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Re: Market Return
Old 11-29-2004, 04:02 AM   #21
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Re: Market Return

*****, that's such a good explantion I think I'll print it out. *Thanks. *The issues that I have are that we are using performance of an economy making model T's and tube radios, to predict one that is quickly becoming a service economy. *Performance in years when less than 5% of the American households own mutual funds, predicting one where now about 50% of house holds have some market influence. *Are we using an apple to predict an orange?

There is also the assumption that the markets will never assume some sort of statistical indepenence. *When ever issues come up here like peak oil, China economic dominance, terrorist threats, etc., the answer is always, we got throught worse, we'll get through this. Or "not another disaster prediction". As if there is no chance any of these things could swing the reversion to the mean. I was lunching with a friend two weeks ago after the 60 minutes program featuring a former CIA official predicting almost certain nuclear attemps on our cities. *My friend thinks this is probable, but is almost 100% equities in his retirement funding. *This seems like a conflict of beliefs to me.

The SWR theory and use are great references that are a good base to consider. *I am not a full doubter and indeed it's as a reference for my own future retirement. *However, as the gospel to assure my well-being for the next 40years, I have reservations. When we say a 95% chance of success, I'm thinking more like a 75% chance considering the events around the numbers. *In the end, they are only numbers predicting other numbers. *The historical events surrounding these numbers as well as the current and future global econonomics are equally as important as the numbers themselves.
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Re: Market Return
Old 11-29-2004, 04:49 AM   #22
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Re: Market Return

When we say a 95% chance of success, I'm thinking more like a 75% chance considering the events around the numbers.

I think you are right to see it this way. The 95 percent number presumes a future no worse than the worst that we have seen in the past. Nuclear war or hyperinflation or mass spread of disease could put us in a circumstance where the future for this particular country is worse than anything we have in our historical record. If that happens, the 95 percent number is out the window.

To get the true odds of a withdrawal rate not working, you need to add the percentage chance of a future worse than the worst we have seen in the past to the percentage chance of failure of your portfolio presuming that we do not see anything worse in the future than the worst that we have seen in the past.
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Re: Market Return
Old 11-29-2004, 07:25 AM   #23
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Re: Market Return

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Obviously if you put your savings in the bank or buried it in your back yard inflation would eat you alive if you had 60 years of retirement.
I understand that it's obvious - that's why I asked it since you seemed to be ignoring this in your suggestion to basically save up all you need for retirement and put it somewhere that you left unspecified. *In another thread on this board you were also suggesting bank accounts because they had a (marginally) longer history of usage by "common people" than stocks. *If history of usage is important then precious metals and goats win by thousands of years. *Where were you suggesting to put this very large sum of money that has a "long enough" history of usage by "common people"?

There's another factor in your "plan" that you've left unspecified. What you also haven't explained is how our potential early retiree is going to come up with 2.5 times as much retirement stash unless it's to continue working until retirement is no longer early.
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Re: Market Return
Old 11-29-2004, 08:03 AM   #24
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Re: Market Return

RogerR:

I think you have made some good points on this thread. I much appreciate your participation.

Here's a link to a thread from the SWR Research Group board in which JWR1945 looks at some numbers for TIPS. It might help you develop some data-based strategies that are in tune with the investing concerns you have put forward here.

http://www.nofeeboards.com/boards/viewtopic.php?t=2598

JWR1945: "A 100% TIPS portfolio at currently available rates are truly safe at a withdrawal rate of 4.0% more than thirty years. This finding is highly significant considering the hazards in todayís stock market."
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Re: Market Return
Old 11-29-2004, 09:20 AM   #25
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Re: Market Return

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The 95 percent number presumes a future no worse than the worst that we have seen in the past. Nuclear war or hyperinflation or mass spread of disease could put us in a circumstance where the future for this particular country is worse than anything we have in our historical record. If that happens, the 95 percent number is out the window.
This appears to be a common misperception. * It won't take a disaster for the future return to be worse than the past (perhaps much worse). * There are several ways the future can be worse than the past worst-case:

1) We can have an economic disaster on par with the Great Depression. * This is the least likely scenario, but there's still a 30% chance somebody would see something like this in their lifetime.

2) We can have less RTM to the upside. * There is no law that says we'll have a max of 3 bad years in a row followed by a bunch of great years in the stock market. * If we ever have a longer bear market, or less of a bull following a bear, than we have historically, then future returns will likely be worse than past returns.

3) The economy can grow slower than it has in the past. * This is extremely likely, and may result in a lower long-term return than we've had historically.

4) The rate of equity dilution can increase. * Bernstein has shown that long-term market returns closely track economic growth less the rate of equity dilution. * Equity dilution occurs when companies issue new shares, which they routinely do when they grant stock options and acquire new companies. * This is a subtle effect that is likely to further dampen future returns.

In other words, chances are very good that the future won't be as rosie as the past.
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Re: Market Return
Old 11-29-2004, 09:48 AM   #26
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Re: Market Return

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What you also haven't explained is how our potential early retiree is going to come up with 2.5 times as much retirement stash unless it's to continue working until retirement is no longer early.
The desire for something does not create the means of achieving it. Retiring really early may turn out to be similar to marrying a very beautiful woman. Not something that every ordinary guy who does well at college, keeps clean and lives really, really cheaply will necessarily be able to do.

"If wishes were horses, beggars would ride."

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Re: Market Return
Old 11-29-2004, 10:24 AM   #27
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Re: Market Return

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If you are thinking perhaps that I am somewhat out of my gourd, it is a little similar to a method mentioned by the Coffee House invester in one of their "portfolio ponderings" articles a few weeks ago. *Not to say they may be a bit daft, too .
No, I don't think you're out of your gourd. Actually my planning is based on about 40 years, and I found your comment interesting because I just happen to use 2.5% (plus inflation) as a basis for my plan. I hope for better but plan for around 2.5%. But I arrived at that figure in an entirely different manner.
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Re: Market Return (whatever THAT is)
Old 11-29-2004, 10:32 AM   #28
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Re: Market Return (whatever THAT is)

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In other words, a 40 year lifespan would always produce a 2.5% withdrawal rate, right? Or am I missing something?
What do you do in the 41st year?

My spouse claims to know my life expectancy. Until she shares that with me (I don't want to know), I'm going to avoid spending principle.
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Re: Market Return
Old 11-29-2004, 10:39 AM   #29
 
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Re: Market Return

Hey Nords.............I would watch out for ground glass
in the sugar bowl also

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More on life expectancies.
Old 11-29-2004, 10:43 AM   #30
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More on life expectancies.

We saw a PBS special a while back on Alzheimer's.

Clinicians claim that a flawless indicator of early-stage Alzheimers, but less intrusive than a cerebral autopsy, is the loss of the ability to hear a spoken word and to then verbally spell it backwards.

Passing those pop quizzes worries me more than the ground glass...

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Re: More on life expectancies.
Old 11-29-2004, 01:41 PM   #31
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Re: More on life expectancies.

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Clinicians claim that a flawless indicator of early-stage Alzheimers, but less intrusive than a cerebral autopsy, is the loss of the ability to hear a spoken word and to then verbally spell it backwards.
I can't even spell frontwards, so I would fail the test now. I saw today I have been spelling deductible as deductable every time.
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Re: Market Return
Old 11-29-2004, 01:48 PM   #32
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Re: Market Return

>>Clinicians claim that a flawless indicator of early-stage Alzheimers, but less intrusive than a cerebral autopsy, is the loss of the ability to hear a spoken word and to then verbally spell it backwards.

I Don't get it...if you can't hear it, how are you supposed to spell it backwards? Does that mean all deaf people have Alzheimers?
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Re: Market Return
Old 11-29-2004, 03:11 PM   #33
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Re: Market Return

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I understand that it's obvious - that's why I asked it since you seemed to be ignoring this in your suggestion to basically save up all you need for retirement and put it somewhere that you left unspecified.
In my example of dividing savings by years of survival I think the favored investment would probably be inflation protected securities. My portfolio is currently being reorganized from a traditional broker's account and I am weighting it that way to a degree. But I had hoped to point out as well that there are alternate methods to predict future returns without using past performance as the primary indicator. And that there may be externalities to consider before assuming that past performance is a shoe in for future returns.


Quote:
In another thread on this board you were also suggesting bank accounts because they had a (marginally) longer history of usage by "common people" than stocks. If history of usage is important then precious metals and goats win by thousands of years. Where were you suggesting to put this very large sum of money that has a "long enough" history of usage by "common people"?
Again I think I had hoped to point out or discuss that past returns are not based on a fixed set of variables, but have had a changing face of eras, one of which would be a relatively recent influx of money from the private investor into equites. So my personal confidence in past performance predicting future returns is probably less than the confidence numbers used by many calculators that are based on statistics only. Borrowing/lending institutions such as banks and treasuries probably have less volitility from speculation and emotion, but also by their nature and history of investor base, a more predictable return from past performance. But certainly not without risk.

Quote:
There's another factor in your "plan" that you've left unspecified. What you also haven't explained is how our potential early retiree is going to come up with 2.5 times as much retirement stash unless it's to continue working until retirement is no longer early.
I certainly am offering nothing beyond discussion. We all have to come up with our own method of estimating returns. Risk and return will always be intrinsically related. There will be some who take risks and will be rewarded and others who will be disappointed. The method of dividing savings by years of retirement and investing in inflation protected securities is a very low risk approach. It also means that many will have to work more years. The opposite is high yield, high risk investments. The middle ground is a conservative diverse portofolio. But assuming that past returns will insure this method beyond doubt is ignoring risk. I think that inflation is a very high risk for any one with a long retirement and no corporate pension. And that if we depend only on the numbers to identify risk we're missing some important elements of risk. The middle ground we pick in our risk assessment is a personal choice.

I have slightly different opinions on these issues, but also don't know everything (though am a bit stubborn on a few). It helps to discuss and defend my own thoughts. Thanks for the discussion.
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Re: Market Return
Old 11-29-2004, 03:24 PM   #34
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Re: Market Return

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In my example of dividing savings by years of survival I think the favored investment would probably be inflation protected securities. *My portfolio is currently being reorganized from a traditional broker's account and I am weighting it that way to a degree.
<snip>
I think that inflation is a very high risk for any one with a long retirement and no corporate pension.
So, you are going to rely on the US government to calculate the inflation amount and give you what they think inflation was? We've had a few discussions about that here and I'm not sure that I would trust the US inflation measure to any great extent. There is tremendous incentive (both from a TIPs and a SS perspective at least) to under report it. There is tremendous pressure to use increased utility in the inflation measure (i.e. your medication is more effective therefore it is cheaper even if it is more expensive). TIPs might make sense for a small portion of one's portfolio but a heavy TIPs portfolio seems very risky to me. It might not jiggle every day like the market does but over the long run it looks a lot scarier.
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Re: Market Return
Old 11-29-2004, 03:39 PM   #35
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Re: Market Return

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TIPs might make sense for a small portion of one's portfolio but a heavy TIPs portfolio seems very risky to me. *It might not jiggle every day like the market does but over the long run it looks a lot scarier.
The only guarantee you'll get from the stock market is that it will always "jiggle." * There is no guarantee that it'll go up in the long term, much less keep up with inflation. * If you don't believe me, ask anybody who invested in the Japanese market over the last 20 years.

TIPS are about the safest investment available. * If the market really believed the stuff about the BLS under-reporting inflation, you can rest assured that the price of TIPS would reflect that concern, and you'd be compensated accordingly.
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Re: Market Return
Old 11-29-2004, 03:52 PM   #36
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Re: Market Return

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The only guarantee you'll get from the stock market is that it will always "jiggle." * There is no guarantee that it'll go up in the long term, much less keep up with inflation. * If you don't believe me, ask anybody who invested in the Japanese market over the last 20 years.
Yes, that is definitely a possibility with investing in a single country as many (most?) US investors do. Have at least a look at the Sharpe papers and the "world market" portfolio. It's going to be a pretty grim future if all markets are down and stay down for 20 years. How well do you think a TIPs heavy portfolio will fare in such an environment as you suggest - the Japanese and the Chinese will be turning in their US treasuries and the dollar will plummet and "official" inflation will be negative.
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Re: Market Return
Old 11-29-2004, 04:04 PM   #37
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Re: Market Return

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How well do you think a TIPs heavy portfolio will fare in such an environment as you suggest - the Japanese and the Chinese will be turning in their US treasuries and the dollar will plummet and "official" inflation will be negative.
I'm not sure I follow your deflation prediction. If the dollar weakens, imports will be more expensive, which will fuel inflation. Our massive debt means more treasuries will be issued, which will also fuel inflation. I agree that we're likely to see both a decreased demand for US treasuries and an increased supply. That means treasury prices are likely to fall and yields to rise.

For somebody like me, who plans to hold their TIPS to maturity, that means my return is guaranteed to be at least 2 points above inflation, and likely much higher as I reinvest interest and DCA into new cheaper TIPS.

As far as stocks go, I shoot for 60% US and 40% int'l, just like the world markets capitalization suggest I should.
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Re: Market Return
Old 11-29-2004, 04:29 PM   #38
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Re: Market Return

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I'm not sure I follow your deflation prediction.
If we take your scenario that world equity markets were down for 20 years in some sort of end of the world scenario then it is likely that unemployment both in the US and elsewhere is very high leading to very low demand and that is one cause of deflation (oversupply or underdemand). *The Japanese and Chinese governments will want to convert those US treasuries to prop up their own economies (and stop propping up the US one as they do now) and that will further drive down the dollar. *That might sound like a good thing for manufacturing exporters but remember that you were postulating that all markets (and by extension economies) were down (20 years down) so nobody wants to buy and if they do they'll likely buy at home (perhaps future foreign versions of the Hawley-Smoot Tariff Act). *Presto-chango, your 20 year world markets down scenario brings just what I said. *It may also bring US government defaults on credit obligations.

Quote:
As far as stocks go, I shoot for 60% US and 40% int'l, just like the world markets capitalization suggest I should.
That's close but in inverse proportions. Depending on how much you've got there that's also a long way from stashing it in a bank account or putting it under your mattress.
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Re: Market Return
Old 11-29-2004, 04:42 PM   #39
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Re: Market Return

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If we take your scenario that world equity markets were down for 20 years...
Now we're just misinterpreting one another. When people talk about stocks for the long run, they're almost always talking about the US market, and their "proof" is the US market's performance over the last 120 years or so.

I'm not sure what would cause the markets of the entire world to go down over the long-term, unless we had a large decrease in working-age population world-wide. That would be scary, and all invesment classes would suffer, but the resulting deflation would also cause prices to drop, so you'd still have a predictable outcome for TIPS -- 2 points above the rate of inflation/deflation. In other words, worst case is that your principal is preserved in terms of real dollars, and you still get the real rate of return.

Regarding the world's allocation of stock market capital, I believe it was close to 50/50 a couple of years ago, and then the US share increased since then, but if you factor in the falling dollar, who knows where we are. 50/50, 40/60, 60/40 all make more sense than 100% US to me.
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Re: Market Return
Old 11-29-2004, 05:46 PM   #40
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Re: Market Return

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>>Clinicians claim that a flawless indicator of early-stage Alzheimers, but less intrusive than a cerebral autopsy, is the loss of the ability to hear a spoken word and to then verbally spell it backwards.

I Don't get it...if you can't hear it, how are you supposed to spell it backwards? Does that mean all deaf people have Alzheimers? *
We played a lot of the board game Cranium this weekend with the kids, and they have this as one of the tasks. It is surprisingly difficult (you do in fact hear the word spoken before you have to spell it backwards! :) but it requires some new neural circuitry. I suppose any of us with Alzheimers in the family could do worse than to practice this one!

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