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Can you "what if" the New Normal paradigm?
Old 12-07-2010, 12:07 AM   #1
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Can you "what if" the New Normal paradigm?

How can the FireCalc historical run be used to model the "new normal" for yield, growth and dividends?

Perhaps starting the run at the beginning of all of the (5 to 10) year periods that actually did have such low results?

As an example of how the New Normal could be quantified, PIMCO says:

Sept 28

Investment returns will drop, says Pimco's Gross - MarketWatch

Investors are "faced with 2.5% yielding bonds and stocks staring straight into new normal real growth rates of 2% or less. "The most likely consequence...will be a declining dollar and a lower standard of living."

SNIP

...high government deficits and ultimately, inflation,
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Old 12-07-2010, 01:15 AM   #2
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There is no "new normal." It's just a catch-phrase to give journalists something to write about. And Bill Gross can't call stock market returns any better than you, I, or a chimpanzee can. FireCalc reports the likelihood of portfolio survival based on roughly 139 years of market data. In each of those 139 years there were at least some people declaring a "new normal," though they may not have used those exact words.
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Old 12-07-2010, 02:44 AM   #3
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But if your compounding begins at a low point you have the worst case. I like to examine worst cases.

Actually what I want to see is a nice thick nearly horizontal line that doesn't leave a huge pile under the mattress for the undertaker to find, and that line should be comfortably high above the zero line with no jaggies falling towards it
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Old 12-07-2010, 06:36 AM   #4
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Originally Posted by Bongleur View Post
But if your compounding begins at a low point you have the worst case. I like to examine worst cases.
FIRECALC does use the worst cases (of the past) in its report (those are usually the 'failures'.

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Actually what I want to see is a nice thick nearly horizontal line that doesn't leave a huge pile under the mattress for the undertaker to find, and that line should be comfortably high above the zero line with no jaggies falling towards it
Easy - just four steps:

1) Invest your funds in something relatively stable.

2) Determine the year of your death.

3) Divide portfolio (minus your 'buffer') by years remaining.

4) Spend that amount that year, go to step 3.

EZ.

I agree with Onward - no one knows. You add enough buffer to get comfortable and the rest is a crap shoot. You adjust if you need, which is probably something you did your entire life. Or work till you die. Your choice.

There are probably 1,000's of posts expanding on that basic principle.

-ERD50
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Old 12-07-2010, 06:55 AM   #5
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I should point out that the historical periods that were most stressful to portfolio survival were not low growth/low yield (Depression, etc.). The worst years were high inflation. If you retired in the mid 1960s you were hosed.

What you seem to be looking for is a payout annuity for life. You can buy such a thing, but it ain't cheap and it does not eliminate all risk. Sorry.
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Old 12-07-2010, 07:52 AM   #6
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I don't know how, or if, FIRECalc can be tweaked to replicate the current environment, but here's where we are valuation wise compared to FIRECalc's historic database . . .

Stock PV-10 multiples are currently in the top quintile
Stock Dividend yields are in the bottom decile
10-yr treasury yields are in the bottom quintile

Unfortunately, I wasn't able to find another period where all of those metrics were as bad as they are today. If you ignore dividend yield, only three years were as bad . . . 1937, 1901, and 1899. Not much data to draw any useful conclusions from. But if you believe that valuations matter to future returns, the next 30 years will likely fall in the bottom quintile of FIRECalc's historic results. Plan accordingly.
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Old 12-07-2010, 08:16 AM   #7
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Originally Posted by Bongleur View Post
But if your compounding begins at a low point you have the worst case. I like to examine worst cases.

Actually what I want to see is a nice thick nearly horizontal line that doesn't leave a huge pile under the mattress for the undertaker to find, and that line should be comfortably high above the zero line with no jaggies falling towards it
The worst case is not low average returns, it is a substantial drop in assets immediately following ER. This forces a drawdown so deep it becomes unrecoverable.

Low annualized returns do not mean low returns every year, they mean lots of volatility with high return and low return years. See Japan from 1995-2010 or S&P 1965 thru 1980 as examples.
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Old 12-07-2010, 10:53 AM   #8
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Originally Posted by Bongleur View Post
But if your compounding begins at a low point you have the worst case. I like to examine worst cases.

Actually what I want to see is a nice thick nearly horizontal line that doesn't leave a huge pile under the mattress for the undertaker to find, and that line should be comfortably high above the zero line with no jaggies falling towards it
Indexed annuity should do it.
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Old 12-07-2010, 11:36 AM   #9
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I don't know how, or if, FIRECalc can be tweaked to replicate the current environment, but here's where we are valuation wise compared to FIRECalc's historic database . . .
Someone can correct me if wrong, but Firecalc is not a forecasting tool. It only tells you what would have happened in the past for certain inputs/outputs to your portfolio. In 30 years, Firecalc will tell us how a portfolio fared in our current environment.
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Old 12-07-2010, 11:56 AM   #10
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The worst years were high inflation. If you retired in the mid 1960s you were hosed.
We are just in a down stock/interest rate down cycle. Probably towards the end of this decade it will change. The 'new normal' then will be higher inflation, taxes etc.
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Old 12-07-2010, 01:28 PM   #11
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Someone can correct me if wrong, but Firecalc is not a forecasting tool. It only tells you what would have happened in the past for certain inputs/outputs to your portfolio. In 30 years, Firecalc will tell us how a portfolio fared in our current environment.
Nope, you're right. But it's worth reflecting on whether we're starting with market conditions that look more like those of 1981, or more like 1965.
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Old 12-07-2010, 06:52 PM   #12
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> Firecalc is not a forecasting tool.

Is _anything_ a forecasting tool? Only within defined boundaries.

Firecalc is in my mind a sort of Monte Carlo using historical data. Any sequence of future year-by-year returns is possible, but we are presuming that the 100 or so historical sequences of events being used as inputs represent the "most likely" outcomes in a meaningful way.

Does this aggregated history represent the 90th percentile of probable forward sequences? Or the 10th percentile? We can't objectively say; but since you have to believe something, the Firecalc outputs are subjectively reasonable to me.
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Old 12-08-2010, 01:58 AM   #13
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Hello Gone4Good - how should we plan in this environment then ? Thank you for letting us know.

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But if you believe that valuations matter to future returns, the next 30 years will likely fall in the bottom quintile of FIRECalc's historic results. Plan accordingly.
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Old 12-08-2010, 10:31 AM   #14
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There is no "new normal." It's just a catch-phrase to give journalists something to write about.
I'm not certain of this. The post-WW2 economic boom introduced a "new normal," and perhaps so too is the current unwinding of the economic expectations of that era of unsustainable prosperity.
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Old 12-08-2010, 12:14 PM   #15
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Investors are "faced with 2.5% yielding bonds and stocks staring straight into new normal real growth rates of 2% or less.
It's grim, but if someone would guarantee me real growth of 2% - I'd take it and sleep better than I expect to over the next 30-40 years.
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