Spherical Cows

[walkinwood]

I like Dirk Cotton's blog and thought this entry is one of his best.

He points out the short-cuts & simplifications taken in retirement finance literature.

Enjoy

The Retirement Cafe: Spherical Cows

 

[NW-Bound]

Posters here are not Spherical Early Retirees like financial planners assume?

They need to eat more bacon.

 

[rodi]

Thanks for posting that. It restates what we know here. And I love the term "spherical cows" and description of where the term comes from.

 

[RetireBy90]

I love reminders like this one. We may know many of the points he makes, but it is always good to hear again. We get so much noise from all sides that being reminded of such truths like past performance is no indication of future performance, and why allows me to rebalance myself. Thanks for the post!!

 

[Chuckanut]

I guess I need to square up my spherical cows by purchasing a annuity. Problem solved. Right?[emoji32]

 

[Gumby]

I prefer cubic cows. Easier stacking with no wasted space.

 

[Chuckanut]

I prefer cubic cows. Easier stacking with no wasted space.

But, the hamburger buns are round? I would think the spherical cows would fit them better.

 

[MichaelB]

But, the hamburger buns are round? I would think the spherical cows would fit them better.

Not White Castle sliders...

 

[NW-Bound]

Back on the OP's article, the fact that retirees are not spherical like the assumption of financial tools and can mold their shapes to fit the circumstances explains why we do not see them fighting for a space under bridges, or eating cat food.

I have been trying to tell people not to worry too much about the financial aspect of retirement. You will manage and adapt. People survive a lot worse calamities than cutting out travel, no eating out, or downsizing the home. It's the health problem that is the scarier wild card, and we cannot really do much about it.

 

[Lucantes]

I have been trying to tell people not to worry too much about the financial aspect of retirement. You will manage and adapt. People survive a lot worse calamities than cutting out travel, no eating out, or downsizing the home. It's the health problem that is the scarier wild card, and we cannot really do much about it.

+1

 

[Gumby]

People survive a lot worse calamities than cutting out travel, no eating out, or downsizing the home.

Yes, they do. It is amazing that what seems so obvious here is a foreign concept "out there".

 

[2B]

I have been trying to tell people not to worry too much about the financial aspect of retirement. You will manage and adapt. People survive a lot worse calamities than cutting out travel, no eating out, or downsizing the home. It's the health problem that is the scarier wild card, and we cannot really do much about it.

Scott Burn's had a recent article describing a similar approach. He talked about the "time value of money" when it comes to enjoying retirement given the inevitable decline of our health. Similar discussions have been repeated here.

 

[jebmke]

It's the health problem that is the scarier wild card, and we cannot really do much about it.

True, although there are somethings you can do

Eat sensibly
Regular exercise
Get your flu shot
Leave your phone in your pocket when you get behind the wheel (actually, this may do more for my health than yours).
​

 

[NW-Bound]

True, although there are somethings you can do

Eat sensibly
Regular exercise
Get your flu shot
Leave your phone in your pocket when you get behind the wheel (actually, this may do more for my health than yours).
​

And getting a colonoscopy after 50, etc...

I should have said that some bad things may still happen in spite of us taking all of these precautionary steps.

Oh, let's not forget about paying the health insurance premium on time.

That last step saved me close to $200K in the last 2 years.

 

[Lsbcal]

 

[Lsbcal]

Maybe this is a current example of a spherical cow? We are being told that stock and bond returns will be miserable in the future. At the same time we are being told, generally by the same experts, that buy and hold is the only way to invest.

I know some will not like my example. The devil made me do it.

 

[NW-Bound]

Hmmm... Is there a contradiction there, like you said?

Well, maybe this is what they meant. Yes, investment returns will be lousy, and don't count on 4%WR as you could in the past. But you do not know what bad really is if you don't buy-and-hold.

In other words, they tell us we are caught between a rock and a hard place. Now, where's that cognac bottle of mine? What am I saving it for? It's already 8:30AM, for crying out loud.

 

[Lsbcal]

Well you can climb up the mountain and then come back down again. Or you could climb up the mountain, and then some part way down before taking a break at the little cabin down from the top. The later (develish) approach is impossible according to some very well known and respected experts.

 

[NW-Bound]

But, but, but they say you don't know where the top of the mountain is. Keep on hiking, down, then up, and the next peak will be higher. It is hidden in the cloud, and you can't see it, so you have to keep going.

And at the same time, they also say it is not going to be that high.

I think I am getting another swig out of the bottle.

 

[ERD50]

Maybe this is a current example of a spherical cow? We are being told that stock and bond returns will be miserable in the future. At the same time we are being told, generally by the same experts, that buy and hold is the only way to invest.

I know some will not like my example. The devil made me do it.

Simple enough - pure logic. Future returns being lower than average (I assume that's what you mean by 'miserable'), does not imply that an alternative to Buy & Hold is better.

If you think you have a better alternative, then you have your answer. But since we don't know the future, it isn't provable, so the 'experts' (whoever they are), are simply voicing their opinion, same as you.

-ERD50

 

[NW-Bound]

We are getting away from the OP, but since this matter (market timing ) has been broached, please allow me to state something that came to mind.

If the expected market return is not going to be that great - using fundamental analysis of the economic condition - then when we have a great run, would that not mean the market is ahead of the game, and it is prudent to dial back our AA?

Running-man says that what is he is doing in another thread, and I have been quoting Kelly criterion to say that there is mathematical basis for reducing one's bet when the probability of the outcome changes.

Caveat: I am still around 70% equity, and have been thinking about either dialing back or selling options to hedge.

 

[Lsbcal]

NW-Bound, you are right and we are getting off the OP's intentions I think. It is probably my fault.

So my last word on the subject is that I've never found a good backtested way of dialing back without giving up returns. The current situation is even worse given bond real returns (5 year TIPS now at -0.1%).

I just might start a new thread: "How to reduce equities optimally?"
First I have to look at what I've tested in the past.

 

[walkinwood]

Meandering threads are in the nature of this site. And I think the site is the better for it.