Getting to Enough
- Thread starter arrete
- Start date
I can think of a few examples:
When I was doing portfolio allocation studies several years ago I was surprised first at how little the stock/bond allocation mattered to SWR until I looked at low stock allocations. Then I was surprised at how quickly SWR dropped off for low stock allocation.
Most recently I was surprised at how much SWR could be increased by using a required/discretionary budget split. With as little as 25% of your budget considered discretionary (based on portfolio value instead of inflation) you could increase SWR by over 30%. Of course SWR takes on a slightly different meaning for this study, but it is still a huge impact.
I've also spent some time looking at terminal value sensitivity to input parameter variations. Some pretty surprising results related to interest rates on debt have come out of those simulations.
Some pretty surprising results related to interest rates on debt have come out of those simulations.
I agree wholeheartedly with the point that SalaryGuru is making in this post.
Critics of the Data-Based SWR Tool have held it to an impossible standard. What some have suggested is, unless you can predict with exact precision what the prices of stocks will be for every year in the future, SWR analysis has no value. I reject this suggestion out of hand.
The point of SWR analysis is not to predict the future with precision. It is to use what has happened in the past to develop insights as to what may happen in the future. What you are doing is assigning probabilities to various future outcomes.
It is much like preparing a weather forecast. When the weather-man says "There is an 80 perecent chance of rain tomorrow," we all know that there is a chance that it will not rain. So it is with SWR analysis. When we say "the SWR for an 80 percent S&P portfolio in January 2000 was 1.6 percent," we are not saying that a plan calling for a 4 percent take-out is certain to fail. We are saying that you had better keep your slicker and galoshes close at hand because there is a darn good chance that you are in for some stormy weather.
I agree wholeheartedly with the point that SalaryGuru is making in this post.
Critics of the Data-Based SWR Tool have held it to an impossible standard. What some have suggested is, unless you can predict with exact precision what the prices of stocks will be for every year in the future, SWR analysis has no value. I reject this suggestion out of hand.
The point of SWR analysis is not to predict the future with precision. It is to use what has happened in the past to develop insights as to what may happen in the future. What you are doing is assigning probabilities to various future outcomes.
It is much like preparing a weather forecast. When the weather-man says "There is an 80 perecent chance of rain tomorrow," we all know that there is a chance that it will not rain. So it is with SWR analysis. When we say "the SWR for an 80 percent S&P portfolio in January 2000 was 1.6 percent," we are not saying that a plan calling for a 4 percent take-out is certain to fail. We are saying that you had better keep your slicker and galoshes close at hand because there is a darn good chance that you are in for some stormy weather.
Was there a particular point (inflection point? Can't remember terminology) where the SWR took a dive depending on the stock/bond mix? It might be interesting as you grow older to nudge your portfolio in that direction, but not past it.
arrete
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Yep. Less than 20% stocks in the mix produces lower returns without significantly lowering volatility and more than 80% stocks produces higher volatility without significantly increasing returns.
Some folks still go 100% bonds or 100% stocks. Historically, the data says they're not doing themselves any favors.
Some folks still go 100% bonds or 100% stocks. Historically, the data says they're not doing themselves any favors.
Hi arrete,
The inflection point depends on the kind of bonds you use and the length of retirement. For 30 years and TIPS or I-bonds, the inflection point is fairly low (10% to 30%). For commercial paper it was significantly higher (50% to 60%). These numbers change if you include social security, pension or other annuities. Also, although TIPS and I-bonds produce higher SWR with lower stock mixes, they also produce much lower average terminal values. In other words, while the safety of outspending your retirement in 30 years is increased, so is the risk of outliving your retirement.
As TH mentions, this issue is also often viewed from the perspective of risk (as defined by the beta of the investment). Bernstein shows the inflection point in a risk-return plot that is a little bit different than the inflection point on a SWR-allocation plot. But you end up with similar conclusions about optimum allocations. Again, your original point about using all the tools helps to understand the issue from multiple angles.
although TIPS and I-bonds produce higher SWR with lower stock mixes, they also produce much lower average terminal values.
This makes sense to me. TIPS are a less volatile asset class. You would expect them to be safer. They are not a growth-oriented asset class. So, in best case scenarios, you would generally expect stocks to do better.
you end up with similar conclusions about optimum allocations.
I question whether this is so for those who engage in switching. If you lower your stock allocation at times of extremely high stock valuations, it allows you to buy more shares when prices return to more moderate levels. That provides you with the stability you require at times when stock prices are most volatile on the downside, plus the long-term growth potential associated with stocks at times when the downside risk has been diminished.
This makes sense to me. TIPS are a less volatile asset class. You would expect them to be safer. They are not a growth-oriented asset class. So, in best case scenarios, you would generally expect stocks to do better.
you end up with similar conclusions about optimum allocations.
I question whether this is so for those who engage in switching. If you lower your stock allocation at times of extremely high stock valuations, it allows you to buy more shares when prices return to more moderate levels. That provides you with the stability you require at times when stock prices are most volatile on the downside, plus the long-term growth potential associated with stocks at times when the downside risk has been diminished.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Are the geese returning northward already?
Hyperborea
Thinks s/he gets paid by the post
salaryguru,
Have you looked at how following market timing "gurus" either in the media or on the internet affects your portfolio performance? Following market timing or "switching" strategies how quickly does one have to take on paying employment to avoid exhausting their portfolio?
Thanks for your insight on this.
Have you looked at how following market timing "gurus" either in the media or on the internet affects your portfolio performance? Following market timing or "switching" strategies how quickly does one have to take on paying employment to avoid exhausting their portfolio?
Thanks for your insight on this.
Here's a tutorial published at the Gummy Stuff web site that relates to these questions:
http://www.gummy-stuff.org/JWR.htm
http://www.gummy-stuff.org/JWR.htm
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Re: Getting to Enoughu hav
That's a cop-out. It's not a real response.
I put up my "What Bernstein Says" post on August 27, 2002. That's 30 months ago. Bernstein says that the conventional methodology (the methodology used in the study published at RetireEarlyHomePage.com) is "highly misleading." He said that because the conventional methodology makes no adjustment in the SWR for changes in valuation levels and Bernstein believes that changes in valuation levels affect long-term returns as a matter of "mathematical certainty." He even went to the trouble of calculating what the SWR was at the top of the bubble, and his analysis produced a number a full 2 percentage points lower than the number identified by intercst as "100 percent safe."
We have examined the historical data every which way it can be studied in the 30 months since, and every examination has pointed to the same conclusion--Bernstein was right, intercst was wrong. In those 30 months, we have not seen one post that made a reasoned argument for why Bernstein is wrong. SalaryGuru took a step in the right direction with a post put to the NFB board a week or two ago. He at least was honest in acknoweldging that he thinks Bernstein is wrong rather than engaging in the standard deception claiming that Bernstein did not in fact say what he in fact said.
Bernstein said what he said, and what Bernstein said was important news to aspiring early retirees. If the best that the DCMs can do is put forward links to snake oil sites, they are insulting the intelligence of the board community to keep at this after all this time. There is a time to say that enough is enough, and I think that we are far past that point now. Enough is enough.
If you want to join SalaryGuru in saying that you think that William Bernstein is wrong, that is your right. Bernstein is not God. People are allowed to say that they think he is wrong. But Bernstein is not selling snake oil. Bernstein is not a troll. Bernstein is not mentally ill.
If you have some reasoned argument for disputing what Bernstein says, please put it forward. If you do not, I ask that you kindly knock off the nonsense and permit those community members who wish to engage in reasoned discussions of what the historical data says re SWRs do so in peace.
That's a cop-out. It's not a real response.
I put up my "What Bernstein Says" post on August 27, 2002. That's 30 months ago. Bernstein says that the conventional methodology (the methodology used in the study published at RetireEarlyHomePage.com) is "highly misleading." He said that because the conventional methodology makes no adjustment in the SWR for changes in valuation levels and Bernstein believes that changes in valuation levels affect long-term returns as a matter of "mathematical certainty." He even went to the trouble of calculating what the SWR was at the top of the bubble, and his analysis produced a number a full 2 percentage points lower than the number identified by intercst as "100 percent safe."
We have examined the historical data every which way it can be studied in the 30 months since, and every examination has pointed to the same conclusion--Bernstein was right, intercst was wrong. In those 30 months, we have not seen one post that made a reasoned argument for why Bernstein is wrong. SalaryGuru took a step in the right direction with a post put to the NFB board a week or two ago. He at least was honest in acknoweldging that he thinks Bernstein is wrong rather than engaging in the standard deception claiming that Bernstein did not in fact say what he in fact said.
Bernstein said what he said, and what Bernstein said was important news to aspiring early retirees. If the best that the DCMs can do is put forward links to snake oil sites, they are insulting the intelligence of the board community to keep at this after all this time. There is a time to say that enough is enough, and I think that we are far past that point now. Enough is enough.
If you want to join SalaryGuru in saying that you think that William Bernstein is wrong, that is your right. Bernstein is not God. People are allowed to say that they think he is wrong. But Bernstein is not selling snake oil. Bernstein is not a troll. Bernstein is not mentally ill.
If you have some reasoned argument for disputing what Bernstein says, please put it forward. If you do not, I ask that you kindly knock off the nonsense and permit those community members who wish to engage in reasoned discussions of what the historical data says re SWRs do so in peace.
Hyperborea
Thinks s/he gets paid by the post
I put up my post "What does Bernstein say about SWR?" on TMF REHP on November 24, 2002 and that's well that's almost 27 months ago so that must mean something (other than the fact that I was alive and posting to TMF REHP board 27 months ago I'm not sure what though). After digging through Bernstein's online journal Efficient Frontier it was clear that:
Bernstein believes that a 4% withdrawal from a mixed equity/bond portfolio should be about 4% of the original value adjusted for inflation or a flat 5%.
http://www.efficientfrontier.com/ef/998/hell.htm
Bernstein believes that a 4% withdrawal from a mixed equity/bond portfolio should be about 4% of the original value adjusted for inflation or a flat 5%.
http://www.efficientfrontier.com/ef/998/hell.htm
Re: Getting to Eno
I understand, Hyperborea.
What you are doing here is tying this back to Arrete's thread-starter. I think it is fair to say that Bernstein is more pro-stock at these valuation levels than I am. That doesn't change the fact that he said on Page 234 of his book "The Four Pillars of Investing" that the SWR for a high-stock portfolio at the top of the bubble was not 4 percent, but 2 percent.
The fact that the SWR was 2 percent does not mean that a law has been passed that no one may take out 4 percent. You may take out whatever you please. Arrete said that she used the REHP study number as a mere rule of thumb, and it of course her right to do so.
It is NOT anyone's right to deny the results of the Bernstein calculation. He calculated the number and he determined that the SWR was 2 percent and not 4 percent. Are we in agreement that that is the number that Bernstein came up with when he calculated the SWR that applied for a high-stock portoflio at the top of the bubble?
I understand, Hyperborea.
What you are doing here is tying this back to Arrete's thread-starter. I think it is fair to say that Bernstein is more pro-stock at these valuation levels than I am. That doesn't change the fact that he said on Page 234 of his book "The Four Pillars of Investing" that the SWR for a high-stock portfolio at the top of the bubble was not 4 percent, but 2 percent.
The fact that the SWR was 2 percent does not mean that a law has been passed that no one may take out 4 percent. You may take out whatever you please. Arrete said that she used the REHP study number as a mere rule of thumb, and it of course her right to do so.
It is NOT anyone's right to deny the results of the Bernstein calculation. He calculated the number and he determined that the SWR was 2 percent and not 4 percent. Are we in agreement that that is the number that Bernstein came up with when he calculated the SWR that applied for a high-stock portoflio at the top of the bubble?
This is not "nonsense" nor "unreasoned discussions". It is merely a difference of opinion.
If there are posters who want to have discussions of what the conventional methodology studies say without proponents of the data-based methodology jumping in and arguing that the conventional methodology is analytically invalid for purposes of determining SWRs, I have no problem with that. There ARE legitimate differences of opinion here and those differences should be respected.
The other side of the story is that proponents of the data-based methodology should also be given the freedom to engage in non-disupted discussions of what the data says from their perspective. DCMs should not be permitted to disrupt those threads with all sorts of nonsense. Claims of mental illness are nonsense. Charges of trollery are nonsense. You know the sort of thing I am talking about.
All community members, regardless of their views on SWRs, benefit from us following reasonable rules promoting civil discussion at this forum. We should all be working together to achive that goal. Working together in good faith, I am certain that we could pull it off.
If there are posters who want to have discussions of what the conventional methodology studies say without proponents of the data-based methodology jumping in and arguing that the conventional methodology is analytically invalid for purposes of determining SWRs, I have no problem with that. There ARE legitimate differences of opinion here and those differences should be respected.
The other side of the story is that proponents of the data-based methodology should also be given the freedom to engage in non-disupted discussions of what the data says from their perspective. DCMs should not be permitted to disrupt those threads with all sorts of nonsense. Claims of mental illness are nonsense. Charges of trollery are nonsense. You know the sort of thing I am talking about.
All community members, regardless of their views on SWRs, benefit from us following reasonable rules promoting civil discussion at this forum. We should all be working together to achive that goal. Working together in good faith, I am certain that we could pull it off.
This thread was started by a DCM, according to you, so all DCMs are welcome.
If you want only DCMs to participate on a thread you start, I am willing to honor that. It's important that you say that because when you say that you put community members reading the thread on notice that they are hearing only one side of the story on that particular thread.
Blither about not being allowed to post is not welcome
It's not blither, Arrete. It is a serious problem and it has been for 33 months now. There have been scores and scores of community members who have expressed a desire to hear about the Data-Based SWR Tool. I can provide links if there are any newcomers who have doubts on this point. Those community members have made it clear that they are not willing to participate in threads that are poisoned with all sorts of ugliness that the DCMS have been bringing to the table. The ugliness is uncalled for, and it should stop.
We should all want it to stop, regardless of our views on SWRs. This is an issue on which the community should be united. It is only by permitting a variety of views to be expressed that the boards gain life and blood and achieve their full potential.
If you want only DCMs to participate on a thread you start, I am willing to honor that. It's important that you say that because when you say that you put community members reading the thread on notice that they are hearing only one side of the story on that particular thread.
Blither about not being allowed to post is not welcome
It's not blither, Arrete. It is a serious problem and it has been for 33 months now. There have been scores and scores of community members who have expressed a desire to hear about the Data-Based SWR Tool. I can provide links if there are any newcomers who have doubts on this point. Those community members have made it clear that they are not willing to participate in threads that are poisoned with all sorts of ugliness that the DCMS have been bringing to the table. The ugliness is uncalled for, and it should stop.
We should all want it to stop, regardless of our views on SWRs. This is an issue on which the community should be united. It is only by permitting a variety of views to be expressed that the boards gain life and blood and achieve their full potential.
cute fuzzy bunny
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Feeding it will not make it go back under the bridge.
haha
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Wow! Waspish, but you don't have to be nice if you are right.
Mikey
unclemick
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Vanguard Balanced Index (a 60/40) - current yield 2.49%
Vanguard Wellesley (a 40/60) managed value fund and a good one - current yield 3.67%
?? Who would look better in a kayak - the Norwegian widow or Yogi Berra??
Hint - even with grey hair, she's a hottie.
Dump your mutual funds, calculators, MPT, Index funds, yada, yada - buy a few good dividend paying stocks and don't pay anybody any stinking expense/management fees.
How much is enough? - when you can live on the dividends of what you have.
Heh, heh - not a CHP - but close enough!
Vanguard Wellesley (a 40/60) managed value fund and a good one - current yield 3.67%
?? Who would look better in a kayak - the Norwegian widow or Yogi Berra??
Hint - even with grey hair, she's a hottie.
Dump your mutual funds, calculators, MPT, Index funds, yada, yada - buy a few good dividend paying stocks and don't pay anybody any stinking expense/management fees.
How much is enough? - when you can live on the dividends of what you have.
Heh, heh - not a CHP - but close enough!
unclemick
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
P. S. - Bogle, Bernstein, and yes Intercst, JWR have taken a look in their own way at individual stocks - to varying degrees. Interestingly, Bernstein hangs with index funds - but as a retiree in the distribution phase, I can take his data differently.
So I'll still SWAG 4% of my nest egg handgrenade wise, but look to dividends and interest as 'real money' to live on.
So I'll still SWAG 4% of my nest egg handgrenade wise, but look to dividends and interest as 'real money' to live on.
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