Thoughts on risk and the 4% guidance

[haha]

Quote:

Originally Posted by ERD50 Sure, a 'black swan' could come along, but then we could all be in deep doo-doo. Do I work to save up 2x my portfolio, 3x, 4x, .... 10x? Cut spending in half, a third, a quarter, a tenth? It always comes down to some reasonable balancing act between spending some % of portfolio (which might be the dividend stream), or working until we die. I'm already going 40 plus years and 100% historical success. I'm comfortable enough with that, and realize there are no guarantees - in anything. ooops, cross-posted with REWahoo! -ERD50

I'm not commenting about what anyone should or should not do. I certainly don't know. Just what seemed to me to be an on the money quote from a pretty clever guy.

Ha

[Gearhead Jim]

Quote:

Originally Posted by haha Very interesting article by some very well informed professionals. I chose this quote that is relevant to heavy users to Firecalc "Nassim Taleb points out that “Black Swans”—unwelcome outliers that exceed the bounds of normalcy—are a recurring phenomenon; the abnormal is, indeed, normal. Our own stock market history is but a single sample of a large and unknowable population of potential outcomes.." Ha

Trying to extrapolate something into the future, it seems to me that the relative performance of equities vs bonds will more likely produce the larger premium for risk that has been seen over the last 50 or so years.
Not because stocks have gotten better, but because bonds have recently gotten worse.

In the past, a bond was like a solemn oath that could only be broken by circumstances truly beyond the issuer's control. Now, bonds are treated like "I'll pay you back if it's convenient for me." The GM bankruptcy might be an example. Governments that inflate their way out of debt obligations would be another example.

Agree or disagree?

[Options]

Quote:

Originally Posted by Gearhead Jim Trying to extrapolate something into the future, it seems to me that the relative performance of equities vs bonds will more likely produce the larger premium for risk that has been seen over the last 50 or so years. Not because stocks have gotten better, but because bonds have recently gotten worse. In the past, a bond was like a solemn oath that could only be broken by circumstances truly beyond the issuer's control. Now, bonds are treated like "I'll pay you back if it's convenient for me." The GM bankruptcy might be an example. Governments that inflate their way out of debt obligations would be another example. Agree or disagree?

All predictions are noise.

From Bernston at BH:

Impulse is the greatest enemy of the investor. Wise investors make decisions slowly. Changes are made over the course of years. There is no portfolio decision that cannot be put off for at least a year.

Building a portfolio is like growing an oak tree. It's slow and boring. Nothing is time sensitive.

Few portfolio decisions matter. Spitball the rest.

Be skeptical. The wise investor has measured expectations. He knows that markets are incomprehensible and that he understands little.

Never sell investments. (Exceptions: Tax-loss harvesting. Rebalancing a very large portfolio. Distributions in retirement.) This encourages discipline when adding investments and making allocation decisions. Investments should be held for decades.

Plan for the worst.

Love uncertainty like an old pair of shoes. Long-term and short-term uncertainty are not the same. Do not confuse them.

Diversification is the only rational response to uncertainty.

Precision and optimization are also enemies.

The strongest trees bend with the wind. Wise investors see this and adopt flexible goals.

Contentment is strength and greed weakness.

Simplicity is said in many ways.

Everything has diminishing marginal returns. Examples: volatility, equity allocation, rebalance frequency, small tilting, value tilting, and diversification.

Investments are like a forest: they grow best when undisturbed.

We don't know whether it will rain or shine, so the wise investor packs his bags for any weather.

[Birchwood]

We are lucky to have enough to be able to withdraw only 2% of our asset(including pension) + SS. We are ready to make adjustments and if the market turned south, we are going to stay in and will survive with 1.5% withdrawal. It may be a little quiet, but it will be fine. Some major expenses can wait. When times are good, we intend to spend more and move up to 2-3%. The key is to understand that we need to make adjustments from time to time. Retirement is not an end, it is a continuous process.

[CaliforniaMan]

Quote:

Originally Posted by Katsmeow I don't disagree with the general concept that one should be wary in retiring when there is a market run up. I just disagree that failures only happen in that situation.

I think what I can take from this thread is that it is dangerous to retire after a prolonged market run-up because you base your withdrawal on a higher SWR, the market could tank and wipe you out faster than expected.

On the other hand, it may be difficult to retire after a prolonged bear market, because your SWR will be too low to live so you should keep w*rking until there is a sustained bull market. But then....

On the other hand, you could keep grinding at it until you drop, the problem for sure goes away then.

On the other hand, what hand am I at now?

Quote:

Originally Posted by NW-Bound; Quote: "P.S. Anyone know how to do multiple quotes, looks like it didn't work here." You are missing the right square bracket...

Thanks NW-Bound, ugh, should have seen that.

[haha]

Quote:

Originally Posted by Gearhead Jim Trying to extrapolate something into the future, it seems to me that the relative performance of equities vs bonds will more likely produce the larger premium for risk that has been seen over the last 50 or so years. Not because stocks have gotten better, but because bonds have recently gotten worse. In the past, a bond was like a solemn oath that could only be broken by circumstances truly beyond the issuer's control. Now, bonds are treated like "I'll pay you back if it's convenient for me." The GM bankruptcy might be an example. Governments that inflate their way out of debt obligations would be another example. Agree or disagree?

I have no idea. I tend to think about these things less abstractly, when I can figure out how to think about them at all.

Ha

[Ed_The_Gypsy]

Quote:

Originally Posted by REWahoo Far too verbose for what can be succinctly stated in two words: asteroid strike

I am betting on the supervolcano.

[Ed_The_Gypsy]

Quote:

Originally Posted by daylatedollarshort From what I have read, there have been decades where stocks have not kept up with inflation but real interest rates are usually positive. This article says stocks for growth is the biggest urban legend in finance - The Biggest Urban Legend in Finance

Interesting article but deceptive. The 10-year annualized returns for the S&P (1 Mar 2001 to 1 Mar 2011, my estimate from the date of the article) are NAV ONLY and do not include dividends. (~3% for the same period, dividends included.) (OK, he does say 'growth'.)

The S&P is not the only game in town for equities, and not my first choice in any case.

Also, who cares about the 'equity premium' if the 30-year return on S&P is 10.71% and that for Ibbotson US LT Govt is 10.18%? (BTW, is that total return for the bonds, or just capital gains?)

This guy is not an investor, he is a gambler and he wants to be your croupier.

Other than that, I am using 6.5% as my projected TOTAL return on equities for the balance of my lifetime, which seems reasonable. When interest rates shoot up again, I will look at bonds again (more Wellesely, probably).