Safe Withdrawals of up to 6% per year? Part 1

[newellcr]

Mikey,

If you find someplace better that has a better future than the US, please let me know. Do you have a short list of countries that you want to become a citizen of to avoid the problems that you listed with the US? I wish you luck in the new world order.

Cheers,

Chris

[newellcr]

Hello Cutthroat,

"My guess is that you will continue to run FIRECalc after you're retired also. "


Yes, I suppose. It always sounds so final when folks discuss the SWR. Hopefully, I'll be too busy retrieving my line from the tree to spend too much time with FireCalc. (grin)

Cheers,

Chris

[haha]

Mikey,
If you find someplace better that has a better future than the US, please let me know. *Do you have a short list of countries that you want to become a citizen of to avoid the problems that you listed with the US? *I wish you luck in the new world order.

Whew! This may be a new world's record for consecutive non sequiters. I am only responding to your post about asset returns. I am reasonably happy with my residency in the US. I am puzzled by your concatenation of citizenship with investment outlook.

As to your question of avoiding the problems I listed with the US, financially speaking, the answer is already stated in my earlier post. I think there are probably a number of countries that will grow faster than the US going forward, and a number of foreign companies that will on average outperform their US counterparts. Some of these will be Chinese, and others will be in other Asian countries.

And you too, I wish all the best

Mikey

Unclemick, could you expand on that? Are you saying the portfolios Bernstein suggests in Four Pillars would have significantly underperformed a total market approach in the 90s?

I'd be interested in hearing both pros and cons for the Bernstein type portfolio vs total market. I'm on the fence. Currently I have a total market type stock allocation, but I'm leaning toward Bernstein. Then I read Sharpe's comments and I'm not so sure. But then again, I like the higher yields that come with a value tilt, and some other things about Bernstein's approach. I'm usually quite decisive, but there seem to be equally compelling reasons for both approaches. So how did you decide, and how confident are you with your choice?

Bob,

Not unclemick, but I'll take a stab at your question.

If you are asking which portfoilo performs better, I don't think Bernstein is ever trying to achieve the best performing portfolio. *I think he is going for a good performing portfolio over a long range period (more than 30 years) with low volatility.

As you remember, he addresses recency and there will always be portfolios or asset classes that perform better than others in 10 year periods.

[unclemick]

CT has got it.

There has never been a period since 1966(when I started) when I couldn't look back and find somebody/some portfolio that outperformed mine. Took a long time to stop chasing performance and concentrate on what I was doing and why I was doing it.

The central difficulty of Bernstein/DFA/Coffeehouse/slice and dice portflio's for me is POGO - losing discipline in the stretch and not rebalancing. In my '7-8 asset class days I was guilty of looking at past performance and reluctance to cut back winners and fund underperformers. I also managed to hold gold/PM all the way down for twenty years and chicken out - sell at close to the exact bottom. At least my div/yield/value bias helped.

Hence - balanced index (Vanguard Lifestrategy) with 10% REIT Index (mini Bernstein). Plus individual stocks(div bias) for brain farts and male biology.

There is no reason a multi asset portfolio can't provide a successful ER - provided discipline is maintained.

[Bob_Smith]

If you are asking which portfolio performs better, I don't Bernstein is ever trying to achieve the best performing portfolio. *I think he is going for a good performing portfolio over a long range period (more than 30 years) with low volatility.

Cut-Throat, I keep my stock allocation relatively low (roughly 35% now, but I will go as high as 50% or so if stocks get creamed). So I'm always quite a long ways away from having to sell stocks to pay the bills. Therefore I'm not sure volatility is as big an issue for me as it would be for someone with a high stock allocation, otherwise I'd jump to the Bernstein model. I just can't decide if a switch is worth the hassle. I keep going back to Sharpe - that any diversion from the Total Market approach is a bet, and I have no strong opinions driving a desire to make any bets, and I'm not sure volatility is a big issue for me. Does this make sense? Can you (or anyone else) think of any other reasons to change horses? I'm suffering from analysis paralysis!! :-/

Bob,

I think sticking to a plan is worth probably more than which plan you go with. Berstein points that out. If you start switching gears, you let emotions get the best of you (one of the 4 pillars).

I think investing in the total stock market is fine. I would couple that with other asset classes such as REIT's, Bonds, and Foreign Stocks, Emerging Markets.

I think Unclemick's approach is the simplest with his Vanguard Retirement Portfolio. I went with individual asset classes, because I don't mind putzing a bit and this fufills some of the male testosterone thing that Unclemick refers to.

But I think developing a plan and Sticking to it is the best thing you can do.

[Bob_Smith]

Took a long time to stop chasing performance and concentrate on what I was doing and why I was doing it.

Unclemick, I'm not looking for the best performance. I'm just looking at the pros and cons and trying to make a decision. Let me ask you this? Discipline aside, do you see other disadvantages/advantages to Bernstein's approach?

[Hyperborea]

There is no reason a multi asset portfolio can't provide a successful ER - provided discipline is maintained.

And a well constructed one can provide better insurance against risks than a straight S&P500/Wilshire5000/US market only portfolio. It won't track the same as one either so that might be scary for some who want to compare to others but over the longer run it should be comparable unless of course the need for that "insurance" occurs.

[Bob_Smith]

Cut-throat and unclemick, I think what it comes down to is that there are very compelling arguments for both approaches. I have tried to tip the scales one way or the other, and it always comes up 50-50. It helps to pick two of the best brains out there. The fact that you each have chosen a different approach confirms my thinking, and explains my paralysis. I'm sticking with the same horse. Thanks for hashing it out with me.

[Hyperborea]

I keep going back to Sharpe - that any diversion from the Total Market approach is a bet, and I have no strong opinions driving a desire to make any bets, and I'm not sure volatility is a big issue for me. Does this make sense? Can you (or anyone else) think of any other reasons to change horses? I'm suffering from analysis paralysis!! * :-/

What confuses me is that those pushing "total market portfolios because otherwise you are making bets on sectors" just about always mean total US market. *The problem with that is that you are making country bets - it might pay off and it might not. *If you are talking about a total world market *portfolio, as Sharpe appears to be (I'm only in the 1st of the the 3 lectures though I've peeked ahead to see the ending), then that has some validity. *I can see the reasonable argument for mixing a total world equity portfolio in some %age with some %age of bonds to set the desired risk level. *At rough national market caps that would mean that ~40% of the equities would be in the US market and 60% in the rest of the world.

There is some evidence for value and small premiums though there is only some evidence and it isn't definitive. *That might suggest that one could take a "bet" by including an extra weighting to those sectors though I wouldn't make it a large bet.

As I mentioned before I think Bernstein (though I'm not sure if it was him nor can I re-find the reference) did a study using international market data and built such a national market cap weight portfolio (the total world portfolio) and rebalanced it yearly to account for changing market caps. *IIRC he started this portfolio simulation sometime in the late 1800's and ran it until 2000 or so. *The results were that you would have done just about as well with this portfolio as you would have by "magically" choosing the equity market that would have done the best. *We can't know which one will be the best over the future so by choosing only one national market or overweighting one national market we are taking a bet.

A simple "total world portfolio" could be something like 40% VTSMX + 60% VGTSX. *For those not using Vanguard perhaps something like 40% VTI + 50% EFA + 10% EEM though I may have EEM set too high as this is just off the top of my head. *This portfolio would then make up the equity portion with bonds mixed in to bring the desired risk level into line.

For those who imagine that the US ceeding the leading country position has to be anything at all like a "fall of the Roman Empire" scenario just look at the last such transition. *Britain had no great collapse. *The US passed British GDP sometime around 1870 or so and China is expected to do the same to the US in about 10-20 years. *For the very old "early retirees" in their 60's or 70's then this transition may have little to no effect on them. *Those of us in our 20's, 30's and 40's should be thinking carefully about better diversification - a total world portfolio at least.

[Bob_Smith]

If you are talking about a total world market *portfolio, as Sharpe appears to be (I'm only in the 1st of the the 3 lectures though I've peeked ahead to see the ending), then that has some validity

Yes Hyper, I am referring to a total world market. But I'll probably maintain some home bias.

Do you recall where you saw the study showing that a world market cap weight portfolio would have done just about as well as "magically" choosing the equity market that would have done the best. I'd be interested in seeing that.

[unclemick]

One small concern with slice and dice beyond discipline and any costs related to rebalancing is turnover.

Recently - Vanguards small cap value index has done well with over 13%/yr the last five years. 0.27% expense ratio BUT 109% turnover. Back when I last looked it was 28%.
The Boglehead in me - says this is costing something. I've wondered about slicing asset classes so thin that 'internal in and out of asset class' is generating trading costs some may not be aware of.

As for U.S./rest of the world cap weight - at age 61 and no plans to become an ex pat, I'm not as concerned - having been thru the 70's and early 80's - hopefully I know the drill.

That said - having taken a lot of ribbing from Brits/Commonwealth type over thirty years - myopic, proventcial, etc. The rest of the world market agruments deserve attention as previously mentioned - if you plan to live abroad, have a long ER span, or just want to be aware of what's availible 'out there'.

[charlie]

Bob_Smith, et. al,

I have mentioned this before but let me repeat
myself. I use the coffeehouse approach which
equally weights all equity asset classes. I cheat
a little by using 7 equity classes instead of the
usual 6. The extra class is small cap international
represented by Vanguard's International Explorer.
This gives an over all exposure of about 28%
of my equity to international.

The reason I am doing this is to avoid the reverse
DCA affect of drawing down a balanced fund like
Target Retirement 2025. At age 70 with RMD
in force, I feel that I can manage the distribution
more efficiently. I remains to be seen if I can
rebalance during severe stock market down years.
That, they say, is when the rubber hits the road.

For those in the accumulation phase, I think unclemick's
balanced index with a splash of REIT is just fine. I
would add a dash of international as well, however.

Cheers,

Charlie

[Hyperborea]

Do you recall where you saw the study showing that a world market cap weight portfolio would have done just about as well as "magically" choosing the equity market that would have done the best. I'd be interested in seeing that.

I wish I did but I've tried to find it before and haven't been able to - perhaps it was one of the other Bernstein's books (Peter Bernstein)?

I just spent a bit of time searching though and I came up with this interesting paper that I've only had a chance to skim but it appears to support this.
http://www.gsm.uci.edu/~jorion/papers/century.pdf

From page 18 we have:

Over the last 76 years, the U.S. stock market provided an arithmetic captial return of 5.48 percent, measured in real terms. Its geometric growth was 4.32 percent over this period.
<snip>
The "survived markets" index has a compound return of 4.33 percent; it only accounts for markets in existence in 1996 and examined since their last break. The "all markets" index has a compound return of 4.04 percent; it accounts for all market and attempts to interpolate returns over major breaks in the series.

There was a reference to this paper and some more discussion of the US equity premium in a paper by Jeremy Siegel on "The Shrinking US Equity Premium".
http://www.jeremysiegel.com/view_art...1&h=1#_ftnref8

[Bob_Smith]

Thanks Hyper - I'll read those.

[Bob_Smith]

For those in the accumulation phase, I think unclemick's balanced index with a splash of REIT is just fine. *I would add a dash of international as well, however.

Charlie - or anyone - I'm in the withdrawal phase and my stock allocation is relatively low. I plan to rebalance annually, and because my stock allocation is low (and will remain so) I doubt that I will need to sell stock funds to pay the bills. So I shouldn't encounter reverse dollar cost averaging or the need to sell stocks when they're down. My point is this: doesn't a slice and dice portfolio make the most sense for those with relatively high stock allocations? In other words, doesn't a lower stock allocation reduce the impact of volatility all by itself, and eliminate that as a reason to slice? Is my thinking right on this, or am I missing a piece of the puzzle?

In other words, doesn't a lower stock allocation reduce the impact of volatility all by itself, and eliminate that as a reason to slice? Is my thinking right on this, or am I missing a piece of the puzzle?

Bob,

As I understand it the bond portion of the portfoilo is to reduce volatility. The slice portion of the stock is mainly to increase return over the long haul. Even though some asset classes do tend to reduce volaltility.

Someone correct me, if I'm wrong.

[Bob_Smith]

Cut-Throat, that's the way I understood it too. Charlie mentions the problem of reverse DCA, which is important. It isn't an issue for those in the accumulation phase, but it could cut a few years off the life of a portfolio for someone in the withdrawal phase. Slicing helps with the problem. It enables one to withdraw from the slices that have appreciated to restore the balance. But if one has all their stock holdings in a total market fund, you're forced to sell a piece of all the slices because they are all blended together in one fund - you can't pick and choose.

I'm thinking that shouldn't be an issue for those who maintain a relatively low stock allocation because in practice, they shouldn't ever be in a position where they need to sell when prices are down. In other words, the "insurance" Hyper mentions shouldn't be an issue for someone with a stock allocation of 35-40%. Then it just comes down to which is likely to perform better. When you factor in the simplicity and the reduced transaction costs on one hand vs. the chance you may do better with the fine tuning one can do with slicing - it seems to be a coin toss.

[charlie]

Bernstein and Swedroe both argue that slicing your
stock allocation will help reduce the volatility of
your port. The "total market" is dominated by
large cap growth stocks. When they are out
of favor, your port would suffer if that was all
you had.

Bob_Smith, IMHO you would still have a lower overall
volatility by slicing even if you had a relatively low
stock allocation. Take today for example. My
coffeehouse was down .59% but every one of
Vanguard's 60/40 funds that use TSM was down
even more. My coffeehouse exposure to international
small cap bucked the trend.

Cheers,

Charlie