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Old 01-04-2014, 03:35 PM   #61
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I should have added that a corporation does not have to pay out all of its income. The market's profitability would be reflected in its P/E, which is higher than it used to be.
The P/E can remain exactly the same, but the stock price appreciate and thus the investment show capital gain. What happens is that the per share earnings (usually) increase with time. This is ultimately why stock indices increase over very long periods of time independently of dividends paid out.
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Old 01-04-2014, 03:38 PM   #62
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Earlier, when I said I believed in a balanced portfolio, I meant a diversified portfolio. The non-stock portion does not have to contain long bonds.
I believe that Dr. Pfau has done work indicating that stocks and SPIA's do better than stocks and bonds.
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Old 01-04-2014, 03:40 PM   #63
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I believe that Dr. Pfau has done work indicating that stocks and SPIA's do better than stocks and bonds.
Later it was proven otherwise. It turned out fixed income did better. See later papers on "the glide path".
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Old 01-04-2014, 03:43 PM   #64
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Well, I tend to be a bit more casual with my choice of words. And that gets me in trouble with people who are more serious with their writing.

Anyway, on the growth of stocks, surely some individual companies will do better than others even in bad times. By picking the right stocks, some investors will manage to do well when others fail. But if the backdrop of the economy does not support the kind of growth like we had in the past, meaning the end of the Vietnam war and then the fall of Communism and the advent of computer technology, it is harder for stock investors to do as well as they did up to 2000.

What helps the Y2K retiree's portfolio was that in addition to the E rising in 1980-2000, the P had risen even more due to P/E expansion. This P/E expansion obviously cannot go on forever, and indeed stopped in 2000. And if the interest rises, P/E very well will contract.

And even if the interest rate stays low where it is now instead of going up as many expect, what will drive the bond yield lower so that bond holders can get the capital appreciation that they enjoy in the past?

Just my 2 cents...
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Old 01-04-2014, 04:23 PM   #65
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...(snip)...
And even if the interest rate stays low where it is now instead of going up as many expect, what will drive the bond yield lower so that bond holders can get the capital appreciation that they enjoy in the past?
...
The short answer is deflation.

When I did some recent FIRECalc runs for us I used a 65/35 portfolio of stocks/5yr_Treasures and our spending levels around 3.3%. So this is very specific but gives a flavor of things for 3 bad periods of depression, recession-recession-inflation-recession, and the recent 2000's :




Notice that the portfolio held up OK in the early 1930's because of bonds. I hope we never see this but we could get deflation and a bad stock market.
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Old 01-04-2014, 04:34 PM   #66
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I still have a lot of cash, which will help me out in the unlikely case of deflation.

At this point, with 3.5%WR which can be cut back if necessary and with SS as a backstop, I do not fear going broke, particularly as I do not think of living till 100 as others do.

I just do not want to see my stash going down because it hurts my psyche more than my physical well being. And there's satisfaction of successfully managing your stash so that it grows. As Soros once said, and I have to paraphrase, it shows that your understanding of the world is correct.
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Old 01-04-2014, 07:03 PM   #67
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...(snip)...
I examined the spreadsheet downloaded from FIRECalc and saw the following. FIRECalc only applies the income or dividend of the bonds to its growth. FIRECalc does not consider the appreciation of the principal when the interest drops, and the bond yield follows it.
...
The more I thought about this one, the more I worried about what FIRECalc is doing with this data. The 3 bad scenarios I mentioned above would be greatly affected by not considering the interest rate rise/fall (so called capital returns).

So I did a test for years 2002 to 2011. I looked at a pure 5 year Treasury portfolio of $1M with no spending. FIRECalc gave a final value of $1,064,095 inflation adjusted. Then I looked at what $1M would have done in VFIUX (Vanguard 5 year Treasury admiral). The final inflation adjusted value was $1,457,944 (for total return, green area below). This is a huge difference. Then I just used the income return for VFIUX (blue area below). The result was much closer to FIRECalc $1,173,121 indicating FIRECalc does indeed ignore the capital returns.

Did I do this right? Do you guys agree that this is a problem?

Here is the relevant parts of the spreadsheet:
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Old 01-04-2014, 07:38 PM   #68
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Did I do this right? Do you guys agree that this is a problem?
Yes I think you are right and yes I really think it is a problem..
I posted a message in the firecalc support forum and I think the discussion would be better over there.
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Old 01-04-2014, 08:47 PM   #69
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Thanks Clifp. I posted a copy of my comments above over in that thread: Firecalc accuracy and future.
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Old 01-05-2014, 08:21 AM   #70
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Thanks for all the hard work uncovering this issue!!! NW-Bound and Lsbcal!
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Old 01-06-2014, 04:39 PM   #71
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I have a spread sheet that models a Y2K retiree and the 4% rule. For investment vehicles, I chose Vanguard Total Stock Market fund and the Vanguard Intermediate Term Bond fund. I use these because they are investable and are what I would have chosen for a 2 fund portfolio.

- I use CPI from the end of each November
- I take the inflation adjusted 4% out at the beginning of each year
- I rebalance at the beginning of each year
- I use Admiral funds when they become available

The results shown are "real". The low point for the 80% stock portfolio is just under half of the starting value.

I think my Y2K retiree has a good chance of making it. At least, I hope so.
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Old 01-06-2014, 10:03 PM   #72
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I have a spread sheet that models a Y2K retiree and the 4% rule. For investment vehicles, I chose Vanguard Total Stock Market fund and the Vanguard Intermediate Term Bond fund. I use these because they are investable and are what I would have chosen for a 2 fund portfolio.

- I use CPI from the end of each November
- I take the inflation adjusted 4% out at the beginning of each year
- I rebalance at the beginning of each year
- I use Admiral funds when they become available

The results shown are "real". The low point for the 80% stock portfolio is just under half of the starting value.

I think my Y2K retiree has a good chance of making it. At least, I hope so.
Wow. Registered on the forum in 2005 and your first post is in 2014? I'd ask "Where have you been?" but I already know the answer, adrift.
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Old 01-06-2014, 11:02 PM   #73
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- I use CPI from the end of each November
- I take the inflation adjusted 4% out at the beginning of each year
- I rebalance at the beginning of each year
- I use Admiral funds when they become available

The results shown are "real". The low point for the 80% stock portfolio is just under half of the starting value.

I think my Y2K retiree has a good chance of making it. At least, I hope so.
Interesting result. Thanks for crunching the numbers.

A question:

-I realize many rebalance, but I personally don't really do much of that. Are the results markedly different with no rebalancing?
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Old 01-07-2014, 12:05 AM   #74
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I know that you have many individual stock positions, so how would you do rebalancing?

I don't rebalance as much as selling stocks or ETFs that I feel have become overvalued, then look for areas that I feel is oversold to put that money into. I do keep an eye on equity AA, because I do not want to become overzealous and keep pouring money into value-trap stocks that linger for a long time without going anywhere. Lately, it has been EM, and I have to tell myself that enough is enough.
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