple market timing has worked consistently well for a long time. The "logical" explanation is that investors compare the earnings yield on stocks to risk-free investments, and if the risk premium for stocks is too low, they move out of stocks and into bonds.

However, there are criticisms of this "logic." Some will argue that the earnings yield is *real* and shouldn't be compared to a nominal bond yields. This may be true, but maybe investors aren't rational enough to make that distinction.

Also, there are lots of arguments that various measures of P/E are bogus or that earnings should be smoothed, but again -- investors as a herd may not be smart enough to do the "correct" analysis, so this fairly dumb metric continues to work....

In any case, I wouldn't make any large moves based on E/P, but it's worth watching. When the spread starts getting really out of wack (like it did around 1999), it's time to start questioning the market's underlying assumptions about growth.

 

[JohnEyles]

What's an easy way to find the P/E of S&P500 ? Thus look at the quote for SPY ?

Sure, or any S&P mutual fund. It looks like the current P/E is around 15, which gives an "earnings yield" of over 6%, so stocks are in BUY! territory according to this simple metric.

If I go to finance.yahoo.com I don't see anything like a P/E for VFINX.
Only for an ETF like SPY.

VFINX has a yield, of course, which is way lower than the "earnings yield"
reciprocal of P/E. What is the difference ?

 

[wabmester]

If I go to finance.yahoo.com I don't see anything like a P/E for VFINX.

Vanguard says the fund's P/E is 17 as of 9/30, so E/P is 5.9%.

linky

VFINX has a yield, of course, which is way lower than the "earnings yield" reciprocal of P/E. What is the difference ?

The SEC Yield they report is based on their dividend distribution.

Earnings yield is the average earnings "rate" you're getting from all of the companies in the S&P 500. Dividends come out of earnings. So, I guess one way to think of the earnings yield is as the maximum dividend yield you would get if all companies paid out all of their earnings as dividends.

 

[MasterBlaster]

P/E of S&P500

The trailing P/E of the S&P 500 is around 17.9 or so .The trailing P/E is computed over the last 12 months.

The forecast (forward projection) P/E of the S&P 500 is around 15 or so and is projected over the next 12 months.

I believe that different sites are displaying either the forward or trailing P/E's without much disclosure...

Hence the confusion

 

[wabmester]

The forecast (forward projection) P/E of the S&P 500 is around 15 or so and is projected over the next 12 months.

Supposedly, the forward P/E is projected operating earnings, whereas the trailing P/E is actual earnings, so it's not even an apples-to-apples comparison.