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Re: Lord Abbett retirement insight
Old 02-08-2007, 10:19 AM   #21
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Re: Lord Abbett retirement insight

You know, i felt like a real doomsday pessimist when i answered this poll:

http://early-retirement.org/forums/i...?topic=11701.0

Looks like there are a few other doom and gloomers who use something other than 3% for CPI/inflation (really don't know the practical difference between (those).
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Re: Lord Abbett retirement insight
Old 02-08-2007, 10:25 AM   #22
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Re: Lord Abbett retirement insight

Quote:
Originally Posted by calmloki
You know, i felt like a real doomsday pessimist when i answered this poll:

http://early-retirement.org/forums/i...?topic=11701.0

Looks like there are a few other doom and gloomers who use something other than 3% for CPI/inflation (really don't know the practical difference between (those).
Even if the most probable inflation rate might be 3% or less over the long term, five or ten years of 10-12% inflation early in retirement could make a mess of someone's plans. It's something to think about in the middle of the night when you can't sleep.
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Re: Lord Abbett retirement insight
Old 02-08-2007, 10:28 AM   #23
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Re: Lord Abbett retirement insight

I'm pretty sure it was Nords who brought this up, but i'm too lazy to go look. I think his point was that while CPI has run at around 3% long term, in the last 25 years its been closer to averaging 5%.

The flashing red light on my dashboard is that it looks to me like a lot of businesses and services are cutting costs and product quality/service quality along with it...to keep costs in line.

That rubber band has a breaking point. Once you've cut your costs and 'increased productivity' to the maximum reasonable level using current technology, theres nowhere to go but raise prices.

I have this sneaky suspicion that 'invisible' inflation wont remain invisible for long.
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Re: Lord Abbett retirement insight
Old 02-08-2007, 11:33 AM   #24
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Re: Lord Abbett retirement insight

This will get your digestive juices churning!

http://www.shadowstats.com/cgi-bin/sgs/

His "consumer price update" on the right side is....interesting.

Substitution of hamburger for steak, catfood for hamburger - at what point does one say "this is not equivalent". And yes, we spent $3000 on our first computer setup, complete with 80meg harddrive. The gal's phone has a postage stamp sized chip in it with 1 gig of memory - 12.5 times as large. Think we paid maybe $150 for that gig of memory. OTOH, steak and gas are way higher now. Guess it depends what you spend your $$ on.
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Re: Lord Abbett retirement insight
Old 02-08-2007, 12:10 PM   #25
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Re: Lord Abbett retirement insight

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Originally Posted by Cute Fuzzy Bunny
I'm pretty sure it was Nords who brought this up, but i'm too lazy to go look. I think his point was that while CPI has run at around 3% long term, in the last 25 years its been closer to averaging 5%.
Dimson & Marsh, "Triumph of the Optimists".

If that book was more reader-friendly then we wouldn't be having these Chicken-Little conversations. You people laying awake at night and you perma-bears should at least consider using a library copy of this tome to help you get to sleep. Worry constructively, for gosh's sakes. But don't doze off with it on your chest or you'll asphyxiate.

Everybody can get upset about the 1920s Weimar Republic... but no one ever wants to talk about the other 15 countries that muddled through an entire century without blowing up like Germany. Or the 200 other countries who couldn't put together a century of data. Survivor bias indeed...

I think it's worth pointing out that economic data-crunching has never really had a handle on inflation data and is just barely beginning to get to the point of distinguishing between 1% and 2%. (All bets are off below 1%.) U.S. economic policy never really tried to control inflation until the 1970s, either, and earlier attempts at economic manipulation were constrained by the dollar's link to gold, foreign exchange currency controls, the high cost of credit, a lack of liquidity, and a host of other mechanisms that aren't used today. I think the only constant between the economics of the late 19th century and the economics of today is politics.

I think globalization will flatten a lot of things-- inflation, prices, wages, and investment returns. I don't have a problem with that because someone will always be selling their dollar bills for 75 cents. We just have to wait for the blue lights to start flashing and for the crowds of buyers to run away screaming... I'm happy to spend a few years barely keeping ahead of after-tax inflation (or a couple years of lagging it by 5-10%) in exchange for one or two years a decade when I can beat inflation with double-digit returns.
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Re: Lord Abbett retirement insight
Old 02-08-2007, 12:38 PM   #26
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Re: Lord Abbett retirement insight

Quote:
Originally Posted by Nords
Dimson & Marsh, "Triumph of the Optimists".

If that book was more reader-friendly then we wouldn't be having these Chicken-Little conversations.
Ok here is the reader's digest version of it that they wrote - I bet Nords can post the choice bits of them (Though the title makes it seem as if they are saying the exact opposite thing)
http://papers.ssrn.com/sol3/papers.c...ract_id=476981

Abstract:
We address the tendency of many investors to overestimate the rewards and underestimate the risks of investing in stocks over the long term - that is, investors' irrational optimism. In particular, we examine the widely held belief that stocks are a "safe" investment for the long run. The probability of experiencing a real loss on equities depends on the expected real return and standard deviation of stocks. Judgments about the future magnitude of these two parameters typically involve extrapolating from history. We use a global database of real equity returns from 16 countries during the 103-year period from 1900 through 2002 to confront the optimism of investors with the reality of history.

Since 1900, the worldwide real return on equities averaged close to 5 percent a year (before costs, fees, and taxes). This is appreciably lower than is frequently quoted from historical averages, a difference that arises because we use a longer time frame than other studies and adopt a global focus. Prior views on the long-run safety of equities have been overly influenced by the experience of the United States. Furthermore, the US evidence that, over the long haul, stocks have beaten inflation over all 20-year periods is based on relatively few nonoverlapping observations and is hence subject to large sampling error.

To counteract this dependency on projections of the US experience, we examine the histories of other countries. We find only three non-US equity markets (with a fourth on the borderline) that never experienced a shortfall in real returns over a 20-year period. The worst 20-year real returns of 11 countries were negative. Historically, in 6 of the 16 countries, investors would need to have waited more than 50 years to be assured of a positive return.

We also analyze the future shortfall risk of an equity portfolio. The base case for the projections is a worldwide historical volatility level of 20 percent and mean real return of 5 percent, and we also examine a lower return of 4 percent. The projected shortfall risk exceeds the historical risk of shortfall - partly because of the lower assumed real returns, and partly because, even though volatility was projected to be the same as in the past, the shortfall analysis focuses on the full range of possible future returns rather than a single historical outcome. By construction, historical returns converged on long-term realized performance, but the forward-looking analysis shows that there is always risk from investing in volatile securities.

Although the probable rewards from equity investment are attractive, stocks did not and cannot offer a guaranteed superior performance over the investment horizon of most investors. Furthermore, their prospective returns are lower than many investors project, whereas their risk is higher than many investors appreciate. Investors who assume that favorable equity returns can be relied on in the long term or that stocks are safe so long as they are held for 20 years are optimists. Their optimism is irrational.






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Re: Lord Abbett retirement insight
Old 02-08-2007, 01:54 PM   #27
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Re: Lord Abbett retirement insight

Quote:
Originally Posted by lswswein
Ok here is the reader's digest version of it that they wrote - I bet Nords can post the choice bits of them (Though the title makes it seem as if they are saying the exact opposite thing)
http://papers.ssrn.com/sol3/papers.c...ract_id=476981
I've read this book three times. I agree, many people seem to get no further than the title. The book is actually pessimistic, at least when compared to US experience of the past 60 years.

I am not sure who the perm-bears Nords referred to are - I don't see any real bears around here yet. That will have to wait until something happens.

Returns have been good; they may continue to be good. But IMO there is no denying that risk has increased. It has to have. Assets cost more, but are not proportionately more productive.

Ha
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Re: Lord Abbett retirement insight
Old 02-08-2007, 01:59 PM   #28
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Re: Lord Abbett retirement insight

Quote:
Originally Posted by HaHa
I am not sure who the perm-bears Nords referred to are - I don't see any real bears around here yet...

Returns have been good; they may continue to be good. But IMO there is no denying that risk has increased. It has to have. Assets cost more, but are not proportionately more productive.

Ha
I think I've located one...

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Re: Lord Abbett retirement insight
Old 02-08-2007, 02:07 PM   #29
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Re: Lord Abbett retirement insight

Quote:
Originally Posted by HaHa
The book is actually pessimistic, at least when compared to US experience of the past 60 years.
At the end of it, though they conclude that:
- Only stocks reliably beat inflation over the long term (20 years), and
- The small-cap value premium does exist, admittedly accompanied by volatility.

The authors strike a very pessimistic tone, as rightfully they should when presenting their data and extrapolating it, but I see it as the same type of situation as griping about President Bush. The fact that we've made it through their history is a testament to the strength of the American economy, and also an endorsement of its future. If a Depression, two world wars, nuclear weapons, the Cold War, Korea, the Cuban Missile Crisis, Vietnam, Watergate, the oil crisis, Jimmy Carter, the "death of stocks", the Iran hostages, the first & second Gulf Wars, and the Bush administrations haven't brought this country to its knees... then what's it gonna take, hunh? "Bring it on, punk!" indeed.

Quote:
Originally Posted by HaHa
I am not sure who the perm-bears Nords referred to are - I don't see any real bears around here yet. That will have to wait until something happens.
Lord Abbett, Grantham, Gross, the goldbug journalists, and anyone who reads their analyses to conclude that they should lay in a store of MREs & bullion.

Quote:
Originally Posted by HaHa
Returns have been good; they may continue to be good. But IMO there is no denying that risk has increased. It has to have. Assets cost more, but are not proportionately more productive.
Actually I think that risk (the risk of long-term loss of capital, not single-stock risk or inflation risk or volatility risk) is lower than it's ever been in the past century. And to pay for that, future returns will also be lower. That's the real triumph.
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Re: Lord Abbett retirement insight
Old 02-08-2007, 02:09 PM   #30
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Re: Lord Abbett retirement insight

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Originally Posted by REWahoo!
I think I've located one...

Help, my hull has been holed and I'm taking on water!

Ha
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Re: Lord Abbett retirement insight
Old 02-08-2007, 02:46 PM   #31
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Re: Lord Abbett retirement insight

Quote:
Originally Posted by Nords
future returns will also be lower.
Look, we found another permabear!

OK, so we start with a 4% SWR.

We knock off 2% because everybody knows future returns will be lower due to the skinny risk premia.

Then we knock off another 2% because everybody knows the CPI is rigged, and inflation is much higher.

And then the OMB tells us to expect GDP growth to lose a couple points due to the demographic bubble, so knock off 2% more.

4% - 2% - 2% - 2% = keep working!
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Re: Lord Abbett retirement insight
Old 02-08-2007, 03:08 PM   #32
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Re: Lord Abbett retirement insight

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Originally Posted by wab
Look, we found another permabear!
Oh, please, stop putting words in my mouth. I'll be a permabear when profits as a percentage of GDP "revert to the mean".

My Quicken IRR last year was over 15%. It doesn't take much to achieve lower returns when you're starting from that level, and I think we're going to see returns hovering more around the Gordon equation.

But I'll cheer my spouse on in her working efforts!
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Re: Lord Abbett retirement insight
Old 02-08-2007, 03:14 PM   #33
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Re: Lord Abbett retirement insight

It's OK, Nords. We're all permabear brothers here. That's the allure of the worst-historical-case planning tools that Dory gave us.

So, embrace your inner bear and hope for something better.
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Re: Lord Abbett retirement insight
Old 02-08-2007, 04:00 PM   #34
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Re: Lord Abbett retirement insight

Withdrawal studies center around u.s. averages, 25 year withdrawals, and classic 60/40 portfolios, arriving at initial 4% + annual inflation withdrawals, using uncommonly high late life stock allocations to offset below average returns due to volatility. Adding lower dollar weighted returns, lower international returns, past higher investing cost and more conservative retirees removes the offsetting growth, leaving past near 0% net real returns.

Historically, your annual withdrawal rate is the same as your remaining life expectancy.

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Re: Lord Abbett retirement insight
Old 02-08-2007, 04:02 PM   #35
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Re: Lord Abbett retirement insight

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Historically, your annual withdrawal rate is the same as your remaining life expectancy.
You wanna put some numbers on that statement?

Because at the age of 46 with a remaining life expectancy of roughly 50 years I'm having trouble equating a two-digit number to my annual withdrawal rate.
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Re: Lord Abbett retirement insight
Old 02-08-2007, 04:06 PM   #36
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Re: Lord Abbett retirement insight

i'd guess he means 1/(remaining expected years) ... so for a 50 yr expected life, 1/50, 1/49, 1/48, etc.
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Re: Lord Abbett retirement insight
Old 02-08-2007, 04:20 PM   #37
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Re: Lord Abbett retirement insight

Cooley, Hubbard, Walz “Sustainable withdrawals from your retirement portfolio” paper
- home of the 4% rule
Dichev “What were stock investors actual historical returns?” paper
- dollar weighing lowers return
Dimson, Marsh, Staunton “Irrational optimism” paper
- international mostly lower return, more volatile, longer bad runs
Ervin “Shortfall risk, asset allocation, and over funding a retirement account” paper
- over fund in case retiring into down market
Frazzini “Dumb money: mutual fund flows and the cross-section of stock returns” paper
- badly timed changes by investors
Jorion “Long term risks of global stock markets” paper
- past higher u.s. capital gains
Jorion, Goetzmann “Global stock markets of the 20th century” paper
- mean reversion due to market survival
Taleb “Focus on the exceptions that prove the rules” article
- standard bell curve doesn’t really fit data

Complicated withdrawal rules are most likely spurious patterns due to small sample sizes
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Re: Lord Abbett retirement insight
Old 02-08-2007, 04:37 PM   #38
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Re: Lord Abbett retirement insight

Quote:
Originally Posted by Cute Fuzzy Bunny
I'm pretty sure it was Nords who brought this up, but i'm too lazy to go look. I think his point was that while CPI has run at around 3% long term, in the last 25 years its been closer to averaging 5%.



CPI-U in Dec. 1981 was 94, 137.9 in 1991, 158.6 in 1996, and 201.8 in 2006.

Therefore:

Average annual inflation rate for the last 25 years = 3.1%
Average annual inflation rate for the last 15 years = 2.6%
Average annual inflation rate for the last 10 years = 2.4%

I know inflation overestimation is a favorite pastime on these boards, but it does seem like things are moving in the right direction.
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Re: Lord Abbett retirement insight
Old 02-08-2007, 04:39 PM   #39
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Re: Lord Abbett retirement insight

I'm 45, and I'm not particulary happy about less than 4% either, but withdrawal studies use specfic sets of data and rules for their results. They ignore what are somewhat subjective investor actions (bad timimg, investing late in a bull market), plus until "Triumph" came out, they were stuck with "easy to find" U.S. history. I've seen folks talk about 4% and then jump to high bond allocations as if it the caveats in the studies didn't matter.
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Re: Lord Abbett retirement insight
Old 02-08-2007, 10:34 PM   #40
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Re: Lord Abbett retirement insight

Here in Canada it's a lot easier. Plan on two constants:

1) Free health care (such as it is).
2) If you run out of money your kids will put you on an ice flow. It's tradition.

Why worry, be happy!
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