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11-28-2015, 04:26 PM
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#81
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Thinks s/he gets paid by the post
Join Date: Sep 2006
Posts: 1,743
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We fund our kids' annual Roth contributions and will continue to do that as long as the portfolio allows. I made them aware not to expect any inheritance other than the house. We plan to enjoy our retirement and if any funds are left over it'll be theirs.
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11-28-2015, 04:27 PM
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#82
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2006
Posts: 11,401
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Quote:
Originally Posted by Danmar
Have you read my subsequent posts? Why forecast total returns when the actuals are so easily observed? What would you do differently other than adjust your SWR down? Based on forecast rather than actuals?
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For 15 years I have been forecasting NW and doing sensitivity analysis, then comparing with actual returns. I saw no reason to stop just because I am ER. I have no pension, so I need to be proactive about reducing my withdrawal rate if markets crash, particularly in the early years of ER. Modeling adverse situations means I can be better prepared to deal with them.
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11-28-2015, 04:34 PM
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#83
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Thinks s/he gets paid by the post
Join Date: Jun 2010
Posts: 2,301
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Quote:
Originally Posted by Danmar
Why forecast total returns when the actuals are so easily observed? What would you do differently other than adjust your SWR down? Based on forecast rather than actuals?
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Because actuals are in the past and don't help with planning in the future.
Expected returns should be an input to almost all critical investment decisions. Such as what stock-bond mix do I want to use. Does it make sense for me to buy into REITs today? Should I pay off my mortgage or keep the money in bonds? Should I take SS today (and invest in the market) or wait until I turn age 70? and yes, what withdrawal rate should I use in the future years.
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11-28-2015, 04:41 PM
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#84
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Thinks s/he gets paid by the post
Join Date: Jun 2010
Posts: 2,301
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Quote:
Originally Posted by devans0
Still two and working on the third PHD, but yes, he is that ambitious, driven and smart.
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I'm curious -- do you know why he is going for multiple PhDs? The marginal utility of an extra phd degree is basically zero. Once you have one, you meet the minimum for hiring requirements. In fact, if I was hiring and saw that a candidate had 2 or more PhDs I'd consider this a red flag unless there was a very good reason.
Generally most folks I know that want to move from one research area to another just do it by doing the research, finding new collaborators, etc. No need to get another PhD and subject yourself to being a grad student again.
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11-28-2015, 06:14 PM
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#85
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Oct 2005
Location: North Oregon Coast
Posts: 16,483
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Quote:
Originally Posted by photoguy
Because actuals are in the past and don't help with planning in the future.
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That said, why would someone believe the future is more unlikely to be like the past than it is to be like the past? Some day, the people who say "this time it's different" may well be right. But what empirical evidence to we have that *this* time we say it will be different than the many other times we've said it (as recently as about 2009)?
So while the past isn't gospel and isn't proof of what the future will be, I think it's a better (if imperfect) guide to the future than some scenario that does not resemble anything in history. By all means, hedge your bets, but....
That said, I have an AA set to 55-60% equities, and I plan for about a 2.5% real rate of return in the long run, but also run the numbers with a 1-1.5% real rate of return as a sanity check. If we get less than a 1% real rate of return over the next 30-40 years, we're all a lot more screwed than just our portfolios.
__________________
"Hey, for every ten dollars, that's another hour that I have to be in the work place. That's an hour of my life. And my life is a very finite thing. I have only 'x' number of hours left before I'm dead. So how do I want to use these hours of my life? Do I want to use them just spending it on more crap and more stuff, or do I want to start getting a handle on it and using my life more intelligently?" -- Joe Dominguez (1938 - 1997)
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11-28-2015, 07:21 PM
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#86
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2013
Posts: 9,358
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Quote:
Originally Posted by ziggy29
That said, why would someone believe the future is more unlikely to be like the past than it is to be like the past? Some day, the people who say "this time it's different" may well be right. But what empirical evidence to we have that *this* time we say it will be different than the many other times we've said it (as recently as about 2009)?
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Because interest rates globally have been trending lower for many years.
"Sustainable retirement withdrawal simulations that use the Monte Carlo analysis technique also have assumed fluctuations around the historical real rate of return on bond and stock investments within a portfolio without further questioning whether this is a relevant assumption."
https://www.onefpa.org/journal/Pages...d%20World.aspx
__________________
Even clouds seem bright and breezy, 'Cause the livin' is free and easy, See the rat race in a new way, Like you're wakin' up to a new day (Dr. Tarr and Professor Fether lyrics, Alan Parsons Project, based on an EA Poe story)
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11-28-2015, 07:37 PM
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#87
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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In an interview in 2009, Bogle already warned of lower stock returns in decades ahead. He said,
I think we give far more credence to past returns in the stock market than they even remotely deserve. The past is not prologue. The stock market is not an actuarial table. As has been mentioned, and John Maynard Keynes told us back in 1936--and I put a lot of numbers on this--it's the sources of the returns, the kinds of things that I was talking about a moment ago, that determine future returns, not the recurrence of an ongoing event that comes up on a standard probability distribution curve.
In an earlier writing back in 2007, he wrote
While the prices we pay for stocks often lose touch with the reality of corporate values, in the long run, reality rules. So, while investors seem to intuitively accept that the past is inevitably prologue to the future, any past stock market returns that have included a high speculative stock return component are a deeply flawed guide to what lies ahead. To understand why past returns do not foretell the future, we need only heed the words of the great British economist John Maynard Keynes, written 70 years ago: “It is dangerous ... to apply to the future inductive arguments based on past experience, unless one can distinguish the broad reasons why past experience was what it was.”
The speculative component of stock return he talked about was the P/E expansion that Shiller often stressed. Even if it does not reverse, meaning a P/E contraction, it cannot expand once again.
__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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11-28-2015, 08:06 PM
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#88
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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Quote:
Originally Posted by Corporateburnout
We fund our kids' annual Roth contributions and will continue to do that as long as the portfolio allows. I made them aware not to expect any inheritance other than the house. We plan to enjoy our retirement and if any funds are left over it'll be theirs.
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I was actually joking about spending it all before I croak. No, it is not for the kids as they are doing OK so far and I do not want them to be relying on any inheritance.
I have got to keep a certain minimum amount in the stash. It is really for spiritual and mental health, as I will not see myself dying a thousandaire. I want to die on top of a lumpy mattress.
__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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11-28-2015, 08:31 PM
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#89
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gone traveling
Join Date: Oct 2007
Posts: 1,135
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Quote:
Originally Posted by Danmar
Forget about divs that was a bit of a red herring, once you have settled on a SWR eg 3-4% why forecast returns? Would anyone change their WR based on a forecast? I could see actuals causing a change in plan, but forecasts? It's sequence of return risk that comes into play during retirement. Do you forecast sequence of returns?
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Ok. I see your point now - forget about dividends. Rather, the question is do you forecast an annual rate of return?
A more important exercise is to compare actual return to withdraw rate and to understand if the stash is growing, shrinking or holding steady and then of course, why.
And finally any corrective actions that might be needed based on a future forecast, eg more of the same expected or a change in economic patterns. Reversion to the mean. Systemic changes. Major demographic shifts. New geopolitical risks. Politics. And so forth.
I could make a case for it being more than an academic spreadsheet exercise per the above.
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What Investment Rate of Return do you Use?
11-28-2015, 08:45 PM
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#90
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gone traveling
Join Date: Oct 2007
Posts: 1,135
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What Investment Rate of Return do you Use?
Quote:
Originally Posted by stepford
With 3 PhDs he must be at least 3 times as smart as I am. No wonder he can achieve 3 times my rate of return.
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I've encountered no instructors in a top 20 nationally ranked mba program who are actually FIREd at a younger age and doing it for fun.
All that I've encountered including those In the department of finance are still regular working professors earning money from teaching and writing/selling text books.
So for that prof you have , I'd have him show me his and you show him yours. Financially that is ... . No way is he getting a consistent 15 percent over 7+ years... No way. Sure many can say they got 15 percent in 2009-2014.... But those were Not normal times.
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11-28-2015, 10:15 PM
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#91
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Thinks s/he gets paid by the post
Join Date: Jun 2010
Posts: 2,301
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Quote:
Originally Posted by ziggy29
That said, why would someone believe the future is more unlikely to be like the past than it is to be like the past?
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I think the issue here is what does it means to be "like the past"? There are multiple ways of defining "like" that could lead to widely different forecasts.
For example, consider the following two approaches
(1) You believe that the future stock returns will be like the equally weighted average of returns in the past. So to create your expectation you take a simple average and use that as your forecast.
(2) You believe that future stock returns will be like past years when the market had similar Schiller P/E values (or whatever market condition you think is important). So to create your expectation you take a weighted average (giving higher weight to past years with similar Schiller PE) and use that.
In both cases, we are trying set expectations based on the idea that the future will be like the past. It's just that the definition of "like the past" is a little different in each case.
Quote:
Some day, the people who say "this time it's different" may well be right. But what empirical evidence to we have that *this* time we say it will be different than the many other times we've said it (as recently as about 2009)?
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In some cases like with Schiller PE there's a mountain of evidence that this is a real effect and not some spurious result. Other methods (like using the butter production in bangladesh to predict S&P 500) may have more limited support.
Quote:
So while the past isn't gospel and isn't proof of what the future will be, I think it's a better (if imperfect) guide to the future than some scenario that does not resemble anything in history. By all means, hedge your bets, but....
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The people who make models to forecast stock returns are all basing it, directly or indirectly, on past data. The model might produce different predictions than the historical average but that's because current conditions are not historically average.
Quote:
That said, I have an AA set to 55-60% equities, and I plan for about a 2.5% real rate of return in the long run, but also run the numbers with a 1-1.5% real rate of return as a sanity check. If we get less than a 1% real rate of return over the next 30-40 years, we're all a lot more screwed than just our portfolios.
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I will not be happy either with such low rates of return. But forecasting is extremely difficult and even the best models (which tend to be pessimistic now) do not exclude good outcomes when you look at the range of expected results instead of a point estimate.
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11-29-2015, 03:33 AM
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#92
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Thinks s/he gets paid by the post
Join Date: Dec 2009
Location: Alberta/Ontario/ Arizona
Posts: 3,393
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Quote:
Originally Posted by photoguy
Because actuals are in the past and don't help with planning in the future.
Expected returns should be an input to almost all critical investment decisions. Such as what stock-bond mix do I want to use. Does it make sense for me to buy into REITs today? Should I pay off my mortgage or keep the money in bonds? Should I take SS today (and invest in the market) or wait until I turn age 70? and yes, what withdrawal rate should I use in the future years.
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Ok I can see some of this. These are not decisions I need to take. No debt, no bonds (pension is my FI proxy), trade very infrequently. SS (CPP) immaterial. I can see forecasting different returns for different securities and thus rebalancing. But I don't really think forecasting 2, 3 or 4% real returns over the next decade for the whole market is very useful once retired and set on a SWR. But I have made my case and will retire.
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11-29-2015, 03:39 AM
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#93
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Thinks s/he gets paid by the post
Join Date: Dec 2009
Location: Alberta/Ontario/ Arizona
Posts: 3,393
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Quote:
Originally Posted by Meadbh
For 15 years I have been forecasting NW and doing sensitivity analysis, then comparing with actual returns. I saw no reason to stop just because I am ER. I have no pension, so I need to be proactive about reducing my withdrawal rate if markets crash, particularly in the early years of ER. Modeling adverse situations means I can be better prepared to deal with them.
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Ok but your aren't really forecasting future returns, just modelling what might happen under various scenarios. Agree you might want to reduce your WR if markets crash, but would you do that based on a forecast? I wouldn't. Does it really affect you if you forecast a 2% real return or a 3% real return? I just don't know what retirees would do with such a forecast?
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11-29-2015, 03:53 AM
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#94
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Thinks s/he gets paid by the post
Join Date: Dec 2009
Location: Alberta/Ontario/ Arizona
Posts: 3,393
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Quote:
Originally Posted by papadad111
Ok. I see your point now - forget about dividends. Rather, the question is do you forecast an annual rate of return?
A more important exercise is to compare actual return to withdraw rate and to understand if the stash is growing, shrinking or holding steady and then of course, why.
And finally any corrective actions that might be needed based on a future forecast,
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Yes, that was my point. For someone to change their WR down they would generally have to think the future was looking poor, eg losses on the horizon. Changing your expectation from 3% real return to 2% real return would be highly unlikely to cause a decision to reduce your WR in my opinion. On the other hand a 20% actual decline in the market could easily cause this decision.
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11-29-2015, 06:37 AM
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#95
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Thinks s/he gets paid by the post
Join Date: May 2014
Location: Utrecht
Posts: 2,650
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Quote:
Originally Posted by papadad111
I've encountered no instructors in a top 20 nationally ranked mba program who are actually FIREd at a younger age and doing it for fun.
All that I've encountered including those In the department of finance are still regular working professors earning money from teaching and writing/selling text books.
So for that prof you have , I'd have him show me his and you show him yours. Financially that is ... . No way is he getting a consistent 15 percent over 7+ years... No way. Sure many can say they got 15 percent in 2009-2014.... But those were Not normal times.
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Professoring is a full-time job. Some of them actually quit their jobs and went into investing, with a few having outlier type of success.
A few go back and forth. Joel Greenblatt for example.
That said, I agree with you that I'd have no more confidence in a typical academic managing money vs. others. It's a different discipline, mastering both can be done.
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11-29-2015, 06:38 AM
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#96
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Recycles dryer sheets
Join Date: Dec 2013
Location: Kansas
Posts: 107
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Quote:
Originally Posted by ziggy29
..
I plan for about a 2.5% real rate of return in the long run, but also run the numbers with a 1-1.5% real rate of return as a sanity check. If we get less than a 1% real rate of return over the next 30-40 years, we're all a lot more screwed than just our portfolios.
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This is my thought exactly. I look at 1 to 2.5 % real rate of return. Then I see if I can adjust spending based on the rate I use to see if I am good to go for retirement in a couple of months.
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11-29-2015, 07:23 AM
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#97
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Thinks s/he gets paid by the post
Join Date: Sep 2012
Posts: 1,570
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Many unhappy returns | The Economist
Article is critical of pensions for assuming historical returns when valuations are so high, but it's understandable as no one wants to cut benefits or pay more. It's a long term problem that the "next guy" must deal with.
Concludes that 1-2.5% real is a prudent assumption.
__________________
You know that suit they burying you in? Thar ain’t no pockets in that suit, boy.
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11-29-2015, 08:46 AM
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#98
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2006
Location: Pacific latitude 20/49
Posts: 7,677
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Quote:
Originally Posted by Danmar
Ok but your aren't really forecasting future returns, just modelling what might happen under various scenarios. Agree you might want to reduce your WR if markets crash, but would you do that based on a forecast? I wouldn't. Does it really affect you if you forecast a 2% real return or a 3% real return? I just don't know what retirees would do with such a forecast?
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I have the benefit of 13 years of actual retirement, and we have underspent our SWR in every year but 2 so we have built a buffer. So we keep that as a buffer for future bad years. We did not reduce our spend in those 2 years as it just reduced the accumulated buffer.
Had the reduced returns continued beyond the 2 years and eliminated the accumulated excess, then we would have had another decision to make. IOW the sequence may matter.
(It is interesting how actual experience causes us to rethink theory. My current thinking is that we might have continued the deficit for a few more years.)
__________________
For the fun of it...Keith
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11-29-2015, 08:55 AM
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#99
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Posts: 35,712
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Quote:
Originally Posted by Danmar
Ok but your aren't really forecasting future returns, just modelling what might happen under various scenarios. Agree you might want to reduce your WR if markets crash, but would you do that based on a forecast? I wouldn't. Does it really affect you if you forecast a 2% real return or a 3% real return? I just don't know what retirees would do with such a forecast?
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I do not really forecast, but only plan, or rather trying to imagine what I will do under different scenarios.
As I often said, the world must have gone to hell before I end up in my class C RV boondocking in New Mexico state parks, and even that does not preclude me from having a good life with running water and AC and heat. My wife may not agree, but me worry?
But darn, the bottom number of the Quicken screen gives me such a warm and cozy feeling that I really hate to see that leading digit decreasing, or gasp, disappearing altogether. Hence, I will be sure to cut my spending to preserve it. But again, it will be truly reacting rather than planning at that point.
__________________
"Old age is the most unexpected of all things that happen to a man" -- Leon Trotsky (1879-1940)
"Those Who Can Make You Believe Absurdities Can Make You Commit Atrocities" - Voltaire (1694-1778)
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11-29-2015, 09:04 AM
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#100
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2006
Posts: 11,401
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Quote:
Originally Posted by Danmar
Yes, that was my point. For someone to change their WR down they would generally have to think the future was looking poor, eg losses on the horizon. Changing your expectation from 3% real return to 2% real return would be highly unlikely to cause a decision to reduce your WR in my opinion. On the other hand a 20% actual decline in the market could easily cause this decision.
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That depends on how much margin for error is in the portfolio and on a person's risk tolerance. Those without pensions will naturally be more cautious.
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