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FireCalc limitation?
Old 06-28-2013, 11:11 AM   #1
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FireCalc limitation?

This article questions the amount of investment history required to make future return projections. It appears (according to the author) that the FC database is not enough.

Why

"Based on the previous fifty or eighty years’ worth of data, an Englishman in 1910 would have concluded that Britannia would always rule the waves. A Frenchman in 1788 would have concluded that France would always be a monarchy. A Papal advisor in 1515 could have used 1,000 years’ of data to conclude that the Vatican would remain the supreme power in Europe indefinitely. Intelligent men and women did exactly this, in their millions.

This is not a minor point. Bonds issued by the Czarist regime in Russia were considered safe as houses in 1914. Several years later, Lenin stopped payment — forever."
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Old 06-28-2013, 11:21 AM   #2
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Yep, FIRECalc is fatally flawed. We don't care about the past 142 years included in the database, what we want to know about is the next 50 or 60! Put those years in the database and you'd have a pretty good calculator...
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Old 06-28-2013, 12:03 PM   #3
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I find it very annoying when an author does nothing but rip apart various approaches used without suggesting a better alternative. How can it be the results from firecalc are not guaranteed? It's like reliving the day I found out Santa Claus wasn't real. I got through that now I hope I can get through this.
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Old 06-28-2013, 12:15 PM   #4
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I guess that's why Bernstein wrote the retirement calculator from hell series. Still, No reason to jump in the casket and close the lid. Somehow the Brits carried on, France seems to be still around, There was a new pope elected recently and even the Russians seem to have survived Lenin and his shenanigans somehow
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Old 06-28-2013, 12:18 PM   #5
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I agree we would like more data. It's kind of slim for most of the statistics we would like to know. Seems like 100 year old data would also be somewhat suspect. Almost as much as using U.S. data to predict Japanese retirements. However we'll have to make do with what we have.
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Old 06-28-2013, 12:41 PM   #6
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When I went to see Warren Buffet at an BH annual shareholder meeting, there were similar questions about the risks of a collapse in the financial system.

Eventually he resorted to his claim that everyone in the stadium was likely above average, motivated, and had valuable skills. As such they would likely also do well in any follow on system. As a cautious individual, I like to keep this quote in mind. I have also done paid side projects for friends/family since ER to validate his assertion.

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Old 06-28-2013, 01:56 PM   #7
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I am certainly glad to know that the bonds from the Czarsist regime were defaulted on by Lenin. Makes a really big difference in my plans knowing that going forward from here! Of course I should be more careful without that reminder based on family history. My great great great great great great great great great grandfather based his retirement on tulip bulb mania in Holland all of those years ago. The family still talks about grandpa Noob all these centuries later and how foolish he was to bet his retirement on bulbs.

It seems one can attack any reasonable assumption with extraneous facts of one's choosing. A red herring here and a red herring there and soon everyone is destined to a destitute life of poverty wearing sackcloth.
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Old 06-28-2013, 02:11 PM   #8
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Quote:
Originally Posted by enjoyinglife102 View Post
I find it very annoying when an author does nothing but rip apart various approaches used without suggesting a better alternative. How can it be the results from firecalc are not guaranteed? It's like reliving the day I found out Santa Claus wasn't real. I got through that now I hope I can get through this.
What's this nonsense about Santa not being real?!?!?!
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Old 06-28-2013, 02:19 PM   #9
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What's this nonsense about Santa not being real?!?!?!
Yea!
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Old 06-28-2013, 02:28 PM   #10
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Such drivel wouldn't be published if not for the internet. The author states:

Quote:
The conventional wisdom relies heavily on a relatively small dataset of U.S. stock and bond returns. I have read best-selling books which cite data just from the mid-1970s — a few decades’ worth. Readers bring me accounts of Wall Street brokers citing data covering 20 or 30 years. Some go back further. The best go back to the 1920s. But these are still limited.
So since FC goes back farther than most at least it is using the "best" possible so we'll need to accept its limitations.
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Old 06-28-2013, 02:30 PM   #11
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It's like reliving the day I found out Santa Claus wasn't real.
News to me..........
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Old 06-28-2013, 02:33 PM   #12
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The premise is that we cannot predict anything because there were some times in history when things happened that were not predictable...

WELL, DOOOHHHH....

That is why there are a lot of caveats in the calculators... and why people always talk about the black swan...

IOW, if a meteor the size of Manhattan hit in the middle of the Atlantic a few seconds ago, all models going forward will be useless.... and I have to finish this post quickly or I will not be able to send it at all as the wave crashes down on me....
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Old 06-28-2013, 03:05 PM   #13
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I think FireCalc is an outstanding tool. It covers the entire period of modern investing, and the large majority of the industrial age. You can look at data earlier than that (as Reinhart and Rogoff did in their also excellent This Time is Different), but IMHO one must begin to wonder about both the veracity of that very old information, as well as how much technological and cultural differences influence things.

If FireCalc has a weakness, it is in the inherent assumption that modeling the past is a reliable proxy for the future. While it is indisputably true that it works much/most of the time, it is not always so. Surveying the macroeconomic landscape, and the machinations of central bankers, I think a very good argument can be made that we are living a grand experiment that is not baked into the FireCalc data. How it will all turn out is anybody's guess.

My advice is to use FireCalc, but not to assume it is infallible.
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Old 06-28-2013, 03:42 PM   #14
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My advice is to use FireCalc, but not to assume it is infallible.
+1

A good crystal ball would be handy too. It's the future, folks!
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Old 06-28-2013, 03:48 PM   #15
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I agree Firecalc is a great tool, but not infallible. One thing I noticed in running some numbers is that I got a better result (no failures) entering a 50 year period than I did when I entered a 40 year period (6% failure) with everything else remaining constant. Or, in other words, firecalc says I have a better shot at my funds lasting 50 years than 40 years. I believe this is because there are fewer 50 year "cycles" than 40 year "cycles." Given this flaw, I would advise folks to run multiple calculations around their desired retirement period to see if the results change.
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Old 06-28-2013, 04:03 PM   #16
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I guess that's why Bernstein wrote the retirement calculator from hell series. Still, No reason to jump in the casket and close the lid. Somehow the Brits carried on, France seems to be still around, There was a new pope elected recently and even the Russians seem to have survived Lenin and his shenanigans somehow
I do not think you would have wanted to be a person of money in Russia when Lenin took over. You certainly had none when he finished his revolution. You didn't have to jump into a casket and close the lid on your own he did it for you!
Quote:
Lenin delineated action against defiers of the decreed Bolshevik removal of Orthodox Church valuables: "We must... put down all resistance with such brutality that they will not forget it for several decades... The greater the number of representatives of the reactionary clergy and reactionary bourgeoisie we succeed in executing... the better."[132] ...the crushing of the revolts in Kronstadt and Tambov in 1921 resulted in tens of thousands of executions.[134] Estimates for the total number of people killed in the Red Terror range from 50,000[135] to over a million[136][137]
To me this means anyone with reasonable wealth should heed the words of Harry Browne and his rule #13 and have money in another country in case of a sudden reversal in your country. This is not in Firecalc but helps avert what the 20% chance of total failure Bernstein is referring to.
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Old 06-28-2013, 04:12 PM   #17
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Originally Posted by cabermj View Post
I agree Firecalc is a great tool, but not infallible. One thing I noticed in running some numbers is that I got a better result (no failures) entering a 50 year period than I did when I entered a 40 year period (6% failure) with everything else remaining constant. Or, in other words, firecalc says I have a better shot at my funds lasting 50 years than 40 years. I believe this is because there are fewer 50 year "cycles" than 40 year "cycles." Given this flaw, I would advise folks to run multiple calculations around their desired retirement period to see if the results change.
+1

This has been discussed a number of times over the years on the FIRECalc Support forum. Once you get beyond 30-40 years you reduce the number of available cycles to the point that it clouds the results the calculator can provide.
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Old 06-28-2013, 04:56 PM   #18
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+1

This has been discussed a number of times over the years on the FIRECalc Support forum. Once you get beyond 30-40 years you reduce the number of available cycles to the point that it clouds the results the calculator can provide.

This I guess that the flaw is pretty big... IOW, the calculation should take into account all possible timeframes between 1 and 50 is you choose 50 years..

IOW, if there is any 40 year period that would fail in a 50 year period, that is a fail... if there is any 10 year period that would fail in a 50 year period, that is a fail....

Once you reach 0, there is no way to make it back....
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Old 06-28-2013, 05:05 PM   #19
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This I guess that the flaw is pretty big... IOW, the calculation should take into account all possible timeframes between 1 and 50 is you choose 50 years..
It does. Remember how FIRECalc works:
Quote:
  • FIRECalc starts with a retirement cycle beginning in 1871 and determines whether that cycle would have succeeded (remained in the black) or not. Then it starts over, with a cycle starting in 1872. Then 1873, and so forth until the most recent year for which there are results available.
  • Finally, FIRECalc reports numerically and graphically how often your retirement plan would have worked. If there were 106 possible cycles, and 6 of them failed, then FIRECalc will report 94.3% success.
Do the math to figure out how many 50 year cycles there are between 1871 (where FIRECalc starts) and 2012 (the latest data). Then do the same starting in 1871 using a 30 year cycle. You'll obviously see far more 30 year cycles, which is the point of this discussion.
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Old 06-28-2013, 05:12 PM   #20
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This I guess that the flaw is pretty big... IOW, the calculation should take into account all possible timeframes between 1 and 50 is you choose 50 years..

IOW, if there is any 40 year period that would fail in a 50 year period, that is a fail... if there is any 10 year period that would fail in a 50 year period, that is a fail....

Once you reach 0, there is no way to make it back....
Good point, but it does make the reporting a little tricky.

If the patterns were just so - picture the most recent full 50 year pattern as a 'pass', with a peak in year 't-40' (40 years ago), and then a drop near zero. If one started on the t-40 peak with the same portfolio, that drop from the peak would take them below zero.

So a 'fail' would count as a 'fail', but we can't count a 'pass' as a 'pass' until we get the full 50 years. So how do you report a success rate? It would be interesting to note any short term failures, and maybe report separately a 'success rate no greater than...' for the added partial runs?


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