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Old 09-16-2015, 06:36 PM   #21
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Originally Posted by audreyh1 View Post
At least while you are working you usually have the option of continuing to work and save. Once you retire and start drawing on your nest egg you have much less flexibility.
I think this is the reason it isn't discussed more often. The assumption is that you can continue to work if the sequence isn't ideal and the result is less than hoped for. Once you are retired for a few years going back (at least to what you did and the salary you had) is often off the table.
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Old 09-16-2015, 06:43 PM   #22
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You can't really do anything about it though. What do you do? You save a ton and invest as best you can. Some decades the more conservative investor will be rewarded, others the more aggressive investor will be rewarded. You work until your nest egg meets your goals, or you settle for a less generous retirement if you can't stand to work anymore. At least while you are working you usually have the option of continuing to work and save. Once you retire and start drawing on your nest egg you have much less flexibility.

All true. Even though my ror was 2.5% during accumulation, it didn't prevent me from accumulating enough to retire.
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Old 09-16-2015, 06:58 PM   #23
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It's true. But if we have a set number of years and if a person isn't making withdrawals >and isn't contributing<, the sequence of returns during that time period has zero impact on the value of their portfolio at the end of the period. That's illustrated in the .pdf here.

During the accumulation phase (when contributions are being made), bad returns in the very early years have very little impact, because the growth in portfolio value is going to increase a lot regardless due to the next year's contribution--the growth of the balance is determined primarily by contributions. Not so in much later years, as growth of the balance depends much more heavily on investment returns.
Of course you are correct. The sequence of returns does not make any difference if we make only one deposit at the beginning, and one withdrawal at the end. For most of us however, the deposits are made over a period of time, as are the withdrawals. Then the sequence of returns for both deposits and withdrawals matter, and the most recent years (looking at the past or into the future) are always the most important.
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Old 09-16-2015, 07:24 PM   #24
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I still dont believe sequence of returns affected your returns enough to lower your avg return to 2.5%. You must've made some moves at the wrong time. I would have to do a lot of research to prove it one way or the other, but if all you did was set your AA in 1987 and then make your contributions thru thick and thin every pay period all the way to 2009, I dont believe you wouldve under performed that badly.

You would've had almost no money invested in the crash of 1987. The other pull backs and corrections along the way were all followed by quick recoveries.
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Old 09-16-2015, 08:31 PM   #25
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That's my point. The return sequence is so important that Jane gets to retire and Joe is still working. It just seems to be understated and brushed off.
I also think you are overstating it in this case.

So let's just use a hypothetical. A & B have invested for 30 years. A started 5 years before B. At A's year 30, let's say A has $1M and the market has done very well the past decade, and B has something close.

The market hits a bear for the next 5 years. So when B looks at his portfolio just when he wants to retire, his overall returns are lower over his 30 years than for A's 30 years.

But A's portfolio is down too. So they really aren't that far from each other.

I think you are applying a bit of tunnel vision to the situation.

You can also consider the 'valuation' of the portfolio (which mostly explains the apparent 'paradox' of the 4% SWR for the investor that retires a few years after another, and into a market bear, when they both had the same portfolio amount when the first started). A really wasn't in much better shape than B. A's $1M was near a peak, it was likely to come down. B's lesser amount has already come down from a peak, it is no longer subject to that loss.

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Old 09-16-2015, 09:08 PM   #26
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I still dont believe sequence of returns affected your returns enough to lower your avg return to 2.5%. You must've made some moves at the wrong time. I would have to do a lot of research to prove it one way or the other, but if all you did was set your AA in 1987 and then make your contributions thru thick and thin every pay period all the way to 2009, I dont believe you wouldve under performed that badly.

You would've had almost no money invested in the crash of 1987. The other pull backs and corrections along the way were all followed by quick recoveries.
If 2.5% is inflation-adjusted, it's possible particularly if accumulation was done in a relatively short period of time.
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Old 09-16-2015, 09:57 PM   #27
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If 2.5% is inflation-adjusted, it's possible particularly if accumulation was done in a relatively short period of time.
He didnt say anything about his returns being inflation adjusted. Why would we assume his accumulations happened over a short period of time when he was talking about 1987-2009 a 22 year period?
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Old 09-16-2015, 10:51 PM   #28
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He didnt say anything about his returns being inflation adjusted. Why would we assume his accumulations happened over a short period of time when he was talking about 1987-2009 a 22 year period?
Missed the period being 1987-2009. Somehow, my reading comprehension goes down when on an iPad. I reckon it's still possible particularly if savings rate ratcheted way up from 2002-2009. Income isn't exactly flat throughout a person's career and those later in their careers probably have higher savings rate compared to gross income than someone just starting out.

Yep, 22 years is relatively short. There are a number of 20-year periods ending on 1974 to 1985 where inflation adjusted rate of return for an 80/20 portfolio is 1-2%. That's a depressing thought.
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Old 09-17-2015, 12:02 AM   #29
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Sequence of return risk is important when you have to take income in retirement.....it's also a big risk if you have been dumb enough to buy a variable annuity.

Going into retirement I feel that many people don't adjust their AA enough to mitigate sequence of return risk. This is why I feel that people should have more secure income generators rather than concentrating on equity and some of the riskier bonds. Unfortunately the investments like SPIAs, CDs, I-Bonds etc that could once be relied upon for income are very poor value when you have rock bottom interest rates and not many people have pensions.

I retired back in early 2014 and I have lived off cash and rental income so far. In 2015 I'll start a pension which together with the rental income will cover my spending needs.....so I have zero sequence of return risk no matter what my AA.
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Old 09-17-2015, 12:59 AM   #30
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Our plan is to more or less live off SS and pensions. We invest mainly for capital preservation and do not have much of an AA in stocks. Even a zero real return on our portfolio would give us a 2.5% draw down over 40 years if we wanted to spend more than the SS + pension income, and we could do better than a zero real return with a blend of TIPS and I-bonds even at current yields.

So for us we don't see a need to have to invest for more volatility / growth or have to worry about sequence of returns. Plus we bought our house a long time ago and prices and rents have increased in our area, so we have the option to downsize and cash out or rent out the house if we ever need more money. We also have hobby income I don't include in the budget so that is all available for savings or fun stuff.
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Old 09-17-2015, 05:34 AM   #31
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Fancy schmancy. The old school rule of thumb was buy low sell high. Always has been and always will be true. Applying various formulas and backtested results really don't have anything to do with the future.
Diversify, make your best guess and hope for the best.
buy low sell high has lost more money for investors then any other mantra.

We thought low was when markets fell 2000 points in 2008 . Who knew it had 4000 more to go triggering stop losses and sending many investors running for the exits.

You see that mantra flys in the face of never try to catch a falling knife.

So what mantra made more money then any other ?

Buy high and sell higher.

An object in motion stays in motion until it hits something. Unless you were the unlucky person who bought the day the trend ends you will make money.

As they say don't fight the trend but the saying buy low sell high does just that since we never know how low is low.

It sounds great in theory but sucks in execution
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Old 09-17-2015, 07:32 AM   #32
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I still dont believe sequence of returns affected your returns enough to lower your avg return to 2.5%. You must've made some moves at the wrong time. I would have to do a lot of research to prove it one way or the other, but if all you did was set your AA in 1987 and then make your contributions thru thick and thin every pay period all the way to 2009, I dont believe you wouldve under performed that badly.

You would've had almost no money invested in the crash of 1987. The other pull backs and corrections along the way were all followed by quick recoveries.
I didn't really make all that many moves. I rebalanced periodically and sometimes changed funds (tried to keep 4 or 5 star ratings), but usually in the same category. Technically, I made one withdrawal in late 94 for about 19,000 (QDRO in a divorce). I kept quarterly records on spreadsheets and tracked the return every year. I never bailed on a downturn if that's what you are referring to. I have a hard time believing it too. I haven't had to make any withdrawals so since 7/1/09 its increased significantly.
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Old 09-17-2015, 07:38 AM   #33
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He didnt say anything about his returns being inflation adjusted. Why would we assume his accumulations happened over a short period of time when he was talking about 1987-2009 a 22 year period?
The accumulations were consistent, generally increasing slightly each year. However, they were about 3 to 4 times larger the last 5 years because I paid off my mortgage in 04. I'm sure that had a effect on my return.
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Old 09-17-2015, 07:51 AM   #34
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I haven't done the math for our situation (I don't have the details) but I am inclined to agree with the OP.

We had a great bull market from 1982-1999 but we had lesser income, more family expenses and less money to put in during that period. From 2000-2015 we had more money to put in but the market has not been as good. I think if our personal money situation had been reversed, more money put in the first stretch and less money put in during the second stretch we would be a lot better off today.

The plus side of it is we made more mistakes early, and they were less costly mistakes because there was less money; we became smarter and settled down to asset allocation and low cost index funds later but not too late.
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Old 09-17-2015, 08:37 AM   #35
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It's also important to note, if you are retiring on a minimal income, with a minimal amount of cushion, that is incredibly more risky than any sequence of returns. Not getting a 50/50 return based on some asset allocation is also more risky. If you cannot match what FireCalc predicted, you may be in trouble.

If we have 15 years of down markets, I suspect that many here would be in trouble. Many will survive, because of various amounts of extra capacity they have. You can reduce your travel budget pretty easily, reducing the rent or property tax budget is more difficult.
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Old 09-17-2015, 09:07 AM   #36
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I like to think in terms of compound annual growth rate versus average annual returns. The various "financial experts" will always tout that the stock market has been returning an average annual return of about 10 percent a year since its inception. Although it is basically accurate, it's a poor number for financial planning. First, consider this short term example: you have $1000 invested in the S&P 500 on 1 January (no additional contributions will be considered as we are concerned about market return effects.) Say the market takes a 40% dive that year (not a crazy number) and your balance is at $600. The next year, everything goes right with the world and the market gains 60% (yes, a crazy number picked to make the point). Your 'average annual return' is (-40% + 60%)/2 = 10% a year -- not bad!!! However, your $1000 balance now stands at $960 after 2 years of 'growth' but you can tell your friends that you are invested in the market that gains 10% a year. Take this to a longer period - say you retired on Jan 1 2000 and you were 100% in the S&P 500 index (the NASDAQ example would be much worse) with your $1000 balance. Let's say you didn't even bother withdrawing the money during that period of time as you were spending down other streams and wanted your balance to grow at the historic 10% average annual return rate. (Note: I am leaving out reinvestment of dividends - it doesn't make that much of a difference). At the end of a 15 year period, the S&P 500 average annual return was actually a little over 6% (not 10%) BUT your actual balance sits at $1869 which is what you would have gotten had you invested in something that had a fixed rate of 4.3% during those 15 years and it was compounded annually. Historic average annual returns don't always translate into ending balance expectations/reality.
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Old 09-17-2015, 09:13 AM   #37
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But your example, which is extreme, still only results in a difference of 6% return for the pretend market and a 4.3% return for the pretend portfolio. The market returned 40% more than the portfolio

The OP says he got a 2.5% return when the market returned 8.5% over 22 yrs. The market returned 240% of what his portfolio did. I dont believe that can happen with just sequence of returns. Especially after such a long period of time where that stuff has a better chance of evening out.
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Old 09-17-2015, 09:17 AM   #38
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Without knowing the savings or portfolio contribution rate over that same period of time we really can't compare the OP's rate of return with any benchmark. This is especially true if the bulk of the contributions were made toward the end of the period.

IIRC, the key to retirement savings is saving more, not getting a higher rate of return.
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Old 09-17-2015, 09:29 AM   #39
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buy low sell high has lost more money for investors then any other mantra.

We thought low was when markets fell 2000 points in 2008 . Who knew it had 4000 more to go triggering stop losses and sending many investors running for the exits.

You see that mantra flys in the face of never try to catch a falling knife.

So what mantra made more money then any other ?

Buy high and sell higher.

An object in motion stays in motion until it hits something. Unless you were the unlucky person who bought the day the trend ends you will make money.

As they say don't fight the trend but the saying buy low sell high does just that since we never know how low is low.

It sounds great in theory but sucks in execution
Good luck. The point I was trying to make is that nobody knows nothin'. Before I make any investment decisions I always ask myself " what do I know that no one else knows?" This has helped keep me on course and avoid many pitfalls. However if I have invested at X and it is now worth X+1 and I sell I will not lose any money. I guess it really doesn't matter anyway since I've been accumulating (index funds) for 35 years and still haven't sold. Next year will be the test as I will be living on interest and dividends.
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Old 09-17-2015, 09:34 AM   #40
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On the accumulation phase I don't think sequence of returns is significant compared to LBYM and investing regularly.

In 2000 I had ~ $70k
In 2015 I have ~ $600k

During this time the S&P has supposedly been flat and I have invested ~ 10%-15% of my income into retirement.

I invested with a new advisor in 2008 right before the crash. I promptly lost ~ 54% by March 2009. Now, my annualized return since inception of the account is 4.77%, so much more than cash or bonds alone over that time.

Much more worried about the spending phase and losing 50% when I want to stop working. Not really sure how to adjust for that risk. Considering moving few years expenses to cash, immediate annuity, etc. Life expectancy is currently 30+ years, so time for markets to recover but without ongoing investments the impact will be much less.
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