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Old 08-14-2009, 04:19 PM   #61
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Sooo... Do you feel better now, Audrey? I had posted a congrat on your ER anniversary, but you probably saw it already.
Yes! I do feel much better, thanks. I thought I was having to communicate across a chasm. Turns out you are not standing that far away after all. Good, because I only have the energy for a few such discussions a year.

Yes, ERD50, I forgot the 95% success rate for FIREcalc meant that the portfolio did not survive in 5% of the cases. I thought I recalled some discussion that threw such percentages around and that there was a % above which the success rate was perhaps not that meaningful - was it 99%?, but I don't remember exactly what that discussion concluded. Maybe someone can post a link or two - it's been a while.

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Old 08-14-2009, 11:18 PM   #62
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Yes, ERD50, I forgot the 95% success rate for FIREcalc meant that the portfolio did not survive in 5% of the cases. I thought I recalled some discussion that threw such percentages around and that there was a % above which the success rate was perhaps not that meaningful - was it 99%?, but I don't remember exactly what that discussion concluded. Maybe someone can post a link or two - it's been a while.

Audrey
Ah, I bet that was William Bernstein's 80% number.

The Retirement Calculator from Hell, Part III

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Originally Posted by William Bernstein
Let’s examine a small sampling of possible political, economic, and military failure modes:

The mildest scenario is that of catastrophic inflation, as experienced in Germany and Hungary in the 1920s or, more recently, in much of the developing world.

Political failures are slightly worse, since these threaten the basic human motivation to work and produce. The state, for whatever reason, can decide to confiscate your assets or, worse, society’s means of production. Anyone who judges this unlikely should turn on CNN during any G-8 or WTO conference.

Local military action. Probably the lowest-probability item on this list, but something to think about on other continents.

The Big One: Some deranged prime minister or colonel in central Russia, Pyongyang, or South Asia could let loose the four horsemen upon the planet.

So, think about what a 97% 40-year success rate means: the absence of all of the above for approximately the next 1,200 years. (A 97% success rate means a 3% failure rate; those 40 years divided by 0.03 is 1,200 years.) Ignore for a minute the uncertainties of the less-developed world and think only about the winners: Germany—in this century alone, three episodes of military and/or economic disaster, the first two associated with mass starvation. Japan—wartime devastation even worse than Germany’s. England—near brushes with disaster in 1812-1814 and in both world wars. And even the United States—repeated banking failures, civil war, and the near-bankruptcy of the Treasury in the 19th century. The near collapse of the capitalist economy in the 1930s. And oh yes, I almost forgot—the entire globe barely missed mass incineration in October 1962.

History’s best-case scenario was the Roman Empire, which survived more or less intact for about seven centuries (if you ignore the odd sackings of the capital after 200 A.D.).

A wildly optimistic historian might give us another few centuries of economic, political, and military continuity. Back-of-the-envelope, that’s about an 80% survival rate over the next 40 years. Thus, any estimate of long-term financial success greater than about 80% is meaningless.
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Old 08-15-2009, 12:53 AM   #63
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Excellent, excellent...

Thank you M Paquette, for reminding us of this. I have seen this writing from Bernstein a while back, then forgot all about it, probably the same as many members of this forum. Nowadays, we have access to so much information and data, and having conditioning ourselves to be fast readers lest we miss something important, we become infoholics who often fail to retain the crucial things we ran across.

Those exogenous variables can throw a monkey wrench into our plan and ruin it. "Eat, drink, and be merry" indeed, as we can never be sure. The human mind hates uncertainties, but sadly there is never any guarantee. Least from a computer program.
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Old 08-15-2009, 06:50 AM   #64
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Ah! And it was William Bernstein of the The Online Asset Allocator no less! That name was vaguely stuck in my memory as being associated with the x% survival rate, but I couldn't remember the context exactly or the precise numbers. Thank you so much M Paquette for the link! What a genius you are to figure out what I was mumbling about!!!

Bernstein's site is an excellent reference/overview page for those seeking to learn more about AA. It may be about the best "launching point". The Frank Armstrong link is no longer valid, but you can easily find his book and other materials on the web by searching.

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Old 08-15-2009, 08:51 AM   #65
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Ah, I bet that was William Bernstein's 80% number.

The Retirement Calculator from Hell, Part III

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Thus, any estimate of long-term financial success greater than about 80% is meaningless.
Thanks for digging up the quote. If Bernstein wants to look at it that way fine, but I don't agree with that view at all. Maybe my kids will thank me some day.

Sure, there is a chance something bad will happen over 40 years. I don't see that as any reason to add to that risk by choosing a WR that historically would not survive in 2 out of 10 cases.

Consider someone who RE'd @ age 50 in 1969 in the US. What world events in that time rendered having or not having a portfolio left "meaningless" for that 90 year old person today?

Even if bad times come, I would think one could weather them better with some extra cushion in the portfolio.

I do agree that people have to make the personal decision regarding the "risks" involved with working long enough to achieve the portfolio size required for 100% versus 80% ( ~ 25% larger according to FIRECALC). But I'm not going to try to rationalize it as anything other than what it is, trading one risk for another.

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Old 08-15-2009, 09:40 AM   #66
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I forgot to add that I will continue to keep my WR low. In fact I will strive to keep to 4% or less of the current value of portfolio. One can never run out of money this way. It means I will splurge in good years, and go back to my LBYM way in bad years. If we have more people like myself, the recession would get worse, but I cannot help being selfish. Would you do the reverse?

Not that I discounted Bernstein's possible black swan events. But in case it doesn't happen, I hate having to kick myself for having to panhandle while the world parties on.

In the case a black swan happens, we would be going down the tube together. In that condition, I doubt that any of us would say "I wish I had bought that Porsche instead of sticking with my 3.5%WR".

Still, Bernstein had a good point about not sweating these things too much.
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Old 08-15-2009, 09:41 AM   #67
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Further to my previous post:
Quote:
And even the United States—repeated banking failures, civil war, and the near-bankruptcy of the Treasury in the 19th century. The near collapse of the capitalist economy in the 1930s. And oh yes, I almost forgot—the entire globe barely missed mass incineration in October 1962.
Which of these scenarios would have not gone better with more money? I recall my father saying that "cash was King" in the Depression. Hmmm, I'd rather come out of a "near miss" with my portfolio intact - I'd have enough money to buy a round of drinks. I just don't get his reasoning.

Worse, and very surprising for Bernstein, I think his numbers are off.

First, we only live in one industrialized country at a time. You can't add events from different places on the globe together to make a point. Calculated as a failure rate ( Bad Event / One person's 40 year exposure to Bad Events ) , he is increasing the numerator (multiple country bad events), but not increasing the denominator ( The Germany unique bad events apply to the person in Germany, not to the person in the US and Germany). He sort of implies that when he says: And even the United States...

That is like calculating *my* odds of getting hit by lightening based on the number of lightening strikes in the entire world over 40 years, rather than the number of lightening strikes that hit the space I occupy over 40 years.

Second - even accepting his 80% factor for external events

80% success from external events combined with an 80% success portfolio = .8*.8 = 64% success.

80% success from external events combined with an 97% success portfolio = .8*.97 = 77% success.

80% success from external events combined with a 100% success portfolio = .8*1 = 80% success.

I'm not so sure we should be referring to a difference in odds going from 64% to 80% as "meaningless".

I think Bernstein is great, but I'm not buying into this one. Maybe this is what is bugging me about this - we run FIRECALC and we see a 5% failure rate due to the market events (that would affect all people with that portfolio, AA, WR, etc) over the past periods since 1871. I don't see external events (that would affect all people with that portfolio, AA, WR, etc) occur in 5% of these cases that make having money unimportant. Couple that with a surviving spouse, I think there are good reasons to shoot for above 80% success rates.

You could almost turn his viewpoint around to say that there is not much sense in planning for anything past your 40th birthday. World events might wipe you out anyway, so why bother?

edit/add after seeng NWBs post - yes, you captured my feelings with the party/panhandle analogy.

-ERD50
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Old 08-15-2009, 10:03 AM   #68
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it sometimes helps to look at the min/max/avg end values), and repeatability (and probably a few others I've forgotten about).

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.

Absolutely! I find output data that simply states the number of failures per trial to have little meaning to me. Reading posts here, it's obvious others get confused too. For example, I read posts frequently where the poster assumes a 100% success rate means his/her portfolio performs wonderfully during the withdrawal phase and there will never be concern over breathtaking dips, slides or prolonged periods of inflation causing degradation in buying power.

I always take the output of Firecalc by year and organize it into a simple histogram. Then I can see (and show DW) that historically our plan would have resulted in zero failures but , depending on the period, might have had constant growth and a huge ending value or might have exposed us to scary dips and left us with near zero assets during our final years. Or anything inbetween.

An earlier version of Firecalc provided this histogram. I think eliminating it from the current version was a mistake.
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Old 08-15-2009, 12:40 PM   #69
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The way I interpret the probability of success numbers and Bernstein's suggestion that 80% success is 'good enough' is pretty much summed up by:

Don't sweat the small stuff.

Unlike a computer program, I can respond to possible problems by making adjustments. That is, if I have a reasonable asset allocation, and a reasonable withdrawal rate and plan for my available assets, I'm not going to worry about whether one online calculator says I have only a 95% chance of making it, or another calculator says I have a 100% success rate.

If I find myself on a path that looks prone to hitting a failure, I can adjust. I can lower my withdrawal rate a bit, for example, or I can alter when I want to take Social Security, or when I want to start IRA withdrawals. I can even (shudder!) by a Single Payment Immediate Annuity.
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Old 08-15-2009, 01:14 PM   #70
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Just for fun, I punched in my current numbers into FireCalc, and tried various variations on withdrawal plans, from the "spend more now, because old pharts spend less" option to Bob Clyatt's "95% of the previous year" rule for handling downturns, as well as the flat rate. I also put in possible asset allocation changes I would permit myself to make, limited to a 15% max change.

At the 80% confidence level, lowest to highest annual safe withdrawal rates had a 1.75:1 ratio. My current withdrawal rate was lower than the lowest safe rate. When I went for a 95% confidence level things tightened up a bit, but again my current withdrawal rate was low.

I obviously have too much money saved for retirement. What to do, what to do?

The wide range of safe withdrawal rates just shows that I have the room to adjust things significantly within my overall plan, my only real point in this pointless weekend.
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Old 08-15-2009, 01:20 PM   #71
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Unlike a computer program, I can respond to possible problems by making adjustments...
Of course, the key is to have the basic necessities being only a small percentage, say 60% or 75%, of the 4% WR. It means that you have leeway to cut out expenses in bad years. Since our lifestyle is frugal despite having two houses, my fixed costs are fairly low, and I must remind myself to keep it that way.

In a way, it is good that my expenses in the past varied wildly from year to year. One year, we spent more than 2.5 times the level of the previous year, and did not even notice until I reviewed it much later. It was great living in a bull-market year, and when you still had work income to boot! The high expenses included "one-time" events like home remodeling, but also more potentially recurrent items such as travels. We just need to go back to our frugal way until the storm is past. Somebody else will have to provide the stimulus the world economy needs.

PS. If there are further signs that we are out of the woods, there is still time for us to book a trip later this year. Maybe go to the town of Cognac to see my favorite spirit being made, or any wine town to see the vendange. You can't take it with you, heh heh heh...
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Old 08-15-2009, 01:51 PM   #72
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The way I interpret the probability of success numbers and Bernstein's suggestion that 80% success is 'good enough' is pretty much summed up by:

Don't sweat the small stuff.

... I'm not going to worry about whether one online calculator says I have only a 95% chance of making it, or another calculator says I have a 100% success rate.

If I find myself on a path that looks prone to hitting a failure, I can adjust. I can lower my withdrawal rate a bit, ...
Yes, but I wonder how this would work out in practice. Let's stick to Bernstein's 80% number, FIRECALC says:

80% success for 40 years = 4.15% WR; a $41,500 annual WD on a $1M portfolio
100% success for 40 years = 3.34% WR; a $33,400 annual WD on a $1M portfolio

So hard times come along, and Mr 80% has to cut back. Since he was taking out a higher average than Mr 100%, it would seem that he would now need to cut back below what Mr 100% was spending in order to get back on track. That is a pretty steep cut - I'm sure it's more complex than a simple average, but if that is ballpark, then Mr 80% might need to cut back to ~ $25,300 in some years. While Mr 100% can keep rolling along at $33,400.

I don't see either as right/wrong. Some might see it as a good trade-off to live a bit higher (or retire a bit earlier) if they have some confidence that the cut back is only a 20% risk, and are willing to make those kind of cuts. Others might not feel comfortable with that idea at all.

As to how this works in practice - I really wonder about that. People keep saying they would cut back, but what exactly triggers that? How much, when, how often? If one cannot answer those questions before the stuff hits the fan, I think they will have trouble figuring it out in the midst of a mess. For example - do you cut back after a single bad year? Two, three, five? A certain % drop in NW? I wonder how many people who have said they will do this actually have a plan, and have an understanding of how it would work. I'm not saying that as a criticism or a challenge, I'd actually like to see it, maybe I would do some of it if I felt comfortable enough.

I've done some crude modeling of this in a spreadsheet, and cutting back had to be pretty extreme to right the ship. I just ran the 95% spending rule in FIRECALC - that took the spending $41,500 spending down to ~ $18,000 ( a 57% cut!) for some long stretches (kinda tough to follow the lines, but the 10-20 year period was bunched up with lines in that area).

Are people really going to cut back that much for that long? And was it worth spending extra in the early years, versus a continuous $33,400? Maybe for some - but I wonder how many have thought this through.

edit/add: I keep cross posting with NWB - Of course, the key is to have the basic necessities being only a small percentage, say 60% or 75%, of the 4% WR. Or ~ 43% in the case above, for a 5-10 year stretch...

-ERD50
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Old 08-15-2009, 02:47 PM   #73
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I think ERD50 and NW-bound both have it right.

The key to making this whole early retirement thing work financially is it have a plan. A good, detailed plan of testable options and regular checkup points, with an honest-to-gosh budget for the spending side.

I've been doing this for myself so long that I forget to state what is obvious to me. (Senior moments?) Mea culpa.

Anywho, I do a quarterly checkup to see if I'm on a reasonably survivable path. This resulted in a small adjustment downward in withdrawals last March, which put me on what is currently a 3.09% withdrawal rate for the next 4 quarters after March. The changes in spending came off the luxury tranch of the budget. (I have tranches for bare essentials, basics, comfort & nice to have, and luxury items.) For example, we got an outside view cabin instead of a balcony cabin for a cruise, and skipped a few other very nonessential items.

The gotcha with this, as ERD50 correctly points out, is that a repeat of the Great Depression, or even the 1960's will result in the luxury tranch, and some of the comfort & nice to have tranch going empty. We'll be comfortable, but we won't be going on any cruises. That's a decision we have decided we can live with. (I'll be out back in the tomato patch...)

Annually, I'll rebalance the portfolio and tap off enough to bring short term cash to a year's expenses. As part of this I'll do a sanity check on asset allocation and expected dividend flow, as well as the budget going forward.

Realistically, I know that we won't be traveling as much or as far in our 70s and 80s as we do in our 50s. I also know that at least part of our Social Security income is likely to be available when we are in our late 60s. Countering that will be things like possible long term medical expenses, downsizing the home, a possibility of needing to move to assisted living, and so on, all of which affect the future budget.

Risk is everywhere. There is no such thing as certainty. I accept that, and will deal with it. I've planned as best I can to cover a range of scenarios, as as for the rest, well, the thing about black swans is that they're black, and hard to spot, especially at night.

Rule 19: Satisfaction is not guaranteed.
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Old 08-16-2009, 12:24 AM   #74
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Further to my previous post:


Which of these scenarios would have not gone better with more money? I recall my father saying that "cash was King" in the Depression. Hmmm, I'd rather come out of a "near miss" with my portfolio intact - I'd have enough money to buy a round of drinks. I just don't get his reasoning.

Worse, and very surprising for Bernstein, I think his numbers are off.

First, we only live in one industrialized country at a time. You can't add events from different places on the globe together to make a point. Calculated as a failure rate ( Bad Event / One person's 40 year exposure to Bad Events ) , he is increasing the numerator (multiple country bad events), but not increasing the denominator ( The Germany unique bad events apply to the person in Germany, not to the person in the US and Germany). He sort of implies that when he says: And even the United States...

That is like calculating *my* odds of getting hit by lightening based on the number of lightening strikes in the entire world over 40 years, rather than the number of lightening strikes that hit the space I occupy over 40 years.

Second - even accepting his 80% factor for external events

80% success from external events combined with an 80% success portfolio = .8*.8 = 64% success.

80% success from external events combined with an 97% success portfolio = .8*.97 = 77% success.

80% success from external events combined with a 100% success portfolio = .8*1 = 80% success.

I'm not so sure we should be referring to a difference in odds going from 64% to 80% as "meaningless".

I think Bernstein is great, but I'm not buying into this one. Maybe this is what is bugging me about this - we run FIRECALC and we see a 5% failure rate due to the market events (that would affect all people with that portfolio, AA, WR, etc) over the past periods since 1871. I don't see external events (that would affect all people with that portfolio, AA, WR, etc) occur in 5% of these cases that make having money unimportant. Couple that with a surviving spouse, I think there are good reasons to shoot for above 80% success rates.

You could almost turn his viewpoint around to say that there is not much sense in planning for anything past your 40th birthday. World events might wipe you out anyway, so why bother?

edit/add after seeng NWBs post - yes, you captured my feelings with the party/panhandle analogy.

-ERD50
Wow! Absolutely spot on, I totally agree with you on this and could not have thought it better, forget posting it! If you have a world event that happens 20% of the time in someone's life in the world somewhere, but only effects 20% of the world population the effect is only 4% not 20%!!!!
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Old 08-16-2009, 01:07 PM   #75
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Further to my previous post:


Second - even accepting his 80% factor for external events

80% success from external events combined with an 80% success portfolio = .8*.8 = 64% success.

80% success from external events combined with an 97% success portfolio = .8*.97 = 77% success.

80% success from external events combined with a 100% success portfolio = .8*1 = 80% success.

I'm not so sure we should be referring to a difference in odds going from 64% to 80% as "meaningless".

-ERD50
I agree with your analysis of the "geographical flaw" in Bernstein's arguments, but the above analysis is not correct.

The multiplication of probabilities as you perform them above is only valid if the individual events are statistically independent.

In this case, many of the black swan events that Bernstein is contemplating would likely precipitate the portfolio failure--therefore the events are related, not independent. Unless you honestly believe that you can design a portfolio that would be independent from total banking system collapse, war, etc. Even if you could (without ruining its performance in more "normal" times), your money might not help you much. You might be better off to invest in reloaders, generators, bullets, etc.

I think the "true" percentage lies somewhere between your calculation and Bernstein's, but probably closer to his. The implicit assumption in your calculation is that the financial and the political are not related to one another. We all know that is not true.

Your argument gains some validity due to the fact that the Firecalc data series doesn't include most, if any, of these events in its history. But that's just really another way of saying that it is a very limited data set, and wrapping one's financial expectations around this limited series is analagous to a market timer that designs a system that optimizes and "curve-fits" past data.

So I think that the spirit of Bernstein's argument stands.
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Old 08-16-2009, 07:07 PM   #76
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to clarify my previous post, I did not mean to imply that the Firecalc data series did not include any periods of war, bank failures, etc. Rather that nothing since the advent of Firecalc data approaches the level of catastrophe found on other continents, yet said catastrophes COULD happen in North America. The flip side of the shrinking world and globalization is more vulnerability. For example, what if a biological toxin were released and spread rampantly, or a nasty pandemic occurred?

Although the US has participated in several wars, none has occurred on home turf since the civil war. But think war of 1812--the US had the stuffing knocked out of it and Washington DC was sacked. Do any of us believe our portfolios would flourish in the event of a homeland invasion, or Germany-style inflation?

I think Bernstein's point is that some things can't be ancitipated or avoided, and therefore the difference between, say 90% and 100% survivability in Firecalc is more an illusion than anything in the face of greater uncertainties. I also think his references to other countries and events were by way of qualitative example, not offered to bolster his argument statistically.
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Old 08-16-2009, 09:44 PM   #77
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I think Bernstein's point is that some things can't be ancitipated or avoided, and therefore the difference between, say 90% and 100% survivability in Firecalc is more an illusion than anything in the face of greater uncertainties. I also think his references to other countries and events were by way of qualitative example, not offered to bolster his argument statistically.
Good points, and I pretty much agree with that and your previous post. It definitely isn't as simple as my math (real life never is), but since that seems to fit how how Bernstein presented it, I followed that for comparison.

On one hand, FIRECALC does include the Great Depression, and the "barely missed mass incineration in October 1962" so to call those out separately might be appropriate for a Monte Carlo simulator or other mathematical model, but not for FIRECALC as it does take historic events into account.

Bernstein may have been counting those other country events to try to calibrate his calculated 1200 years of history with a shorter and more recent time frame. He probably could have done a better/clearer job of the whole section.

However we slice the statistics, I'd still fall back on a combination of my 1969 retiree example, and NW-Bound's illustration of party versus panhandle. If things go OK, I think I'll be glad I planned ahead to have enough money to live my remaining years in comfort. If things go poorly, having something is better than having nothing. And if things go all to heck, and we are all in such deep doo-doo that money means nothing - all I gave up was having a higher life-style in the years before Armageddon.

I personally get more comfort from the first two scenarios versus the "opportunity cost" of the last.

This is another case where the math is all a bit irrelevant on an individual basis anyhow. Armageddon hits us or it doesn't. We can't really predict it, so we should be as prepared as we can for either case. For me, that means having a portfolio that survives if there is no Armageddon. Kind of like those 50% predictions for rain - you bring an umbrella. You're covered if it rains, and it didn't hurt much to carry it around if it doesn't rain. But you still get to enjoy the sunny day.

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Although the US has participated in several wars, none has occurred on home turf since the civil war. But think war of 1812--the US had the stuffing knocked out of it and Washington DC was sacked. Do any of us believe our portfolios would flourish in the event of a homeland invasion, or Germany-style inflation?
I think that would be more valid if it meant that money had no value at all. But in most cases, I suspect that those with more money did better. The German inflation case probably is a good one - I don't know history well enough, but I'd suspect wealthy families still did better than poor ones? Or maybe just "connected" families?

-ERD50
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Old 08-17-2009, 01:18 AM   #78
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The German inflation case probably is a good one - I don't know history well enough, but I'd suspect wealthy families still did better than poor ones? Or maybe just "connected" families?

-ERD50
From what I understand, a lot of fortunes were wiped out, as money, at least German money became essentially worthless. From the stories I read, inflation was so rapid that people would charge to the grocery store immediately upon getting paid, because any delay meant significantly fewer groceries would be afforded. There was actually an account of a woman who went to the store to buy a loaf of bread. She carried enough German currency to buy the loaf in a bushel basket. She set the basket down while looking at the bread. Someone came up, dumped all the currency on the floor and ran off with her empty basket.

But there were those who came through it with flying colors. I think it tended to be those in manufacturing, and probably those with the wherewithal to hold foreign currency, precious metals etc. I suspect you are right about having the right connections as well.

Ultimately, we seem to be in agreement about the value of being prepared, and the use of Firecalc as a tool. I happen to think that it is a tool that gives me a good general idea of where I stand, but I don't count on it for a lot of precision. There are too many unknowns outside the scope of the data series, which I think is Bernstein's point.
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Old 08-17-2009, 11:35 AM   #79
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I think you guys may have just rung a bell.
Ha
Uh oh! The Dow went down on Friday, then some more big time today. Fuego may get his wish after all.

Darn, back to "fear mode".
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Old 08-17-2009, 11:37 AM   #80
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Figures. On Saturday I furtively moved half my TSP out of the (ultra-conservative) G Fund and into equity funds.
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