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Old 11-29-2013, 08:03 PM   #41
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One thing I've commented on in one or two other threads - which often seems to get glossed over - is that when you compute historical results with Firecalc, it pays to reflect on historical levels versus today's levels.

It was very common for stocks to yield 4% or better. So even if you go back to the historical periods in the handful of times we had ultra-low/non-existent interest rates, a 40% stock portfolio was still able to generate a decent yield.

Currently, the S&P yields a little North of 2%. In addition to yielding roughly half of a common historical yield, PE multiples are decidedly higher as well. So not only are you not going to receive the historical gradual PE compression, but you also aren't going to benefit from not only a higher yield, but also not benefiting from a gradual yield compression as well. And you surely aren't going to be getting a strong leg up with your fixed income portfolio for at least 5 years (possibly 10, depending on your specific bond allocation and what rates do).

I realize that FireCalc does the worst-case scenario, and that the likely outcome is that you will come out ok....but it's not a bad idea to keep in perspective certain historical factors which the future may not benefit from, that may have helped beef up historical returns.
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Old 11-29-2013, 08:07 PM   #42
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Okay, thanks again. I guess then that Firecalc's lowest SWR is much more than a lot of the revised SWR rates being thrown around these days in various papers.

I have read about 1.8% being the new SWR, but that is close to the real return on longer term TIPS alone even these days, keeping the inflation adjusted principal intact.
Well, FIRECalc's result is based on historical data, while the new and lower SWRs are based on current pessimistic projections. What's right? Who knows, but we will find out eventually.
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Old 11-29-2013, 08:07 PM   #43
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Originally Posted by MooreBonds View Post
One thing I've commented on in one or two other threads - which often seems to get glossed over - is that when you compute historical results with Firecalc, it pays to reflect on historical levels versus today's levels.

It was very common for stocks to yield 4% or better. So even if you go back to the historical periods in the handful of times we had ultra-low/non-existent interest rates, a 40% stock portfolio was still able to generate a decent yield.

Currently, the S&P yields a little North of 2%. In addition to yielding roughly half of a common historical yield, PE multiples are decidedly higher as well. So not only are you not going to receive the historical gradual PE compression, but you also aren't going to benefit from not only a higher yield, but also not benefiting from a gradual yield compression as well. And you surely aren't going to be getting a strong leg up with your fixed income portfolio for at least 5 years (possibly 10, depending on your specific bond allocation and what rates do).

I realize that FireCalc does the worst-case scenario, and that the likely outcome is that you will come out ok....but it's not a bad idea to keep in perspective certain historical factors which the future may not benefit from, that may have helped beef up historical returns.
IOW, if future returns are worse than any time in the past 142 years, all bets are off.
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Old 11-29-2013, 08:20 PM   #44
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Well, FIRECalc's result is based on historical data, while the new and lower SWRs are based on current pessimistic projections. What's right? Who knows, but we will find out eventually.
Okay, got it. Most of you are betting on Firecalc being right, which is why there are few if any other wusses here like me interested in TIPS and equivalent real returns.

I listen to the financial fear mongers and think the 3.29% SWR from TIPS type returns (with spend down of portfolio) isn't half bad.
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Old 11-29-2013, 08:32 PM   #45
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One thing I've commented on in one or two other threads - which often seems to get glossed over - is that when you compute historical results with Firecalc, it pays to reflect on historical levels versus today's levels.
...
Yes, today's rates and also equity PE's are not the greatest. But we have to remember that in the next 20 year sequence, it may only be a few years into that sequence when we are back to more normal conditions. It was only about 5 years ago that 5 year Treasuries were at 3% (now they're 1.4%). So maybe we have to be patient and just modify the game plan a bit.
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Old 11-30-2013, 12:51 PM   #46
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Yes, today's rates and also equity PE's are not the greatest. But we have to remember that in the next 20 year sequence, it may only be a few years into that sequence when we are back to more normal conditions. It was only about 5 years ago that 5 year Treasuries were at 3% (now they're 1.4%). So maybe we have to be patient and just modify the game plan a bit.
Unless I miss your meaning, the only way to take advantage of a shift in rates and stock yields like you mention is to wait in cash, or very short duration fixed income. Otherwise, when rates/yields shift, your principle shifts in the opposite direction. This is what is usually condemned on here as market timing.

I find this thread interesting, but I really cannot understand the assumptions. I also strongly doubt that many of us could psychologically tolerate a 50% drawdown, let alone 60%. Most of us have been reasonably well off our entire lives. How many could seamlessly drop our spending way down for a possibly long period of time?

I am pretty good at projecting myself into future imagined situations and seeing how they might feel. My report of what is posited on this thread is that it would feel bad, very, very bad.

ha
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Old 11-30-2013, 01:09 PM   #47
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Unless I miss your meaning, the only way to take advantage of a shift in rates and stock yields like you mention is to wait in cash, or very short duration fixed income. Otherwise, when rates/yields shift, your principle shifts in the opposite direction. This is what is usually condemned on here as market timing.

I find this thread interesting, but I really cannot understand the assumptions. I also strongly doubt that many of us could psychologically tolerate a 50% drawdown, let alone 60%. Most of us have been reasonably well off our entire lives. How many could seamlessly drop our spending way down for a possibly long period of time?

I am pretty good at projecting myself into future imagined situations and seeing how they might feel. My report of what is posited on this thread is that it would feel bad, very, very bad.

ha
Ha - If you don't mind my asking, what is your asset allocation? If you don't want to share, I understand. But I would be interested in your perspective.
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Old 11-30-2013, 02:18 PM   #48
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Now, 17% cash, 20% bonds with duration< 4 years. and 63% equities. I would sell more equity, but I am already at the limit of taxable income that I wish to have for this year.

Most of the equities are biased toward growing income and hopefully reasonably stable overall income for the entire portfolio.

If I lost 1/2 of my dividend income I would survive but be hurting. However, I think that is very unlikely to happen. Which is why I am income rather than total return oriented.

Ha
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Old 11-30-2013, 02:41 PM   #49
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Now, 17% cash, 20% bonds with duration< 4 years. and 63% equities. I would sell more equity, but I am already at the limit of taxable income that I wish to have for this year.

Most of the equities are biased toward growing income and hopefully reasonably stable overall income for the entire portfolio.

If I lost 1/2 of my dividend income I would survive but be hurting. However, I think that is very unlikely to happen. Which is why I am income rather than total return oriented.

Ha
Thanks for the reply. I just looked at DHs 401K last night in detail and the company stock from his last job paid out quite a nice, consistent little dividend. Investing for dividends is something I definitely want to learn more about.
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Old 11-30-2013, 02:58 PM   #50
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Now, 17% cash, 20% bonds with duration< 4 years. and 63% equities. I would sell more equity, but I am already at the limit of taxable income that I wish to have for this year.

Most of the equities are biased toward growing income and hopefully reasonably stable overall income for the entire portfolio.

If I lost 1/2 of my dividend income I would survive but be hurting. However, I think that is very unlikely to happen. Which is why I am income rather than total return oriented.

Ha
It's pretty similar to what I have - 24% in cash*, 24% in bonds (my duration is a bit longer at ~5.5 years). The rest, ~52%, is invested in equities with a strong tilt toward moderate but reasonably stable income generation.

*Cash includes CDs and i-bonds. My CD ladder provides a fairly strong positive real return at this time while the i-bond ladder provides a moderately positive real return, so overall my cash position is not losing purchasing power.
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Old 11-30-2013, 03:07 PM   #51
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Now, 17% cash, 20% bonds with duration< 4 years. and 63% equities. I would sell more equity, but I am already at the limit of taxable income that I wish to have for this year.

Most of the equities are biased toward growing income and hopefully reasonably stable overall income for the entire portfolio.
So, we are not that far apart in terms of equities. I am currently at 67% equities, 7% bonds, and 26% cash. The total income from the portfolio, excluding my wife's 401k MFs which do not declare dividends, is 2.5% in the last 12 months. For comparison, the venerable S&P500 ETF SPY yields only 1.93%.

That 2.5% is computed with the stinkin' 26% cash included, which yields only 1.5%, so it's not too bad. Still, after inflation I am getting only 1% real return. Without cap gains, I must really cut back on expenses, even after getting SS if this persists.
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Old 11-30-2013, 06:23 PM   #52
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Unless I miss your meaning, the only way to take advantage of a shift in rates and stock yields like you mention is to wait in cash, or very short duration fixed income. Otherwise, when rates/yields shift, your principle shifts in the opposite direction. This is what is usually condemned on here as market timing.
I'm not suggesting timing. What I meant by the recent comment is that rates may gradually shift towards historical levels and during that time maybe we will be lucky to achieve a zero real rate net, hence the patience comment. Then after that rate move, we will again be back at historical levels. My bonds are probably about 4 years duration now, but I might move the overall bond duration down a bit.

I think waiting in cash or short term bonds is going to be tricky. One looses the term premium and short rates can move up swiftly as the Fed moves to squelch inflation or business excesses. In the 2004-2007 rate move, intermediate term bonds beat short term bonds. I could display a graph if somebody wants to see it. Not saying this will happen exactly the same, just that it could happen.
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I find this thread interesting, but I really cannot understand the assumptions. I also strongly doubt that many of us could psychologically tolerate a 50% drawdown, let alone 60%. Most of us have been reasonably well off our entire lives. How many could seamlessly drop our spending way down for a possibly long period of time?

I am pretty good at projecting myself into future imagined situations and seeing how they might feel. My report of what is posited on this thread is that it would feel bad, very, very bad.

ha
The point of this thread was to survive any extreme drops, like those seen in the 1930's. Since you have >60% equities (like I do currently), you must also be prepared to accept major drops. So I don't quite understand your concern about a 50% drop which could occur with 60% equities depending on one's spending levels. Maybe it is the spending levels that are the concern?

All I did was set a 50% or so floor and check out spending levels with various equity percentages. Some people set no portfolio minim, so they are assuming they will not panic in a true crisis -- not a crisis like 2008 but rather something much worse. With no minim, one would have to have a cast iron stomach ... or not understand their risk tolerance, or have some income sources like SS + pensions.

Of course, FIRECalc cannot model other evasive action one might take like reducing spending for a few years until a recovery appears to be taking place.
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Old 11-30-2013, 07:11 PM   #53
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The point of this thread was to survive any extreme drops, like those seen in the 1930's. Since you have >60% equities (like I do currently), you must also be prepared to accept major drops. So I don't quite understand your concern about a 50% drop which could occur with 60% equities depending on one's spending levels.
I sense that you are saying something important, but I still am not sure that I get your meaning. So are you saying that with 60% equities, an 80%+loss in your equity holdings will cost you a 50% drop in your overall portfolio, given that your fixed income holds steady?

This is pretty much REW's asteroid. I think I am more likely to be hit in a crosswalk or killed in street crime or have my building collapse on my head in a big quake than to lose 80% of my equities' values, or worse yet, 80% of my equity income. I have 0% of what back in the 20s was called water in my portfolio. Anything can fall in price, but I own companies with oil and gas, pipelines, timber, and other things that given reasonable financing cannot disappear. No black boxes, aka indexes.

Maybe you mean something else; perhaps you can clarify.

Ha
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Old 11-30-2013, 07:24 PM   #54
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Yet another interesting thread, with lots of practices I should follow more rigorously. However, I probably let minimizing taxes influence my moves (far) too much. I rebalance using bands (5/25) and not 'back to nominal' as I probably should. Same issue with withdrawals, I have come to believe there's a lot to be said for % of remaining portfolio methodology. Old habits are proving hard to break...
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Old 11-30-2013, 07:44 PM   #55
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I sense that you are saying something important, but I still am not sure that I get your meaning. So are you saying that with 60% equities, an 80%+loss in your equity holdings will cost you a 50% drop in your overall portfolio, given that your fixed income holds steady?

This is pretty much REW's asteroid. I think I am more likely to be hit in a crosswalk or killed in street crime or have my building collapse on my head in a big quake than to lose 80% of my equities' values, or worse yet, 80% of my equity income. I have 0% of what back in the 20s was called water in my portfolio. Anything can fall in price, but I own companies with oil and gas, pipelines, timber, and other things that given reasonable financing cannot disappear. No black boxes, aka indexes.

Maybe you mean something else; perhaps you can clarify.

Ha
I think that you are saying that your portfolio will hold up better then the simple FIRECalc portfolio choice I employed which was made up of 5 year Treasuries and Total Stock Market. The OP was only an illustration and others will have to actually run FIRECalc to get results they can use.

FIRECalc cannot really model my current portfolio choices but I assume the model is a reasonable substitute to first order. Some may feel FIRECalc modeling is not sufficient to model their portfolio. Perhaps that is what you are saying Ha?

It is true that some stuff in index funds would disintegrate in a 1930's market which is generally the sequence that has the worst minimum in the portfolio, hence worst minimum spending. I think that FIRECalc may have modeled the 1930's with bankruptcies and all, but I don't know for sure.

I suspect most of us have some other form of huge loss avoidance. Yours is apparently to hold what you analyze is high quality securities. Mine choice isn't really the topic of this post. But I do use index funds from Vanguard and they are well diversified but not guaranteed. I don't worry about taxes at all as our portfolios are totally tax exempt or tax deferred -- somewhat of an unusual case. We would probably cut spending a lot should a 2008 decline occur.
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Old 11-30-2013, 08:01 PM   #56
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Interesting thread. Even though I think I've won the game, I plan to continue dancing with the girl that brought me to ER (Her name is equities). I've been investing in equities for over 30 years. They go up, they go down and bounce around, but I'm fine with that.

Besides, if I did reduce my equity exposure, where are those funds invested? Bonds are scary as is cash due to inflation risk. I'm in the process of buying some PenFed 2% 3 year CDs but I only see that as a shelter to ride out a possible interest rate rise.
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Old 11-30-2013, 08:12 PM   #57
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I sense that you are saying something important, but I still am not sure that I get your meaning. So are you saying that with 60% equities, an 80%+loss in your equity holdings will cost you a 50% drop in your overall portfolio, given that your fixed income holds steady?

This is pretty much REW's asteroid. I think I am more likely to be hit in a crosswalk or killed in street crime or have my building collapse on my head in a big quake than to lose 80% of my equities' values, or worse yet, 80% of my equity income. I have 0% of what back in the 20s was called water in my portfolio. Anything can fall in price, but I own companies with oil and gas, pipelines, timber, and other things that given reasonable financing cannot disappear. No black boxes, aka indexes.

Maybe you mean something else; perhaps you can clarify.

Ha
Ha - If I remember correctly from other threads, you have individual stocks? How do you think you fared during the recession compared to total market index funds? Would you do anything differently? Can you tell us more about your stock criteria if you have time to share?

I looked at what we lost in in index funds in under a week during the start of the last sell off, and decided I didn't have the stomach for that. I sold low but things went much, much lower after that and I bought TIPS when they were very cheap, so panicking and selling low actually worked out for once. But I need a new longer term AA and I think it will be dividend stocks for equity instead of total market.
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Old 11-30-2013, 08:39 PM   #58
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I think that you are saying that your portfolio will hold up better then the simple FIRECalc portfolio choice I employed which was made up of 5 year Treasuries and Total Stock Market. The OP was only an illustration and others will have to actually run FIRECalc to get results they can use.
You still have not affirmed that my example is what you are referring to- an 80%+ loss in equities across the board.Can you say yes or no, that this is or is not what you are talking about?

Obviously the earning power of one's holdings determines what sort of loss might be expected, and more important, what this means in terms of one's survival. My portfolio is not important to me in understanding what you are getting at. It is also not important to you, as you do not plan to use anything like this and I do not plan to try to make a case for individual stock investing. There are plusses and minuses, and most advisor types feel that the minuses are much greater. Just go with that. I just couldn't imagine that anyone on this forum was seriously planning for a possible 80% equity drawdown.

If PE 10 is currently ~25, an 80% loss means PE10 would be 5 (before earnings drops enough to influence the denominator. This would not be unprecedented, it was reached in the first half of the 1920s, but before we would get there we would have a full- on communist government, or a coup or who knows what. So my advice would be to worry about illness or something else.

Ha
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Old 11-30-2013, 08:51 PM   #59
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No I am not planning on an 80% drawdown. FIRECalc allows one to set a minimum in their portfolio. That is where the 50% number comes from in my example OP. That 50% is from a combo of spending choices, AA, and historical year of retirement. It can be hit over a bad sequence of several years, not necessarily one or two years.

I really don't know what more I can say. Not looking for an argument.
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Old 11-30-2013, 09:10 PM   #60
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No I am not planning on an 80% drawdown. FIRECalc allows one to set a minimum in their portfolio. That is where the 50% number comes from in my example OP. That 50% is from a combo of spending choices, AA, and historical year of retirement. It can be hit over a bad sequence of several years, not necessarily one or two years.

I really don't know what more I can say. Not looking for an argument.
Neither am I, just clarification. I never argue about these things. I don't really care what anyone else does or thinks. I was not able to understand what you were talking about. In any case, a drawdown does not mean in any one year, it just means a lower value than some pervious value. So I assume you mean that in some time period well before the terminal date of the portfolio plan, you do foresee, or at least plan for, an 80% drawdown, even though this is not exactly clearly stated in any of your posting on the topic.

I wonder how many people have thought through this possibility? With a liquidating portfolio plan, this is essentially what is being accepted. If people accepted this as a serious possibility, there might be lot of portfolio revamping!

Ha
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