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Interesting article on impact of sequence of returns
Old 07-12-2013, 02:36 PM   #1
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Interesting article on impact of sequence of returns

Nothing new here really, but it is kind of interesting to see how the numbers might play out in real life. Here they assume somebody retires in 1979 100% invested in S&P 500 stocks. At a 4.5% withdrawal rate their portfolio grows nicely and they end up in 2008 with a substantial nest egg. If you reverse the order of returns, however (still getting the same average 10.99% return in that 30 year period) the portfolio runs out of money after 13 years, because of the down years at the beginning of the distribution period. Kind of scary, but I guess it shows the importance of diversifying assets and not relying on a 4.5% SWR!

Investment Portfolio Strategy: Sequence of Returns Demonstrates How Market Volatility Impacts Long-Term Returns: CliftonLarsonAllen Wealth Advisors, LLC
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Old 07-12-2013, 05:51 PM   #2
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Who retires in 2008, invests all in the SP500, doesn't adjust spending, and runs history backwards?

FIRECalc is a much better tool to see some historical sequences ... and it's free with no ulterior motive.
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Old 07-12-2013, 05:55 PM   #3
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Good article, thanks.

Not accounting for sequence of returns can lead to some dangerous plans. When folks build spreadsheets running through decades of retirement using some average investment return and inflation rate estimates, I hope they realize that their projected outcomes may be far, far off of what actually happens........... even if their average investment return and inflation rate estimates turn out to be exactly correct.
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Old 07-12-2013, 06:16 PM   #4
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Quote:
Originally Posted by Lsbcal View Post
FIRECalc is a much better tool to see some historical sequences ... and it's free with no ulterior motive.
+1
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Old 07-12-2013, 06:53 PM   #5
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Quote:
Originally Posted by Lsbcal View Post

FIRECalc is a much better tool to see some historical sequences ... and it's free with no ulterior motive.
I agree that FireCalc is a good tool that brings historic sequences of events into play.

What ulterior motive did you sense in the article? Yes, the author is a FP and likely hoping publishing articles adds to his client base and career success. But I saw the information presented as good inputs for a DIYer as well. At least I took it that way.
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Old 07-12-2013, 07:17 PM   #6
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I enjoyed the article - thanks for sharing it. It's a good reminder of what can go wrong with investing almost 100% in equities. Diversification, and low correlation between investments classes, is the nice and steady approach.
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Old 07-12-2013, 09:08 PM   #7
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Quote:
Originally Posted by youbet View Post
I agree that FireCalc is a good tool that brings historic sequences of events into play.

What ulterior motive did you sense in the article? Yes, the author is a FP and likely hoping publishing articles adds to his client base and career success. But I saw the information presented as good inputs for a DIYer as well. At least I took it that way.
It would have been better to present something like a well thought out Monte Carlo simulation, or suggest using FIRECalc. It appears the authors took a strange tack to get a desired extreme example sequence.

Anyway it is on their site and so they are free to advertise as done at the end of this article ("How We Can Help"). At the end of the article they say:
Quote:
The purpose of this publication is purely educational and informational. It is not intended to promote any product or service and should not be relied on for accounting, legal, tax, or investment advice.
OK, people have to make a living. If it were my dear relative doing this report I'd think they did a fine job. There are a lot worse types in the financial market place I guess.
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