Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Switching years
Old 03-23-2005, 12:15 PM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Switching years

In looking through the wreckage of SWR discussions, I found an interesting assertion that might be worthy a separate discussion free of the other flotsam and jetsam. I'm going to say right up front that I do not know if the assertion is true or not and I'm not very motivated to find out. Perhaps someone else has already evaluated this and can affirm or deny. Perhaps this discussion has already taken place in another time zone.

One of the wonder twins noted that if you switched two the returns in any 2 years at random in a 30 year SWR run, you fundamentally changed the SWR for the worse. The derived presumption was that our historic SWR's were therefore based on the luck of things falling the right way and returns coming up the way they did.

So heres the discussion point. Presuming that this case is in fact true (confidence factor: somewhat low) does it say that returns are in fact somewhat random and we've just had good luck, or does it indicate some sort of correlation of returns from one year to the next that creates a positive influence on SWR's?

I have a few opinions, but I'm interested in what others think first.
__________________

__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny 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: Switching years
Old 03-23-2005, 12:26 PM   #2
Dryer sheet wannabe
 
Join Date: Mar 2005
Posts: 21
Re: Switching years

I would be curious to see what the numbers are after they are crunched. In other words, how much it affects SWR on average, if the 2 are randomly switched in a 30 year period.

It's very interesting that the SWR would be lower. Common sense would say that on average, the SWR should be about the same overall, less when you switch certain years, and more when you switch others which should balance out.
__________________

__________________
comixfan is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 12:27 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,409
Re: Switching years

Yikes TH

Shades of Monte Carlo. I ain't going there.

Let the experts come forth.

Heh, heh, heh.

Could be fun.
__________________
unclemick is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 12:43 PM   #4
Thinks s/he gets paid by the post
Hyperborea's Avatar
 
Join Date: Sep 2002
Location: Silicon Valley
Posts: 1,008
Re: Switching years

Quote:
I would be curious to see what the numbers are after they are crunched. *In other words, how much it affects SWR on average, if the 2 are randomly switched in a 30 year period. *

It's very interesting that the SWR would be lower. *Common sense would say that on average, the SWR should be about the same overall, less when you switch certain years, and more when you switch others which should balance out.
Yeah, I agree that for a single 30 year run that the probability of an increase in the withdrawal rate is as likely as a decrease. However, since the SWR is the lowest withdrawal rate that survived any 30 year period then if any switch in year data caused a lowering of the withdrawal rate for the worst such 30 year period it would mean that the SWR (the lowest of the low) would be even lower.

What's at the heart of this matter is reversion to the mean.
__________________
Hyperborea is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 12:46 PM   #5
Dryer sheet wannabe
 
Join Date: Mar 2005
Posts: 21
Re: Switching years

Quote:

Yeah, I agree that for a single 30 year run that the probability of an increase in the withdrawal rate is as likely as a decrease. *However, since the SWR is the lowest withdrawal rate that survived any 30 year period then if any switch in year data caused a lowering of the withdrawal rate for the worst such 30 year period it would mean that the SWR (the lowest of the low) would be even lower.

What's at the heart of this matter is reversion to the mean.
I understand. And I'm also thinking that the longer the time period ie 40, 50 60 years etc, the less the 2 year switch would affect the SWR.
__________________
comixfan is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 12:49 PM   #6
Thinks s/he gets paid by the post
charlie's Avatar
 
Join Date: Mar 2004
Location: Dallas
Posts: 1,211
Re: Switching years

We have gone around this horn before, but it
seems to me that if there is no correlation from
year to year in market return, then switching 2
years at random should have no statistical effect.
OTOH, if there is some correlation, then ......

If you give the "Gordon Formula" any credibility,
then you must concede that the looong term
market return is predicted by current dividend
rate plus dividend growth rate. This, to me,
supports the year-to-year correlation theory
in some subtle way that is impossible to predict
on the short term.

The problem is that the shorter the time frame,
the less predictable the outcome.

I hope this does not resurrect the ghost of the
recently departed.

Cheers,

Charlie
__________________
charlie is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 12:54 PM   #7
Dryer sheet wannabe
 
Join Date: Mar 2005
Posts: 21
Re: Switching years

Quote:
We have gone around this horn before, but it
seems to me that if there is no correlation from
year to year in market return, then switching 2
years at random should have no statistical effect.
OTOH, if there is some correlation, then ......

If you give the "Gordon Formula" any credibility,
then you must concede that the looong term
market return is predicted by current dividend
rate plus dividend growth rate. *This, to me,
supports the year-to-year correlation theory
in some subtle way that is impossible to predict
on the short term.

The problem is that the shorter the time frame,
the less predictable the outcome.

I hope this does not resurrect the ghost of the
recently departed. *

Cheers,

Charlie * * *
What is the worst 30 year period? *Anyone have the returns by year for that period? *I'll crunch them just to take a look.

And I think because there is a correlation from year to year, switching numbers at random doesn't really have the same impact on me that it would've otherwise.
__________________
comixfan is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 01:04 PM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Switching years

Nah I dont think its going to create any resurrections. NFB is in the process of shutting down due to the unchecked hoco-mania, leaving the wonder twins with no franchise or forum to continue their fun and games.

I dont think there are any correlations directly in very short term periods (couple of years), but I do think market psychology has a short to intermediate term effect...ie...when things are down, people may be likely to buy back in or invest further capital. Markets also move downward on bad economic situations or extended fears and bad news. Since people (in general) will try to resolve poor economic conditions and bad news goes away eventually, things do tend to pick up. The only two times that didnt work out well were the period during and after the '29 crash and that silly 1965-1975ish period when everything stunk. In both cases we went into long term economic funks that took longer to extricate ourselves from.

Longer term, (thanks for taking your cue charlie!) the gordon equation takes hold, or reversion to mean if you want to approach it from that angle.

Switching two years should produce the same results, however if one of the switches results in cratering the portfolio (lets say a 50% decline from sometime in the 70's gets moved into 2003?), and the portfolio is then consumed by the next years withdrawal, you get a failure.

I think the good analogy here is someone repeatedly crossing the street with the walk light on. Theres a chance you get a rogue driver that runs the red light and hits the pedestrian. But the rule of law keeps that likelihood low. If you change that by having the guy occasionally run across the street willy-nilly against the traffic, you've created a higher likelihood of a failure (thump!). But that sort of violates the rule of law in an unnatural manner.

Interesting stuff though...although if its true it sort of says that monte carlo simulations almost automatically create a worse scenario than analysis of data the way it actually happened. There are a couple of hands on the wheel, albeit tenatively...jerking the wheel back and forth artificially creates artificial results not bearing resemblance to the original.

Comixfan, thanks for the offer...knock yourself out if you've got the time, but I'd wait a few hours...my bet is that someone already has beaten this horse to hell and back and they'll be along shortly. BTW, notice your appearance in the past week, why dont you drop by "Hi I am..." and introduce yourself so we know who and what you are?
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 01:18 PM   #9
Dryer sheet wannabe
 
Join Date: Mar 2005
Posts: 21
Re: Switching years

Ok, I'll post something in the "Hi" section, thanks.
__________________
comixfan is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 01:46 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Switching years

Yep, here we go...
http://raddr-pages.com/Retire%20Earl...b/Sequence.htm
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 02:10 PM   #11
Thinks s/he gets paid by the post
BigMoneyJim's Avatar
 
Join Date: Feb 2003
Location: DFW
Posts: 2,627
Re: Switching years

Some words cut and pasted from a question I had on the same subject earlier:

-----
As far as randomly shuffling returns in the historical record it seems to me self-evident that the averages would be the same yet be more dangerous because historically the big dips were quickly followed by big upswings; shuffle those around and of course ports are gonna fail.

But how do you figure valuation into random returns? If the returns are considered random, then how does valuation matter?
-----

Back to original posting: I haven't looked at raddr's simulations closely yet, and my words above are in response to an assertion--not by raddr as far as I know--that this raddr simulation indicates that past returns were lucky returns. I guess my conclusion for the moment is that valuations and/or correlation matters but we have no reliable way of determining valuations or correlation. However I'm still spinning it around in my head and watching this discussion for more insight.

Please forgive my speaking around a couple of people. At the moment it seems the "100% safe" move.
__________________
BigMoneyJim is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 02:36 PM   #12
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Switching years

I think about the only thing I can summarize from this are that there is less randomness in returns than I thought, and that simple monte carlo simulations aint worth doody for stock work.

Surmising that there was some "luck" in the past trends seems a bit of a huge leap to nowhere.
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 02:54 PM   #13
Thinks s/he gets paid by the post
Hyperborea's Avatar
 
Join Date: Sep 2002
Location: Silicon Valley
Posts: 1,008
Re: Switching years

Quote:
I think about the only thing I can summarize from this are that there is less randomness in returns than I thought, and that simple monte carlo simulations aint worth doody for stock work.
There is a small but positive correlation of market returns from one year to the next. *This correlation drops and becomes negative after about 2 to 3 years. *If this wasn't so then rebalancing asset classes in a slice and dice portfolio would provide no benefit. *The historically "best" point to rebalance is about every two years (tested using model portfolios with historical data). *That is just about the time that the correlations start to go negative.

If a Monte Carlo simulation doesn't take this into account then it will produce survival results for withdrawal that are less than historically observed. *If you use Monte Carlo for a portfolio in the accumulation stage the results will also be lower but the difference will be small mostly due to losing the rebalancing bonus.

This is the real beauty of the historical data in that it integrates all the interactions between the asset classes and inflation. *If you try to simulate it then you have to build a very complex model to account for all of this. *If one really wants to try different numbers it would probably be better to use the historical data and slightly perturb it and see what results. *Make the perturbation small and at least somewhat logically consistent or you will push the model too far (the other data will then need to be perturbed some other way that can only be fully determined by using that large complex possibly unknowable model).
__________________
Hyperborea is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 03:36 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
cute fuzzy bunny's Avatar
 
Join Date: Dec 2003
Location: Losing my whump
Posts: 22,697
Re: Switching years

Hyper- excellent post...describes why I'm leery of any market simulations or processes that fiddle with the data...
__________________
Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
cute fuzzy bunny is offline   Reply With Quote
Re: Switching years
Old 03-23-2005, 09:17 PM   #15
Moderator Emeritus
laurence's Avatar
 
Join Date: Feb 2005
Location: San Diego
Posts: 5,234
Re: Switching years

Hey, we'll have none of that perterbation on this board! This is a family site!
__________________

__________________
laurence 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
Social Security if you coast last few years Rich_by_the_Bay FIRE and Money 21 02-25-2007 01:29 AM
Need 5% APY for 10 years with Liquidity Hydroman FIRE and Money 17 12-12-2006 05:29 AM
FireCalc =5% 40 years with 97.4% success rate Hydroman FIRE and Money 16 08-21-2006 02:56 PM
Retiring from the Armed Force. 20 to 30 years. Sam Other topics 14 03-29-2006 09:46 PM
5 more years...I hope. Da Nag Hi, I am... 4 11-30-2005 04:38 PM

 

 
All times are GMT -6. The time now is 03:21 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.