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Re: Retiring In Secular Cycles
Old 02-14-2007, 08:38 PM   #41
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Re: Retiring In Secular Cycles

Quote:
Originally Posted by crestmont
I am awed that almost all scenarios provide such large ending values, yet the minority scenarios expire a portfolio. And since zero is so incredibly serious, the prospect of failure becomes more than just a low probability. At some point for many of us (certainly for me), running out of $ at 80 in completely unacceptable (yet I respect anyone willing to risk it even when the odds are very low).
Yet, anyone that has studied this problem would detect that money was getting a bit tight long before age 80 and reduce spending to a point that running out of money would be almost impossible.

Or have you never heard of the "Trout Bum in a trailer park down by the river lifestyle"? 8)
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Re: Retiring In Secular Cycles
Old 02-14-2007, 08:39 PM   #42
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Re: Retiring In Secular Cycles

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Originally Posted by Nords
Pretty impressive what happens when you set the feedback gain and then just turn your back for 30-40 years, huh?

I think that the models don't reflect the very real human behavior of reducing spending, raising cash, and possibly even finding part-time work. But they sure scare a lot of people into being more conservative than perhaps is warranted.
Hey, how come I didn't see this before I just posted?

I could have saved my breath, you already covered the same point, only with a LOT less words!
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Re: Retiring In Secular Cycles
Old 02-14-2007, 08:42 PM   #43
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Re: Retiring In Secular Cycles

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Originally Posted by DRiP Guy
Hey, how come I didn't see this before I just posted?

I could have saved my breath, you already covered the same point, only with a LOT less words!
Me Too!
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Re: Retiring In Secular Cycles
Old 02-14-2007, 08:58 PM   #44
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Re: Retiring In Secular Cycles

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Originally Posted by Cut-Throat
Me Too!
Well, your post wasn't wasted though... it got me thinking of the LBYM lifestyle, obviously it propels us to be more likely to FI/RE, but also post-accumulation it is great to already be adaptable in the short term (delayed gratification, like we did when we saved our paper route money) in order to preserve the long term health of the plan.

I have not formalized this in any way in my own head, but I would be willing to bet that many ERs think about this the same way I do:

The nest egg driving the available SWR is the golden goose to me. It must be preserved. So during the salad days, if the SWR is good, and I am taking out SEPP or otherwise moving from the Goose to my local storage (MM fund or whatever), I am certainly not going to be blowing all 4.227% of an available 4.227% -- I will likely be socking away a growing (hopefully) mini-surplus, so that if the SWR does need to dip to 3.11% for a while, I can easily use some of the acorns stored closer to my little nest, figuratively speaking.
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Re: Retiring In Secular Cycles
Old 02-14-2007, 09:02 PM   #45
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Re: Retiring In Secular Cycles

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Originally Posted by wab
I'm waiting for the Japanese market SWR study.
This would be very interesting.

It may prove surprising too. Certainly an all equity portfolio would not have faired well. And anyone who treated their house like a bond for allocation purposes would be out on the street. But a 60/40 mix, coupled with the general price deflation experienced by Japan, may actually have been survivable for 30 odd years. . . don't know, but it would be interesting to see.

I'm cautiously optimistic, too, that US equity returns over the past 100 years were not an anomaly. US economic growth has largely resulted from a free enterprise focus that large portions of the world are now starting to embrace (continental Europe notwithstanding). Although the US will not likely lead the main charge in the 21st century, places like India and China have the ability to drive global economic growth the way the US did in the century past. No reason we can't ride along.

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Re: Retiring In Secular Cycles
Old 02-14-2007, 09:16 PM   #46
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Re: Retiring In Secular Cycles

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Originally Posted by 3 Yrs to Go
I'm cautiously optimistic, too, that US equity returns over the past 100 years were not an anomaly. US economic growth has largely resulted from a free enterprise focus that large portions of the world are now starting to embrace (continental Europe notwithstanding).
Please keep in mind that the most-often quoted data--Ibottson's Annual Yearbook--only reflects long-term returns of 10% because the series starts in 1926 when P/Es were 10.2 and ends when P/Es are almost twice as high. Starting P/E impacts the dividend yield component of total return as well as the capital gain component. Had P/Es at the start been the same as today, long-term returns would have been (necessarily) less than 7%. That alone would be a major change to conventional thinking. The starting point has a major impact.
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Re: Retiring In Secular Cycles
Old 02-14-2007, 09:31 PM   #47
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Re: Retiring In Secular Cycles

And I know that CRSP provides databases that clean up biases associated with survivorship and M&A issues, but not sure Ibbotson or others do, so that may also be a confounding factor as well...
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Re: Retiring In Secular Cycles
Old 02-14-2007, 09:36 PM   #48
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Re: Retiring In Secular Cycles

Hmm... thought this was interesting. I knew small caps were outperforming, but did not know for how long or to what degree:

Quote:
Ibbotson also breaks out the performance of each size decile, or 10% slice of the market. What’s interesting is that the returns are almost perfectly rank-ordered—the smallest 10% has done the best, and the largest 10% has done the worst.

Since 1926, the smallest decile has returned an average of 13.96% a year. My only caution about micro-cap investing is that although the “outperformance premium” is very real, it’s not very well-behaved. The relative performance is highly cyclical. It’s either feast or famine.
http://www.crossingwallstreet.com/ar...on_yearbo.html


Not likely to change my own style on such intriguing things though. Slow and steady, broadly diversified, market basket of all stocks...
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Re: Retiring In Secular Cycles
Old 02-14-2007, 09:39 PM   #49
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Re: Retiring In Secular Cycles

Quote:
Originally Posted by wab
I still think that looking at historical US returns for SWR's is wildly optimistic. And I'm waiting for the Japanese market SWR study.
This came up on raddr's board last May:
http://www.raddr-pages.com/forums/viewtopic.php?t=2546

Maybe I'll do an update through 2006 at some point, but the basic results won't change: 3% and diversification starting in 1990 would have left one intact (so far).
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Re: Retiring In Secular Cycles
Old 02-14-2007, 09:54 PM   #50
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Re: Retiring In Secular Cycles

Quote:
Originally Posted by crestmont
Please keep in mind that the most-often quoted data--Ibottson's Annual Yearbook--only reflects long-term returns of 10% because the series starts in 1926 when P/Es were 10.2 and ends when P/Es are almost twice as high. Starting P/E impacts the dividend yield component of total return as well as the capital gain component. Had P/Es at the start been the same as today, long-term returns would have been (necessarily) less than 7%. That alone would be a major change to conventional thinking. The starting point has a major impact.
While not showing P/Es, this chart from FPA 1 IMHO shows pretty well that the 10+% returns averaged since ~1990 are atypical, and if past is prologue, we should look for ~6.7% to return. Of course, you seem to be telling us that if P/Es don't move down, we may not get that, either...





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Re: Retiring In Secular Cycles
Old 02-15-2007, 12:52 AM   #51
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Re: Retiring In Secular Cycles

Quote:
Originally Posted by bpp
This came up on raddr's board last May:
http://www.raddr-pages.com/forums/viewtopic.php?t=2546
Wow, that's great work, bpp. Let's hope it doesn't happen here. Lots of good insights on that thread.

BTW, Swedroe had some data last year on the recent ScV outperformance, and I believe it was the highest in history (or at least since WWII). Scary all around. And I do believe that F&F didn't find much of a small-cap premium internationally.

Quote:
Originally Posted by crestmont
Yes, I assumed 'yield' for the quick analysis since the presumption would be that today's investor would be "stuck" with current yields. Even if there were total return gain/losses, the reinvestment rate would be at market yields and thus would imbed the now current yield.
That's a good point -- bond returns are more predictable than stock returns. It seems a little odd to mix current bond yield with historic stock returns, but I like the insight. Maybe you'd get a different SWR result if you also assumed the current embedded inflation estimate in those bonds (assuming you used historic CPI data in your analysis).
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Re: Retiring In Secular Cycles
Old 02-15-2007, 06:15 AM   #52
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Re: Retiring In Secular Cycles

Quote:
Originally Posted by DRiP Guy
While not showing P/Es, this chart from FPA 1 IMHO shows pretty well that the 10+% returns averaged since ~1990 are atypical, and if past is prologue, we should look for ~6.7% to return.
Note that the chart is Total Return (Index + Dividends) adjusted for inflation. Since there are only 3 sources of return from stocks: (1) EPS Growth + (2) Dividend Yield + (3) P/E Change, the chart is actually showing us Real EPS Growth + Dividends (since the impact of P/E changes, if any, over 135 years would be minimal). Given that Real EPS growth tracks economic growth over time, and since Real EPS grew at just over 3% over that period, we have the first part of the total. Dividend yields averaged close to 3.5%. Thus the the total is 6.7%, in line with the chart. The key thing to note about this is that the chart is reflecting rational economics, not random finance. Going forward, from today's level of valuation and expected economic growth, the outlook is closer to 6.5% or a little less.


Quote:
Originally Posted by wab
That's a good point -- bond returns are more predictable than stock returns. It seems a little odd to mix current bond yield with historic stock returns, but I like the insight. Maybe you'd get a different SWR result if you also assumed the current embedded inflation estimate in those bonds (assuming you used historic CPI data in your analysis).
Yes, using today's yield was an assumption since the retiree would be buying long-term bonds in the current interest rate environment and so any scenario with higher or lower yields would not be applicable. Also, since the anaysis really focuses on the risks in the top quartile of P/Es--periods when inflation was very low--bond yields in those periods would have been close to 5%. Had the bond yields varied with inflation changes, I think the impact would reflect even better success (not a lower risk of failure) in lower quartile periods since the bonds would be acquired at higher yields. Thanks for your comment.
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Re: Retiring In Secular Cycles
Old 02-15-2007, 08:49 AM   #53
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Re: Retiring In Secular Cycles

Quote:
Originally Posted by crestmont
Yes, using today's yield was an assumption since the retiree would be buying long-term bonds in the current interest rate environment and so any scenario with higher or lower yields would not be applicable. Also, since the anaysis really focuses on the risks in the top quartile of P/Es--periods when inflation was very low--bond yields in those periods would have been close to 5%. Had the bond yields varied with inflation changes, I think the impact would reflect even better success (not a lower risk of failure) in lower quartile periods since the bonds would be acquired at higher yields.
I think this clearly reinforces the notion of having a much shorter duration in the fixed income portion of one's portfolio. Using laddering-techniques, inflation-protected securities, and money-market funds allows the yield earned on the fixed income portion to respond more quickly to changes in inflation. What really killed portfolios in the 1970's and early 80's was higher inflation coupled with having a whole lot of long-term bonds yielding less than five percent. Perhaps that is the bigger risk to a portfolio today. The Ibbotson data shows that, from 1926-1982, the real return on T-bills was about zero. Since then it's been about 2%. Today we have low nominal interest rates, especially at the intemediate and long end of the yield curve. However, real rates are pretty high in historic terms. Even TIPS allow you to lock-in real rates of 2.3-2.4%. So I would argue that, properly managing the fixed income portion of one's portfolio should offset much of the risk of somewhat higher-than-average equity valuations. As it was in the 60's, the major risk to today's retiree is a big increase in inflation. Historically low inflation is what allowed us to weather the big equity decline of 2000-2002.
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Re: Retiring In Secular Cycles
Old 02-15-2007, 09:23 AM   #54
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Re: Retiring In Secular Cycles

Quote:
Originally Posted by crestmont
Please keep in mind that the most-often quoted data--Ibottson's Annual Yearbook--only reflects long-term returns of 10% because the series starts in 1926 when P/Es were 10.2 and ends when P/Es are almost twice as high. Starting P/E impacts the dividend yield component of total return as well as the capital gain component. Had P/Es at the start been the same as today, long-term returns would have been (necessarily) less than 7%. That alone would be a major change to conventional thinking. The starting point has a major impact.
Wait a sec... I may be doing the math wrong, but the expansion of the PE ratio from 10 to ~18 over the last 81 years seems to account for only 0.8% of annual return. The other 9.2% came from "something else". EPS growth and divs.

Based on 10% returns for 81 years, the 1926 values are up 225224%. If the PE would have remained at 10, then the values would be up 125124%.

My point is that over really long periods of time, the relevancy of PE ratios slowly fades away.

One additional point - let's say I'm one year from FIRE, and I have 95% of my target portfolio value in the bank. PE's are currently at 18. 1 year from now, PE's have gone to 36, and earnings growth was zero. My portfolio just doubled in value, so I can afford to take 1/2 of my originally planned "4% SWR" and still get by. So now what is the survivability of a 2% SWR with starting PE's of 36? That's the question I would be interested in finding out. My portfolio value will increase significantly with an expansion of the PE ratio (all else being equal). This will affect what % I'll need to take to live on.
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Re: Retiring In Secular Cycles
Old 02-15-2007, 10:22 AM   #55
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Re: Retiring In Secular Cycles

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Originally Posted by justin
1 year from now, PE's have gone to 36, and earnings growth was zero. My portfolio just doubled in value, so I can afford to take 1/2 of my originally planned "4% SWR" and still get by. So now what is the survivability of a 2% SWR with starting PE's of 36? That's the question I would be interested in finding out. My portfolio value will increase significantly with an expansion of the PE ratio (all else being equal). This will affect what % I'll need to take to live on.
Hey, that’s a good point, maybe I should borrow the copyrighted Ding, Ding, Ding exclamation . I usually don’t look at it the way you suggested because I am not going for a target amount in my portfolio. I am looking at my age and anticipated pension and the rest of my portfolio I just look at as having ‘this much’ on my retirement date and 4% should be a SWR. But what you said makes a lot of sense. If I am looking at a portfolio of $400k and a PE <20 and the PE goes way over 20 but the portfolio goes way over $400k, what is the problem? I have not seen it stated this way. I think Ho%us would find that difficult to deal with.
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Re: Retiring In Secular Cycles
Old 02-15-2007, 10:32 AM   #56
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Re: Retiring In Secular Cycles

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Originally Posted by yakers
If I am looking at a portfolio of $400k and a PE <20 and the PE goes way over 20 but the portfolio goes way over $400k, what is the problem?
That's the way I figure it. I'm shooting for ~$1.5 million. That will give me $60k/yr based on a 4% SWR. That's all I need to fund my FIRE plans.

Well, if the PE's double in my last couple years of investing (and earnings growth remain relatively flat), then the portfolio goes from $1.5 million to $3 million. I still only need $60k/yr for my expenses. That equates to a 2% SWR on the $3 million portfolio.

I don't know how to quantify the effect of PE on SWR, or how reliable or accurate any quantification would be. I feel pretty good about the numbers FIREcalc produces (ie - FIREcalc is telling you if you would have survived historically). But I also keep an eye on PE ratios for a general valuation measure. I think they are pretty useful when they are at extremes, and not very useful when they are in the "middle" territory.
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Re: Retiring In Secular Cycles
Old 02-15-2007, 10:42 AM   #57
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Re: Retiring In Secular Cycles

"Dividends Don't Lie"
Geraldine Weiss Investment Quality Trends

And no - Yogi Berra didn't really say 'dividends are the same as real money'

But he came close!

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Re: Retiring In Secular Cycles
Old 02-15-2007, 11:09 AM   #58
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Re: Retiring In Secular Cycles

Quote:
Originally Posted by crestmont
Yes, using today's yield was an assumption since the retiree would be buying long-term bonds in the current interest rate environment and so any scenario with higher or lower yields would not be applicable. Also, since the anaysis really focuses on the risks in the top quartile of P/Es--periods when inflation was very low--bond yields in those periods would have been close to 5%. Had the bond yields varied with inflation changes, I think the impact would reflect even better success (not a lower risk of failure) in lower quartile periods since the bonds would be acquired at higher yields.
That's a reasonable statement. Much more reasonable than:

Quote:
The results are that the current level of bond yields (5% or so) reduces the success rate (assuming annual rebalancing) at all stock/bond mix ratios.
Which might scare people away from bonds (or at least reinforce the gung-ho stock allocators).

Bottom-line: long-term bonds probably aren't a safe haven during times of high stock valuations. Maybe cash is king?

I wonder if there have been other periods in history with a global liquidity glut making almost all asset classes "expensive" on a global scale. What are the safe havens during times like we have today?
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Re: Retiring In Secular Cycles
Old 02-15-2007, 12:00 PM   #59
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Re: Retiring In Secular Cycles

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Originally Posted by wab
I wonder if there have been other periods in history with a global liquidity glut making almost all asset classes "expensive" on a global scale. What are the safe havens during times like we have today?
Given that US$ and other currencies are fiat, and all income producing assets are high priced, there really isn't an obvious "safe haven". Maybe exotic things for rich people, like ranches in the pampas. But for one who needs income, therefore can't make big bets that might take years and large new capital injections to carry out, looks like slim pickings. TIPS aren't bad, but real interest rates are not as high as they have been, even in the recent past. So there is an opportunity for capital depreciation there, though not absolute loss.

It's a time for speculators, in that we are essentially forced to speculate by the poor passive returns to capital being offered in the marketplaces.

Justin’s argument above about PEs going from 18 to 36, therefore everything still copasetic on the SWR front is a speculator’s argument. “Hell boy, you think 18 is high, just watch!”

And why not? Why not go to 100; surely someone created the intellectual framework for that during the last big boom.

Ha
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Re: Retiring In Secular Cycles
Old 02-15-2007, 12:09 PM   #60
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Re: Retiring In Secular Cycles

Quote:
Originally Posted by HaHa

Justin’s argument above about PEs going from 18 to 36, therefore everything still copasetic on the SWR front is a speculator’s argument. “Hell boy, you think 18 is high, just watch!”


Ha
The element Justin added was that he would use a lower SWR because his portfolio has increaded significantly. I found that a interesting idea.
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