Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Retiring In Secular Cycles
Old 02-14-2007, 03:42 AM   #1
Thinks s/he gets paid by the post
Tadpole's Avatar
 
Join Date: Jul 2004
Posts: 1,169
Retiring In Secular Cycles

I love to hate my weekly newsletters from John Mauldin. I am sure that many others here have already seen this but I decided to post this table from the recent "Outside the Box" which featured a discussion by Ed Easterling of Crestmont Research entitled "Destitute At 80: Retiring In Secular Cycles". The premise of the article is that lower success rates for SWR are achieved when the P/E ratios are as high as they are today. Has anyone tried to match the economic cycle of today to a set of similar periods from the past (if possible to do this match)? Does the set of 5% failures in a 95% SWR success influence you? Do you buy this argument?

http://www.investorsinsight.com/otb_...?EditionID=469

Quote:
When P/Es started at relatively high levels, it had a major impact on future success. When P/Es started at relatively lower levels, returns always were sufficient for 4% withdrawals.



As Figure 1 reflects, the level of valuation (P/E) has a direct impact on success and ending capital. The implication for today's investor is that the likelihood of financial success in retirement is considerably less than most pundits are advocating. Twenty years from now, if the response is "who knew?", it won't be much comfort for retirees in the employment line at Wal-Mart. This is especially true since a rational understanding of history and the drivers of longer-term stock market returns can help today's retiree to avoid that "surprise." I assure you that these are not fear-driven statements, but rather insights that are based upon history and the financial principle that valuation is a major determinant of future returns.
__________________

__________________
Tadpole is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Retiring In Secular Cycles
Old 02-14-2007, 05:16 AM   #2
Full time employment: Posting here.
DRiP Guy's Avatar
 
Join Date: Nov 2006
Posts: 546
Re: Retiring In Secular Cycles

Let's presume his extraction of the data, and the presentation of the chart is perfect. I have no reason to believe it is not. So, yes, I certainly believe if you cherry pick the absolute worst time to enter the market, as compared to the absolute best time, there can be demonstrable differences in ending balance given the same WR, or it follows, that the SWR for them would have to vary.

But just as it is true that water can kill you (drowning of course, but even drinking too much as one unfortunate radio contestant recently learned only belatedly), so it is true that "Valuations matter" to investment returns, and hence, SWRs derived from those returns.

The question is "What is one to do about this truth?"

Well, for one thing, don't stop drinking fluids, you won't make it very long! Same with investing -- Firecalc can show wildly varying outcomes for the terminal value of your retirement funds, based on the particular periods it compares to. Your own investing period is unlikely to match either the absolute best case, nor the absolute worst case. Every investment book written by a source who is considered broadly 'reputable' has acknowledged this fact. But, there are some few charlatans and hucksters (whether they believe themselves to be or not) who, just like those nutritional supplement salesmen on late night TV, would have you believe the "ANSWER" is in this single tiny bit of truth, and cast it as the single most important fact to consider. So they want to tell you that shark cartilage can cure cancer, mumps and a skinned knee.

So would the "Valuation Matters" idiots have you sit out a twenty year market of stocks because they don't like the P/E. Well, the hand we are dealt is not always optimal, and the question is -- do you jump in and participate? I certainly know what my answer has been for the last fifteen years, and I know what my returns show.

Would I buy an individual stock and disregard valuation measures, including EBITA and/or P/E or other measures as appropriate depending on company life cycle or type? Of course not. But for people buying a broad index of the market via a mutual fund, I don't see that today's earnings and ratios command that reasonable people go into cold storage and delay retirement for fifteen years while they hope for a major crash/correction, so they can get in at the bottom by timing for that.

Some may chose to do so. I wish them all good fortune. As for me, call me crazy, but this view of approx the total US market (adding some foreign exposure is de rigeur these days) seems okay to me. Note that TMWX is the actual Wilshire Total Market, but this index fund hand a handy P/E:


Quote:
Dow Jones Wilshire 5000 Index Portfolio

Fundamental Characteristics 6/30/06

Price/Earnings 18.5


Price/Book
2.63
Beta 1.02
Net Assets $157.01m
Number of Securities 2,106
Long term chart of TMWX

http://bigcharts.marketwatch.com/adv...=TMWX&sid=5435

__________________

__________________
DRiP Guy is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 05:54 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,614
Re: Retiring In Secular Cycles

Right. Reliable sources indicate that at least one person has waited more than 10 years for valuations to return to an attractive level. He has entirely missed a huge run-up in prices as a result. There's very little chance that he'll make up for this lost time. Maybe he will ultimately be proven right---but I doubt it.

So, my practical answer to DRiP's "What do we do about it":
- Tilt my portfolio toward value so that at least I'm buying a less "pricey" part of the market.
- Go with a 3-4% of annual ending balance withdrawal strategy, rather than a fixed 4%. This will require some belt tightening in some years, but assures that I can't run out of money even if it turns out that I've picked a bad time to retire. (Yes, you still need to watch the withdrawals relative to inflation to assure you aren't losing purchasing power.)
- Be prepared for the possibility of lean times to go with the booms to follow.

__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 06:55 AM   #4
Full time employment: Posting here.
DRiP Guy's Avatar
 
Join Date: Nov 2006
Posts: 546
Re: Retiring In Secular Cycles

Sounds like great minds think alike -- I have a similar approach!




As a relative newbie, I am trying to keep informed, establish and be comfortable with my risk profile and alternatives, and maintain a general philosophy that includes BOTH a tendency to stay the course, but also willingness to flex some.
__________________
DRiP Guy is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 07:24 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,380
Re: Retiring In Secular Cycles

Quote:
Originally Posted by DRiP Guy
Let's presume his extraction of the data, and the presentation of the chart is perfect. I have no reason to believe it is not. So, yes, I certainly believe if you cherry pick the absolute worst time to enter the market, as compared to the absolute best time, there can be demonstrable differences in ending balance given the same WR, or it follows, that the SWR for them would have to vary.
Very poetic presentation, but it misrepresents what Esterling did here. He did not cherry pick anything; he presented survival percentage given a 4% SWR for 30 years from each quartile. Looking at quartiles is not subject to data mining or other biased sampling as would be the example you gave. Clearly there is less data for quartiles than for the whole data set, but it is hard not to be impressed by the rank ordering here.

The only thing wrong here in my opinion, is that for a long time it has apparently been a very successful strategy to say "Damn the torpedoes, full speed ahead". So any suggestion of caution is open to the easy criticism “Well, if there were anything wrong with my plan, why is it working so well?”

Ha

__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 07:53 AM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 16,455
Re: Retiring In Secular Cycles

Quote:
Originally Posted by samclem
So, my practical answer to DRiP's "What do we do about it":
- Tilt my portfolio toward value so that at least I'm buying a less "pricey" part of the market.
- Go with a 3-4% of annual ending balance withdrawal strategy, rather than a fixed 4%. This will require some belt tightening in some years, but assures that I can't run out of money even if it turns out that I've picked a bad time to retire. (Yes, you still need to watch the withdrawals relative to inflation to assure you aren't losing purchasing power.)
- Be prepared for the possibility of lean times to go with the booms to follow.
Exactly what I am doing!

Audrey
__________________
Well, I thought I was retired. But it seems that now I'm working as a travel agent instead!
audreyh1 is online now   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 08:02 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,408
Re: Retiring In Secular Cycles

Rocky and Carlo's has reopened for eats in ST. Bernard Parish - so one has a place to do lunch if going to look for names on gravestones to vote early and often next time.

I vote for everybody: small (early) pension, early SS, life cycle funds, dividend paying stocks AND variable SWR - depending.

agile, mobile, and hostile - hopefully with enough 'robustness' in the mix should I guess wrong on the weather(cycle) ahead.

Reluctantly - I defer to Bogle and try not to waste too much time in my 14th year of retirement nailing down a 'perfect plan' and try to maintain an adequate plan that gets the job done.

The Norwegian widow(dividends) remains my ultimate defense - should I have to make a goal line stand.

heh heh heh - of course like the lottery ticket - still do Ben Graham's Postscript(4th ed Intelligent Investor) - questing for 'the stock'.
__________________
unclemick is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 08:43 AM   #8
Thinks s/he gets paid by the post
Leonidas's Avatar
 
Join Date: May 2006
Location: Where the stars at night are big and bright
Posts: 2,847
Re: Retiring In Secular Cycles

Quote:
Originally Posted by unclemick2
agile, mobile, and hostile - hopefully with enough 'robustness' in the mix should I guess wrong on the weather(cycle) ahead.
Extremely sage advice from a teenager in Missoula!
__________________
There is no pleasure in having nothing to do; the fun is having lots to do and not doing it. - Andrew Jackson
Leonidas is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 09:02 AM   #9
Full time employment: Posting here.
DRiP Guy's Avatar
 
Join Date: Nov 2006
Posts: 546
Re: Retiring In Secular Cycles

Quote:
Originally Posted by HaHa
Very poetic presentation, but it misrepresents what Esterling did here. He did not cherry pick anything; he presented survival percentage given a 4% SWR for 30 years from each quartile. Looking at quartiles is not subject to data mining or other biased sampling as would be the example you gave. Clearly there is less data for quartiles than for the whole data set, but it is hard not to be impressed by the rank ordering here.

The only thing wrong here in my opinion, is that for a long time it has apparently been a very successful strategy to say "Damn the torpedoes, full speed ahead". So any suggestion of caution is open to the easy criticism “Well, if there were anything wrong with my plan, why is it working so well?”

Ha


I accept both of your criticisms:

* That he certainly did not data mine or selectively pick data to try to get an intended outcome. I am sorry if my language indicated that I thought he did. What I meant to say is that if we grab the extrema of these 'trials', then we are unlikely to have our returns match either end of the spectrum, and so while it is informative as an exercise, it still comes down to a probabilistic question: "What am I likely to experience over my own personal time frame?"

* That my referring to my own relatively good fortune over a recent 15 or so year string does not support nor detract from the initial premise. I (many investors?) really do have a problem with doing that to support a general thesis, and I'll try not to do so in future, unless it is actually applicable to the point. It's difficult, though -- we tend to think of our personal experiences as confirmatory to a degree sometimes not supported by reason. Look at people who grew up in the depression -- I have known many of them that were far more frugal than a typical LBYM type, but I also found them generous with their money to others (family/friends) almost to a fault. I think it had to do with the need to share and support others while still not having many funds for your own luxuries in those old austere times.
__________________
DRiP Guy is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 09:47 AM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: Retiring In Secular Cycles

The article is a good read and I believe has merit. Unfortunately, today's PE's fall almost exactly between the top and second quartile. So, for us recent RE types, are we in the 79% or 100% quartile? It would have been nice if the cell boundaries he calculated came out so today's actual market PE fell nicely within a cell instead of right at a boundary!

Drip - the author made no mention at all of staying out of equities while the PE is high. I wonder why you brought that up?

Samclem and Audrey - your withdrawal strategies fall exactly in line with what the author is saying, at least the way I read the article.



__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 09:50 AM   #11
Moderator Emeritus
Nords's Avatar
 
Join Date: Dec 2002
Location: Oahu
Posts: 26,616
Re: Retiring In Secular Cycles

So nearly 80% of the retirements that blindly persisted in a 4% SWR at the top of the market survived their blissful ignorance, and the study's overall success rate was 95%?

Is there a problem here?

Life is too short to read an endless series of "guest" authors while whining about how hard it is to write a book John Mauldin.
__________________
*
*

The book written on E-R.org, "The Military Guide to Financial Independence and Retirement", on sale now! For more info see "About Me" in my profile.
I don't spend much time here anymore, so please send me a PM. Thanks.
Nords is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 10:00 AM   #12
Thinks s/he gets paid by the post
 
Join Date: Aug 2006
Posts: 1,356
Re: Retiring In Secular Cycles

I don't think valuations are all that high right now. I believe the S&P500 is still under a PE of 20. While that is a little high historically, its not insane considering the low inflation, low interest rate environment we are in.

If you are getting near retirement, it might be worth allocating a little less to stocks (say 5-10%).

Could the market drop 25%? Sure.

Will the market be higher in 5 years? Probably.

Disclosure- I am 34 and 100% equity invested.

__________________
Hamlet is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 10:04 AM   #13
Thinks s/he gets paid by the post
 
Join Date: Jul 2003
Location: Pasadena CA
Posts: 2,695
Re: Retiring In Secular Cycles

For me, this has been one of the best threads on this most excellent board. I am facing retirement in the near future. One thing that does concern me is retiring into a recession. I can avoid that by just keeping my job which I actually do like but I can't imagine that I would prefer it to spending more time with the kids/grandkids, kayaking, volunteering, traveling and the like.
Looking at the data the question still is 'what do I do'? Several people outlined flexible withdrawal approaches. And an 80% success rate for the worst case is a pretty good argument. Certainly I would not want to be out of equities for 10 years as one famous PE watcher is. But its tough to buy bonds right now. I choose to go with my Target Retirement fund for my core and a smattering of DRIP stocks, a few ibonds and my wife's funds in Wellesley/Star. Will it work? Will I have to go back to work? Who knows? But I accept full responsibility if the market returns get less pleasant. I have done the best I can. And it may be that ony having to out run the other hunter, not the bear will be enough.
__________________
T.S. Eliot:
Old men ought to be explorers
yakers is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 10:07 AM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: Retiring In Secular Cycles

Quote:
Originally Posted by Nords
So nearly 80% of the retirements that blindly persisted in a 4% SWR at the top of the market survived their blissful ignorance, and the study's overall success rate was 95%?

Is there a problem here?
Doesn't seem to be. What makes you think there is a problem?
__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 10:07 AM   #15
Thinks s/he gets paid by the post
MasterBlaster's Avatar
 
Join Date: Jun 2005
Posts: 4,359
Re: Retiring In Secular Cycles

For the worriers out there...


If you believe that current valuation levels will cause undue risk in your retirement years then just discount your withdrawals by an appropriate amount. One could certainly make a case for a safe withdrawal rate being tied to (ie weighted by) PE levels.

So if current PE valuations are around 18% and you believe that the "safe" PE valuation is around maybe 14% then just discount your SWR by that amount. That would imply that your 4% SWR would be reduced by the ratio (14/18) giving a new SWR of 3.11 %

personally I think that is way way too conservative but if it helps you sleep at night then I am all for it.
__________________
MasterBlaster is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 10:48 AM   #16
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,408
Re: Retiring In Secular Cycles

Tongue in cheek - I like where the Norwegian widow brings the ghost of Ben Graham to the Modern Portfolio Party (theory?).

With the fleshing out of the Target Retirement Series by Vanguard - one buys the Series with a livible current yield - ala Ben's 25 to 75% stock depending on valuation and changes thru the cycle.

The ancient versions(I'm an older phart) were when one checked pay me the dividends and reinvest cap gains. I've seen value guru's in the past do mixtures of Wellington, Wellesley, Dodge and Cox type value funds.

I'd love to see Bernstein do his TWD(terminal wealth dispersion) ala his 15 Stock Diversification Myth article on a changing 4% yield slice and dice portfolio over 30 40 years.

The mind boggles at attempting that analysis.

heh heh heh
__________________
unclemick is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 10:49 AM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
youbet's Avatar
 
Join Date: Mar 2005
Location: Chicago
Posts: 9,965
Re: Retiring In Secular Cycles

Quote:
Originally Posted by yakers
Looking at the data the question still is 'what do I do'?
yakers.......

Folks on this board vary from conservative (low and/or variable withdrawal rates, highly feathered nests, flexible budgets) to aggressive (WR of 5% - 6% or more etc.). We'll all have to reconvene in 20 or 30 years to see how everyone is doing!

Whenever I run Firecalc I'm amazed at the variability of ending portfolio values based on the year your retirement begins. A lot of discussions on this board are actually discussions of how to reduce this variability as in variable withdrawals schemes, buying annuities, more fixed income investments, etc. And that's all good stuff........

The author of this article is simply saying that some of the ending portfolio value variation is not random but is related to the PE ratio of the portfolio at the beginning of the 30 year period. I'm not sure if his analysis is correct, but it passes my common sense test. If you begin retirement with a portfolio of equities highly valued by common measures, it seems they would likely increase in value slower than a portfolio of stocks more modestly valued by common measures. But, so what? Especially if you're already in your 50's and RE isn't all that early anymore!

My decision was to RE with 25X desired retirement expenses with future SS as a bonus or safety net. With today's PE levels, the author may be correct that my ending portfolio value will be less than the long term average, but I wasn't concerned enough about that to postpone RE any longer.

You have to throw your own die. And you can be sure that while you can follow reasonable guidelines to insure the success of your retirement financial plans, there are no guarantees!

BTW, just bought DW a Valentine Day kayak! A Hobie - Maui. And we're having a ball with the grandkids!

Good luck and enjoy RE.

youbet




__________________
"I wasn't born blue blood. I was born blue-collar." John Wort Hannam
youbet is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 10:59 AM   #18
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Retiring In Secular Cycles

I only skimmed the article, and nobody has mentioned it, but I believe this study was done with a 100% stock portfolio.
__________________
wabmester is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 11:02 AM   #19
Thinks s/he gets paid by the post
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 2,400
Re: Retiring In Secular Cycles

Quote:
Originally Posted by wab
I only skimmed the article, and nobody has mentioned it, but I believe this study was done with a 100% stock portfolio.
Beat me to it, but I agree with you that Mr. Maudlin is talking about 100% stock. I plan to be 80/20 when I start FIRE, which I think gives 100% or very close to it at 4% for 40 years.

2Cor521
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Re: Retiring In Secular Cycles
Old 02-14-2007, 11:09 AM   #20
Full time employment: Posting here.
DRiP Guy's Avatar
 
Join Date: Nov 2006
Posts: 546
Re: Retiring In Secular Cycles

Quote:
Originally Posted by youbet

Drip - the author made no mention at all of staying out of equities while the PE is high. I wonder why you brought that up?

Hmmm... how to answer this one...

I could just say I am perhaps preoccupied with past dialogs espousing just that approach. But for here and now, let's just say that a reasonable person might consider how to hedge against having their SWR 'fail' due to the vagaries of economic cycles. And there are at least two ways to approach that problem, that fall to my own mind readily:

a) Reduce SWR.
b) Change allocation.

(A third is working longer, but let's not go there! ) The issue is that you may not find another allocation (i.e. 100% TIPS??) that could actually support a livable SWR , depending on how big your nest egg is. Obviously, someone needing to draw only 35K/yr from a 2.5MM pot might be fine with a low stock allocation and some sort of bond set up that would support that percentage.

But someone needing a 10.5% SWR, and only being able to draw on ~250K, and hoping to get there with fixed income approach may just have to get a second job. That is certainly not my own plan.

I hope that helps you understand why I might have answered more fully (but hopefully not extending to going O/T) than might have been expected.

__________________

__________________
DRiP Guy is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
What stops you from retiring early? bongo2 Young Dreamers 38 08-31-2007 01:02 AM
Mom is Retiring Vincenzo Other topics 5 03-04-2007 05:44 PM
Real retiring age of Spaniards highest ForeignExchange Life after FIRE 0 01-20-2006 08:58 AM
Retiring from the Military? FlowGirl Young Dreamers 11 09-17-2004 08:08 AM

 

 
All times are GMT -6. The time now is 05:15 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.