Nothing to fear but fear itself.............

[Cut-Throat]

The Quicken retirement planner, with its 'what if' scenarios can help eliminate fears of portfoilo failure very nicely.

For example: - I have mine set up for a conservative 3% return over inflation. If the worst (or close to it) would happen (say stocks lose 50% of their value the day you retired) and I am invested 50% in stocks my portfoilo would take a 25% hit. Even if stocks still only gained 3% in the future my overal plan would still work, without changing spending habits or worrying about timing the market.(Not to mention that stocks would probably do much better after a hit like that).

The graph draws 2 lines showing your current plan with a brown line and the what if scenario is a different colored line in yellow.
FIRECALC does the same thing but applies historical prices to your portfolio rather than ones you set. The Quicken planner is just a lot simpler.

 

[wabmester]

What if your "worst case" assumptions turn out to be wildly optimistic?    Sounds like you're assuming that if stocks take a hit, bonds will do fine.    Some people reasonably think we're currently setup for the following: stocks and housing reset to "reasonable" valuations and then inflation takes off and stays high until we have another baby boom.

This would mean that 3%+inflation would be a fabulous return, and the more likely scenario is that the only assets that keep up with inflation are TIPS, commodities, and maybe gold.

There are plenty of other worse "worst cases" than you've described, such as Japan for the last 15 years.

 

[Cut-Throat]

Well Wab, If you believe that we are headed for times worse than the U.S. had in the Great Depression (I don't - I am more in fear of the Sun burning out), then we'll have a another 'New Deal' to bail us out. Also Japan's bubble was a lot bigger than ours is currently.

And yes, you can always come up with a worse situation. Like you get a brain tumor tomorrow and don't have to worry about investments at all. Always keep in mind that all of us, even you, are dead in the long run.

 

[wabmester]

If you believe that we are headed for times worse than the U.S. had in the Great Depression

Let me first say that I don't necessarily believe we're doomed, just that planning for doom might be more prudent than "fear."

Also, I hope it's clear to everybody that we don't need to have an event worse than the Great Depression in order to have worse long-term returns. All we need is slightly longer bad stretches than we've had in the past and/or slightly less RTM to the upside. I think that is very likely.

 

[John Galt]

I do think we are doomed but not in the sense you mean. I believe our doom will come through
excessive government and resulting micromanaging of people's
lives, as well as general moral decay and decline of
historical social customs. The financial collapse will
follow the societal implosion.

John Galt

 

[cute fuzzy bunny]

I am more in fear of the Sun burning out

OH MY GOD! THE SUN IS GOING TO BURN OUT?!?

AIYEEEEE!

 

[Cut-Throat]

Also, I hope it's clear to everybody that we don't need to have an event worse than the Great Depression in order to have worse long-term returns.   All we need is slightly longer bad stretches than we've had in the past and/or slightly less RTM to the upside.    I think that is very likely.

Well, we certainly differ on this one and the pessimistic economists predictions that I have read predict a 3.5% + real return on stocks without a 50% correction for the up coming decades. If we get a 50% correction in the stock market the return of stocks should be around 7% real. Even ***** may come out of the woodwork then. I don't think your scenario is very likely at all.

Since, no one will know who is right about the future for over 30 years, we'll all have to roll with the punches. And if your prediction is correct, we'll all be cutting expenses. However, I'm not cutting mine until then.

 

[Michael]

THE SUN IS GOING TO BURN OUT

Don't worry about it. Long before the sun burns out, it will expand into a red giant that engulfs the earth. This will melt the earth, making the subsequent shrinking and burning out of the sun irrelevant.

 

[unclemick]

De Gaul and the Nowegian widow folks! American stocks pay dividends. I also don't think the value premium is dead. Even a Bernstein multi asset class is viable - provided you don't freeze and refuse to rebalance.

1. balanced index - take the SEC yield.

2. Wellesley, Wellington, Dodge and Cox Balanced.

3. Bernstein (or Coffeehouse et al) multi - asset class and rebalance.

Take your pick, diversify, keep expenses low, mind the store. "This time it's different?" If Angus Maddison says we've had the weenie - maybe. Until then - ER on and recyle those dryer sheets.

 

[cute fuzzy bunny]

Don't worry about it. Long before the sun burns out, it will expand into a red giant that engulfs the earth. This will melt the earth, making the subsequent shrinking and burning out of the sun irrelevant.

AAAAAAAAAAAAAAAAAAAAAAHHHHHHHHHHHHHHHHH!!!

 

[Jarhead*]

What if your "worst case" assumptions turn out to be wildly optimistic?    Sounds like you're assuming that if stocks take a hit, bonds will do fine.    Some people reasonably think we're currently setup for the following: stocks and housing reset to "reasonable" valuations and then inflation takes off and stays high until we have another baby boom.

This would mean that 3%+inflation would be a fabulous return, and the more likely scenario is that the only assets that keep up with inflation are TIPS, commodities, and maybe gold.

There are plenty of other worse "worst cases" than you've described, such as Japan for the last 15 years.

Wab:
Mid-60's until early 80's in the U. S.
Stagflation. High unemployment and double didget inflation. (I was 27 in 1966, and like the folks that were depression era, I doubt if I'll ever get that out of my memory bank).
No place to hide, as bonds took it on the chin along with stocks.
I remember feeling sorry for the people that had retired during that period. If you were working, you were getting 15 to 20% raises some years. Your employment
was the only real line of defense.
Will that happen again in the next 20 years, who knows.
But I find similarities, sub. costly Vietnam for Iraq.
Having gone through that one time in my life, (Once is enough), I personally bought tips, short-term corporates, and CD's. Although I still have some stocks, I have went to a very defensive stance.
For my kids sake, and all the younger retirees, I hope that doesn't take place again, but I'm too damn old to start all over again.

 

[wabmester]

Same here, Jarhead. I can't predict what will happen in the future, but I can at least try to protect against a nasty turn of events.

 

[Bob_Smith]

1. balanced index - take the SEC yield.

2. Wellesley, Wellington, Dodge and Cox Balanced.

3. Bernstein (or Coffeehouse et al) multi - asset class and rebalance.

Take your pick, diversify, keep expenses low, mind the store.

Unclemick, are you actually taking the yield approach? Do you add 1% or so? How long have you been doing that? I'd be interested in hearing details - for example - does your income vary a great deal from year to year? I was looking at the income on Vanguard's Balanced Index fund and was struck by how close it has been to the 3.5% - 4% SWR:

2003 - 3.13%
2002 - 2.85%
2001 - 3.25%
2000 - 3.11%
1999 - 3.40%
1998 - 3.52%
1997 - 4.08%
1996 - 4.00%
1995 - 4.66%
1994 - 3.67%
1993 - 3.89%

 

[SDY888]

There are plenty of other worse "worst cases" than you've described, such as Japan for the last 15 years.

This type of generic quote has appeared a lot recently. Whilst factually true and there is a possibility it could happen, I think oblique references to the Japanese economic recession are misplaced, specious and akin to scaremongering.

At the onset of it's recession, the Japanese economy bore little resemblence to other developed countries. Capital allocation was (and still is) largely subject to Government influence and direction from the Ministry of Finance and that itself is greatly influenced by the vested interest lobby groups such as the Construction Industry lobby. Secondly, there were/are massive cross holdings between conglomerates, financial institutions and the State, such that profitability was secondary to size, market share and the drive to export. The attitude was one generally of long term relationships and mutuality rather than the individual merit system employed in the West (applicable to investment, money and people). Thus when the bubble burst, the whole fabric of the economy collapsed. The results were far worse and far longer lasting than anything likely to be suffered in a freer western economy because free markets can adapt and change whereas the Japanese system was so rigid and ingrained into society and the psyche of society, it has taken these past 15 years to overcome.

Just my view.

 

[Cut-Throat]

Wab:
Mid-60's until early 80's in the U. S.
Stagflation.  High unemployment and double didget inflation. (I was 27 in 1966, and like the folks that were depression era, I doubt if I'll ever get that out of my memory bank).  
No place to hide, as bonds took it on the chin along with stocks.  
I remember feeling sorry for the people that had retired during that period.  If you were working, you were getting 15 to 20% raises some years.  Your employment
was the only real line of defense.
Will that happen again in the next 20 years, who knows.
But I find similarities, sub. costly Vietnam for Iraq.
Having gone through that one time in my life,  (Once is enough), I personally bought tips, short-term corporates, and CD's.  Although I still have some stocks, I have went to a very defensive stance.  
For my kids sake, and all the younger retirees, I hope that doesn't take place again, but I'm too damn old to start all over again.

Jarhead,

Well, that is the value of FireCalc. If you run your plan against the 1966 period and it survives, it should give you some solace.

And remember this - The older you get - the easier it is to do financial planning

 

[wabmester]

I think oblique references to the Japanese economic recession are misplaced, specious and akin to scaremongering.

There are certainly circumstances that were unique to Japan, but that doesn't mean that the US can't possibily experience a hit of similar magnitude and duration (if not from similar causes).

Firstly, most of us here are concerned with long-term financial/economic performance, with a withdrawl period of anywhere from 30 to 50 years.   We look at the historical record and say "gee, in the past 120 years, there really haven't been any devastatingly bad 30-50 year periods."   While a lot has happened in the last 120 years, that simply isn't a lot of data to predict how things might play out in the next 50 years.   I have *zero* confidence that the historical record gives us a worst-case 30-50 year stock market performance going forward.

So, if one were to retire today, it might be smart to evaluate the current environment to see what we might be in for.   For example:

-- we just came off the best 20 years the stock market has ever had, with a relatively minor bump in 2000-2002.   (Japan had a helluva good ride for 10 years before their 15 year downward spiral.)

-- like Japan, we have nasty demographic trends: aging population, higher tax burden, fewer workers to pay taxes, social security, medicare, etc.

-- like Japan, our banks are setting themselves up for failure by having the most liberal lending standards I can recall in my lifetime, fueling a real estate bubble, which may mean they end up with a bunch of inflated assets on their books once the defaults start.

-- Our treasury debt is at an all-time high, and our currency is feeling the hit.   Our dollar and our low interest rates are currently propped up by the federal banks of Japan and China.  They can stop saving our collective butts anytime they feel like it.

-- Our trade deficit is at an all-time high, we're exporting high-paying jobs, and we're not seeing the same sort of amazing productivity gains fueled by technology over the last 100 years or so.

-- Anybody want to predict how our oil supply will hold up for the next 50 years?

Of course, everything *might* work out fine, our short history *might* contain worst-case performance, and there's always the lottery....

 

[unclemick]

Bob_Smith

Look back take out last ten years - 8.49%. Truly a bogus number. Here's why.

Theory - take the SEC yield and let the principle ride.

Actual practice - most of the 8.49% came from 'survivership bias' it the sense of selling hobby stocks that didn't raise their dividends, spin offs, cash mergers, etc. Because of the recent run up - marked to market hobby stocks are 4.27% yield ballpark. AND, and that's only part of the universe.

Income: non-cola pension 60%, lumpy bumpy dividend stocks 40% (2003 tax).

Reserve: IRA - 85% of total portfolio - Lifestrategy mod/REIT index and at age 61 looking toward SS.

AND,and - SO with pension, widowed mom with SS, and step daughter in spare room with disability income(and a good computer).

The big war - I want to live on 20k, in a 48k income household. BTY - I prefer aggressively frugal dryer sheet recyler to "you cheap b*^#ard, we're not getting any younger".

I watch SEC yield's like a hawk - but in my mind - haven't been 'truly tested' yet to see how much grit I exhibit when a bear arrives. 2000-2003 wasn't it.

 

[JOhn Galt]

unclemick is always entertaining

We could live on 18K a year but I don't want to.
25K is a bit more comfy. I only have about 25% of
my net worth in my IRA (untouched) and bears don't
scare me (no stocks).

John Galt

 

[wabmester]

I understand what you are saying here and you are right, but you can't live your life in fear. What are the alternatives?

There's a difference between living in fear and investing to avoid pain. I like to party, but I don't like surprises.

I simply try to limit my risk, fully realizing that I may be leaving a bunch of upside on the table if all the stars align and the stock market takes off like a rocket.

I have no problem with people taking calculated risks, but it makes me feel warmer and fuzzier if I know that they know the risks going in. Maybe I'm just overprotective by nature -- you kids be careful out there

 

[Whakamole]

Here's a nice cheerful editorial

http://www.upi.com/view.cfm?StoryID=20040806-014126-2438r

As they say, "Hope for the best but expect the worst."

 

[unclemick]

Martin Hutchinson is always such a cheerful cuss - I confess to reading his stuff from time to time. I agree the warning flags are flying and due diligence is in order. But to throw in a little politics:

A nice fella named Benjamin Graham modestly pointed out that IF the much derided Raskob advice in Ladies Home Journal at the peak of 1929 bubble had been followed - "Everybody Ought To Be Rich" may have been a tad over stated but 8% via DCA from 1929 to 1949 wasn't toooo shabby given the Great Depression and WW II - two minor market disruptors of the period.

"God looks after drunkards, fools, and The United States of America".
Charles De Gaul

And remember the Norwegian widow - buy some dividend stocks.

In todays mail Mario Gabelli sent me the six month shareholder report on the closed end conv. bond fund I own - PLUS a little PR blurb on his utilities fund - Mario should have asked me about the Nowegian widow 15 years ago. Fund is three years old - like this is something new. Cycles come and go. What a hoot!

 

[Cut-Throat]

Here's a nice cheerful editorial

http://www.upi.com/view.cfm?StoryID=20040806-014126-2438r

As they say, "Hope for the best but expect the worst."  

This reminds me of the Professor Ravi Batra, who wrote a book in the late 1980's something like "the coming great depression of the 1990's" If you would have listened to him, you would have pulled all of your money out of the stock market, put it into gold bricks and had it under your mattress. Maybe ***** did !


Whenever anyone starts predicting the future, I picture old Ravi (highly esteemed in his day)

 

[Whakamole]

I admit to enjoying the occasional pessimist rant about how the collapse of the US economy (nay, world economy!) is imminent, due to crushing debt/the housing bubble/peak oil/SARS/a giant rock falling into the ocean. Maybe we as a society are very bored.

I have cash for but for entirely different reasons, mainly because I'm not terribly impressed with the value of most investments nowadays. Even commodities have had their run-up. What's a guy to do?

 

[Bob_Smith]

This reminds me of the Professor Ravi Batra

I remember him - he created quite a stir at the time. I checked his latest book and a reviewer described him as a smart guy who has successfully predicted the last 5 out of 1 recessions.

It's easy to be a prognosticator of gloom and doom. It's the financial equivalent of a "do-gooder" on a mission - in this case to save the rabble from financial ruin. Problem is, these guys are usually wrong. I'll bet more opportunity has been squandered, by far, than financial disaster prevented by all the gloom and doomers.

I think early retirees are especially susceptible to conjuring up worst case scenarios - we have the time, we're always reading about each others' fears, and our minds aren't consumed with work anymore (which pretty much kept me numb 5 days per week). But the fact is, most of us are in a very, very good position. We probably have less to fear than 99% of mankind, yet we run the risk of obssessing over things that might go wrong. And if that happens, it will all have been for naught.

 

[wabmester]

So, I'm curious. Does anybody want to present a compelling case for a long-term bull market?

My impression is that we have three types of bears here:

1) economic bears, like me

2) valuation bears, like *****

3) and "gordon equation" bears who don't necessarily expect a big correction, but who are resigned to lower returns going forward

I only know two types of bulls:

i) those who believe that since stocks have historically gone up, they will continue to do so

ii) those who think the economy is doing well and P/E multiples are appropriate given the good times ahead

I obviously don't buy (i), and I think (ii) is largely an illusion created by unsustainable forces such as cost-cutting, tax incentives, and rock-bottom cheap capital.