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SWR: latest findings
Old 09-19-2014, 03:34 PM   #1
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SWR: latest findings

Latest (and very interesting) SWR research by Michael Kitces and Wade Pfau.

They compare:
  • Valuation-based approach*
  • Fixed 60% stocks / 40% bonds
  • Fixed 60% stocks / 40% bills
  • Rising glide path for stocks/bonds and stocks/bills

*Kitces and Pfau define this as "where the portfolio starts out at a 'neutral' 45% in equity exposure, increasing to 60% in equities when markets are 'cheap' and undervalued, decreasing to only 30% when markets are 'expensive' and overvalued, and remaining at the neutral 45% in equities when markets are fairly valued in the middle."

Their conclusion? Kitces says:

Quote:
"Whether based on safe withdrawal rates as a measure of minimizing risk, or median wealth as a measure of maximizing wealth accumulation, the valuation-based tactical portfolios ... appear to do slightly better than either a fixed 60% equity exposure or a rising equity glidepath."
My personal takeaway is that the fixed 60% stocks / 40% bills strategy appears to do nearly as well and the simplicity of this approach tilts the scales in its favor. But then I'm not a financial advisor...
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Old 09-19-2014, 04:59 PM   #2
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These guys need to get laid or something.
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Old 09-19-2014, 06:16 PM   #3
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Lmao ! ! !
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Old 09-19-2014, 11:23 PM   #4
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These guys need to get laid or something.
I dunno. They can't seem to think straight as it is.
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Old 09-20-2014, 02:05 AM   #5
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These guys need to get laid or something.
They still wouldn't know how fast to withdraw, though.
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Old 09-20-2014, 03:26 AM   #6
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is there a penalty for a pre-mature withdrawal?
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Old 09-20-2014, 03:31 AM   #7
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to be honest i find their work entertaining but useless to follow as a strategy.

in just a few months the rising glide path went from the next best thing to i will leave it to you to fill in to well maybe we only need to do the glide path if the cape ratio says we do.

everytime i decide to follow a plan being i am retiring this year the strategy becomes a bit out dated in the next months article.
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Old 09-20-2014, 05:14 AM   #8
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Is their audience do-it-yourselfers or financial planners who are successfully guiding everyone to retirement nirvana?

If they make it complicated enough that the DIYs can't do it, then it's easy to justify taking an 1/8 to a 1/3 of that SWR and giving it to professionals.
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Old 09-20-2014, 05:55 AM   #9
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in just a few months the rising glide path went from the next best thing to i will leave it to you to fill in to well maybe we only need to do the glide path if the cape ratio says we do.
I guess they have a strong incentive for LPUs (least publishable units).

I do find it somewhat odd that they are making a career out of retirement research yet are not retired themselves.

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Old 09-20-2014, 07:08 AM   #10
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These guys need to get laid or something.
When you read their stuff - this is obviously their all consuming life.
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Old 09-20-2014, 07:09 AM   #11
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I guess they have a strong incentive for LPUs (least publishable units).

I do find it somewhat odd that they are making a career out of retirement research yet are not retired themselves.

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Someone has got to do that work. So by definition it will be done by someone who is not retired.
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Old 09-20-2014, 07:11 AM   #12
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My personal takeaway is that the fixed 60% stocks / 40% bills strategy appears to do nearly as well and the simplicity of this approach tilts the scales in its favor. But then I'm not a financial advisor...
Totally agree that if a simpler approach does almost as well, it's a better choice. Because it takes the "fiddling" out of the equation, especially when emotions are high. It's really easy to screw up when you are making extra moves at the same time you are anxious. It's hard enough just to rebalance when things get out of whack!
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Old 09-20-2014, 07:50 AM   #13
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I think it's a brilliant strategy. Makes perfect sense...sell when equities are high, buy when they are low. All I've got to do now is get the timing just right...
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Old 09-20-2014, 08:15 AM   #14
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the only issue with cash instead of bonds is this.

if we go to cash what do we have to do to maintain that same volatility swing in a downturn?

we have to sell stocks and hold more cash instead since cash does not produce potential capital gains . in fact in a bad downturn interest rates usually get cut .

you have to up your cash allocation at the expense of your stock allocations to maintain that same volatility swing .

If you were comfortable with a 50/50 mix of stocks and bonds you may have to go to a 40/60 or 35/65 mix of stocks and cash to get those swings back in line.

think about it, to keep your portfolio in the same volatility range you need to allocate more money to cash and tie it up at near zero than you would have to put in to bonds to accomplish the same volatility objective..

thats crazy, your stocks can go up so much more off-setting any drop in bond prices so why would you want to pull money out of your stocks to increase cash when less money in bonds protects you the same.

so what if bonds fall, the extra money still in stocks will make up most of that if not all of it and then some.

you can not use same allocation of stocks and cash as you had in stocks and bonds and expect the same swings in a downturn..
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Old 09-20-2014, 08:20 AM   #15
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Originally Posted by wishin&hopin View Post

My personal takeaway is that the fixed 60% stocks / 40% bills strategy appears to do nearly as well and the simplicity of this approach tilts the scales in its favor. But then I'm not a financial advisor...
And considering that you must be correct on determining current stock valuations. I'm sure I can find credible articles now stating that stocks are overvalued, fairly valued and undervalued.
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Old 09-20-2014, 08:38 AM   #16
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....I do find it somewhat odd that they are making a career out of retirement research yet are not retired themselves....
Those who can do.....those who can't....
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Old 09-20-2014, 10:23 AM   #17
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I enjoy reading about these alternative approaches to portfolio management, but I think it's rather obvious that Kitces and Pfau come from academic backgrounds, where one's reputation is made by publishing a large number of well-researched papers, rather than dealing with clients in the real world. Their suggested approach to valuation based investing has the same weakness as all other such approaches - it requires nerves of steel to increase stock allocations from 30% to 60% after the market has crashed and valuations are starting to look attractive again. Some people, including some on this forum, can keep their emotions in check and make these huge reallocations after a major market meltdown, but for the average investor this is an insane approach to portfolio management. It assumes decision making that requires huge leaps of faith, that may easily backfire, and is to be implemented by retirees, whose lack of earned income will render them unable to recover from missteps.

There was a recent thread about Bill Bernstein, who has gone in exactly the opposite direction, based on observing his own clients' behavior in 2008. He is intentionally advocating non-optimal conservative portfolios, hoping to prevent his clients from the engaging in the kind of panic selling he saw back then. Maybe he is being excessively cautious, but at least his advice has a chance to work in the real world.
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Old 09-20-2014, 12:11 PM   #18
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And considering that you must be correct on determining current stock valuations. I'm sure I can find credible articles now stating that stocks are overvalued, fairly valued and undervalued.
In his post, Kitces explains the system they used to determine this. It's based on the Shiller CAPE (P/E10), which he says is a poor predictor in the short term for market timing but "a remarkably powerful predictor of long-term performance." He says this valuation measure "really is at elevated levels" right now.
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Old 09-20-2014, 01:06 PM   #19
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Some thoughtful analysis of CAPE 10: philosophicaleconomics/capehigh
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Old 09-20-2014, 02:25 PM   #20
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Totally agree that if a simpler approach does almost as well, it's a better choice. Because it takes the "fiddling" out of the equation, especially when emotions are high. It's really easy to screw up when you are making extra moves at the same time you are anxious. It's hard enough just to rebalance when things get out of whack!
+1
Of course you can always get a better model as you add parameters. The problem is that as you do, you are fitting to the data. Add more parameters, more decisions points, get better results. The problem is as Audrey1 points out is that there is no way to know when you are adding real insight, rather than just fitting to the data at hand. We know the future will be different, equity prices are not a stationary time series. Fiddling gets more papers written, but for real life simpler is better.
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