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Firecalc, AA, and SWR
Old 01-27-2014, 07:03 PM   #1
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Firecalc, AA, and SWR

Using a 60/40 port Firecalc says our 100% SWR = 3.42% for 39 years. If we use a 40/60 port our SWR = 3.24%.

Would it be wise to cut back our volatility risk (a la Bernstein's "you already won the retirement game") for 18bps of SWR cost?

We really like the 60/40 allocation emotionally. But rationally is it a good choice? We have the experience of 3 nasty bear markets so we have good risk tolerance and "strong hands".
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AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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Old 01-27-2014, 07:22 PM   #2
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Quote:
Originally Posted by galeno View Post
Using a 60/40 port Firecalc says our 100% SWR = 3.42% for 39 years. If we use a 40/60 port our SWR = 3.24%.

Would it be wise to cut back our volatility risk (a la Bernstein's "you already won the retirement game") for 18bps of SWR cost?

We really like the 60/40 allocation emotionally. But rationally is it a good choice? We have the experience of 3 nasty bear markets so we have good risk tolerance and "strong hands".
I wonder about this too. Currently 70/30. But the thing that bothers me is that we are in such a low interest rate bond environment relative to the historical average, and how long will we stay here (thinking Japan), are the FIRECalc calculations with high bond percentages still relevant?
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Old 01-27-2014, 07:32 PM   #3
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I wonder about this too. Currently 70/30. But the thing that bothers me is that we are in such a low interest rate bond environment relative to the historical average, and how long will we stay here (thinking Japan), are the FIRECalc calculations with high bond percentages still relevant?

I chose to dump all bonds for cash and CDs. I'm currently 53/47 equities and cash. In addition we have two rental properties. Bonds are just too risky right now. A 2% increase in a 10 year bond will cause a 15% drop in value. With rates so low there just isn't anywhere else to go.
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Old 01-27-2014, 07:38 PM   #4
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Any thoughts on this article on hedged dividend investing?
Hedged dividend investing for retirement - Robert Powell's Retirement Portfolio - MarketWatch

I was thinking that if you only shorted SPY when the Shiller P/E ratio was in a certain range (maybe 20+?), the returns would be even greater?
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Old 01-27-2014, 07:39 PM   #5
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Could the USA suffer Japan's economic fate? I guess anything is possible. The biggest differences between the USA and Japan is flexibility.

The USA is very flexible and adapts very well being so big. She will also start wars to get her way. Japan is probably the most rigid culture on the planet. She was militarily neutered in WW2 so starting a major war without the USA is not an option.
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AA = 60/35/5. Expected CAGR = 5.7%. GSD (5y) = 7.8%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.5%. Net Port Yield = 1.7%. Term = 36 yr. FI Duration = 4.9 yr. Portfolio survival probability = 86%.
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Old 01-27-2014, 08:21 PM   #6
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Could the USA suffer Japan's economic fate? I guess anything is possible. The biggest differences between the USA and Japan is flexibility.

The USA is very flexible and adapts very well being so big. She will also start wars to get her way. Japan is probably the most rigid culture on the planet. She was militarily neutered in WW2 so starting a major war without the USA is not an option.

I think the only kind of war we need to be concerned with that Japan might be involved in is a currency war, which may already be underway. They are already deflating the Yen.
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Old 01-27-2014, 08:42 PM   #7
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Originally Posted by galeno View Post
Using a 60/40 port Firecalc says our 100% SWR = 3.42% for 39 years. If we use a 40/60 port our SWR = 3.24%.

Would it be wise to cut back our volatility risk (a la Bernstein's "you already won the retirement game") for 18bps of SWR cost?

We really like the 60/40 allocation emotionally. But rationally is it a good choice? We have the experience of 3 nasty bear markets so we have good risk tolerance and "strong hands".
Bengen's initial SWR study showed more or less the same thing - ie. SWR doesn't change much between 40% equities and (IIRC) 70% equities. What changes is the median terminal value.

I have no comment on which AA is wiser, but I use a 60/40 AA. My decision was based on the long (~50 year) ER that I am aiming to fund. I also use a %age of portfolio at the start of the year to calculate annual withdrawals rather than the traditional SWR method - % of initial portfolio adjusted annually for inflation.
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Old 01-27-2014, 09:16 PM   #8
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Quote:
Originally Posted by galeno View Post
Using a 60/40 port Firecalc says our 100% SWR = 3.42% for 39 years. If we use a 40/60 port our SWR = 3.24%.

Would it be wise to cut back our volatility risk (a la Bernstein's "you already won the retirement game") for 18bps of SWR cost?

We really like the 60/40 allocation emotionally. But rationally is it a good choice? We have the experience of 3 nasty bear markets so we have good risk tolerance and "strong hands".
While I think these historical reviews are a good starting point, I doubt you can realistically count on the future worst case to be so identical to past worst case to split hairs over 18 basis points.

I look more at general trends, and a 40/60 is getting closer to the knee where success drops pretty fast. For 39 years, and a 3.5% WR, that knee is at about 35%, but is pretty flat all the way to 100% equities. For that reason, I prefer to move more towards the middle of the curve.

As far as volatility, if you were Ok in the last bears, how bad is 60/40 versus 40/60? Look at it this way - if that was a $1M portfolio, and equities took a 50% drop (pretty extreme) and assume fixed maintained its value:

A 60/40 would now by $300K + $400K = $700K

A 40/60 would now by $200K + $600K = $800K

Significant, but not crazy different, IMO.

And the thing that people mostly ignore when they focus on a historically large market drop is that drops like that come after a run up. And if you had higher equity AA all along, that drop would have occurred from a higher level to begin with. It isn't apples-apples to only look at the drop with a given AA, you need to look at what led up to it.

-ERD50

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Old 01-27-2014, 10:10 PM   #9
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And the thing that people mostly ignore when they focus on a historically large market drop is that drops like that come after a run up. And if you had higher equity AA all along, that drop would have occurred from a higher level to begin with.
Thanks for injecting some reason into a subject that often strikes fear into the hearts of investors (or would-be investors). I think that as we see the value of our portfolios rise, we tend to mentally reset and consider the current value as the new baseline, so to speak, which can make corrections feel bad. A historic drop would truly feel bad for someone who has just put all their money into equities in one large sum just before the drop, but most of us don't do this. We dollar-cost average into the market over a long period of time when we are working (and are often too busy working and living our lives to be paying too much attention to these things anyway.) When withdrawing, we also withdraw from the market slowly over a long period of time, so these large drops affect us a great deal less than we might fear.

Disclaimer - I have yet to experience a downturn while in the withdrawal phase. The next one will be my first. I look forward to the opportunity to prove that I am indeed as wise as I pretend to be
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