M* "Asset Allocator" tool: low expected annual returns...

[FIREd]

The SWR method and Portfolios in Work Less Live More show how you can use a widely diversified, low-volatility portfolio (about half stocks, half bonds) to get not only a 4%-4.5% SWR, but also keep the value of the portfolio substantially intact, even in inflation-adjusted terms, over the long run.

That book has been an inspiration for me and this is exactly what I am intending to do. However, it seems that the returns Clyatt used in the book (probably based on historical data) are much higher than what M* is projecting for the future. So my contention is that one can still keep the value of one's portfolio substantially intact, even in inflation-adjusted terms, over the long but that in order to achieve that result the SWR will have to be lower then 4-4.5% quoted in the book.

 

[audreyh1]

Well the "official" 4% SWR doesn't take 4% out every year. It sets an initial withdrawal of 4% of the portfolio the first year, and then each year after that adjusts the withdrawal amount for inflation. The actual % you are withdrawing then varies every year. But this method has been tested over many decades and all sorts of market conditions and has been shown to survive pretty well over long periods of time.

Audrey

 

[cute fuzzy bunny]

Do note that our economy has developed further along the curve than where it was when the historic data was logged. Bernstein showed a nice chart in the 4 pillars about how economies develop from nascent through emerging through mature and, almost always...defunct.

We're probably far along in the maturation process, rather than transitioning from emerging to mature.

Hence, per his analysis...returns will slope off from here.

Unless the US economy is different from nearly all others in history.

 

[ESRBob]

That book has been an inspiration for me and this is exactly what I am intending to do. However, it seems that the returns Clyatt used in the book (probably based on historical data) are much higher than what M* is projecting for the future.

Yes the returns are historical, but they are a necessary blend of very long term historical returns for some of the core asset classes and shorter term (20-50 year) returns for other asset classes like REITs or emerging markets, where the data simply hasn't been available.

The new edition will use the Dimson Marsh Staunton long term international data series, which actually lowers success rates a little, mostly because the European stock markets didn't always fare all that well during the 20th century, (to CFB's point).

Still the WLLM portfolios perform better than the M* averages you quoted mostly, in my view, because they bring in the additional asset classes and asset class permutations which boost expected return and contribute to an overall lower portfolio volatility -- Oil & Gas, REITs, Commodities, Private Equity. along with international bonds and stocks, as well as small stocks, domestic and international.

You can gain some comfort in the wisdom of this by the fact that big institutions today who make annual grants all seem to be investing this way, and making grants of around 4-5% of portfolio value.

By the way, the way the Work Less Live More SWR works is that you take, say, 4% of portfolio value each year, not 4% of Year1 value, with annual inflation adjustments. Real spending each year will therefore fluctuate up and down with market performance, but the result is greatly enhanced security (measured in survival of the real value of the portfolio) over long periods of time.

 

[Nords]

That's why I was saying that if real returns are 3-3.5%, then in my opinion a 4% SWR is not necessarily "safe".

You have to balance your feeling of what's "safe" against your love of working for enough additional years to raise your stash to that level... or else reduce your ER spending plans. "Sleep at night" has a price.

A 4% SWR requires a stash of 25x your annual expenses and will involve some principal consumption.

A 3% SWR requires a stash of 33x your annual expenses or a spending reduction of 25% (from 4% to 3%).

Suddenly those higher-equity portfolios don't seem so volatile anymore!

The new edition will use the Dimson Marsh Staunton long term international data series, which actually lowers success rates a little, mostly because the European stock markets didn't always fare all that well during the 20th century, (to CFB's point).

Excellent! That seems to be one of the best studies ever, as well as one of the world's most dangerous books (don't drop it on your feet or leave it lying on your chest). But it also points out the long-term dangers of inflation as well as the benefits of additional asset classes. In that regard a fixed-income portfolio is even more insidiously hazardous than investing in 100% b33ver-cheeze futures. Every asset class can be highly volatile as long as they're brought together in a non-correlated manner-- the result is much lower volatility.

You can gain some comfort in the wisdom of this by the fact that big institutions today who make annual grants all seem to be investing this way, and making grants of around 4-5% of portfolio value.

That keeps institutions going for a lot longer than 40 years, too.

In 1999 the IRS briefly publicized an interest in raising their guidance to 6%. I guess it was overcome by events and I haven't heard anything since then...

 

[cute fuzzy bunny]

Oh and while we're on the subject, who's the comedian who had the language filter substitute beaver cheese for "beever cheeese"?

 

[Nords]

Oh and while we're on the subject, who's the comedian who had the language filter substitute f*zzy b*nny for "beever cheeese"?

In your case it was the highest compliment we moderators could come up with... or maybe it was Dory's personal best!

 

[cute fuzzy bunny]

Well lemme tell ya, that was a bit confusing this morning when I put in b33ver ch33se and then saw my post...I said "how the heck did THAT happen?"

So i'm roughly equated with an investment product thats loved largely by a small number of nutty people, but has no actual intrinsic value?

Close enough.

 

[Nords]

So i'm roughly equated with an investment product thats loved largely by a small number of nutty people, but has no actual intrinsic value?
Close enough.

Probably a highly volatile commodity based on moldy decaying organic fermentation, too...

 

[cute fuzzy bunny]

Which sort of wraps back around to that cheese joke I was going to put on Ha yesterday...