SWR: latest findings

[Focus]

Latest (and very interesting) SWR research by Michael Kitces and Wade Pfau.

They compare:

• Valuation-based approach*
• Fixed 60% stocks / 40% bonds
• Fixed 60% stocks / 40% bills
• Rising glide path for stocks/bonds and stocks/bills

*Kitces and Pfau define this as "where the portfolio starts out at a 'neutral' 45% in equity exposure, increasing to 60% in equities when markets are 'cheap' and undervalued, decreasing to only 30% when markets are 'expensive' and overvalued, and remaining at the neutral 45% in equities when markets are fairly valued in the middle."

Their conclusion? Kitces says:

"Whether based on safe withdrawal rates as a measure of minimizing risk, or median wealth as a measure of maximizing wealth accumulation, the valuation-based tactical portfolios ... appear to do slightly better than either a fixed 60% equity exposure or a rising equity glidepath."

My personal takeaway is that the fixed 60% stocks / 40% bills strategy appears to do nearly as well and the simplicity of this approach tilts the scales in its favor. But then I'm not a financial advisor...

 

[brewer12345]

These guys need to get laid or something.

 

[aim-high]

Lmao ! ! !

 

[pb4uski]

These guys need to get laid or something.

I dunno. They can't seem to think straight as it is.

 

[jebmke]

These guys need to get laid or something.

They still wouldn't know how fast to withdraw, though.

 

[mathjak107]

is there a penalty for a pre-mature withdrawal?

 

[mathjak107]

to be honest i find their work entertaining but useless to follow as a strategy.

in just a few months the rising glide path went from the next best thing to i will leave it to you to fill in to well maybe we only need to do the glide path if the cape ratio says we do.

everytime i decide to follow a plan being i am retiring this year the strategy becomes a bit out dated in the next months article.

 

[aim-high]

Is their audience do-it-yourselfers or financial planners who are successfully guiding everyone to retirement nirvana?

If they make it complicated enough that the DIYs can't do it, then it's easy to justify taking an 1/8 to a 1/3 of that SWR and giving it to professionals.

 

[photoguy]

in just a few months the rising glide path went from the next best thing to i will leave it to you to fill in to well maybe we only need to do the glide path if the cape ratio says we do.

I guess they have a strong incentive for LPUs (least publishable units).

I do find it somewhat odd that they are making a career out of retirement research yet are not retired themselves.

Sent from my Nexus 5 using Early Retirement Forum mobile app

 

[audreyh1]

These guys need to get laid or something.

When you read their stuff - this is obviously their all consuming life.

 

[audreyh1]

I guess they have a strong incentive for LPUs (least publishable units).

I do find it somewhat odd that they are making a career out of retirement research yet are not retired themselves.

Sent from my Nexus 5 using Early Retirement Forum mobile app

Someone has got to do that work. So by definition it will be done by someone who is not retired.

 

[audreyh1]

My personal takeaway is that the fixed 60% stocks / 40% bills strategy appears to do nearly as well and the simplicity of this approach tilts the scales in its favor. But then I'm not a financial advisor...

Totally agree that if a simpler approach does almost as well, it's a better choice. Because it takes the "fiddling" out of the equation, especially when emotions are high. It's really easy to screw up when you are making extra moves at the same time you are anxious. It's hard enough just to rebalance when things get out of whack!

 

[harley]

I think it's a brilliant strategy. Makes perfect sense...sell when equities are high, buy when they are low. All I've got to do now is get the timing just right...

 

[mathjak107]

the only issue with cash instead of bonds is this.

if we go to cash what do we have to do to maintain that same volatility swing in a downturn?

we have to sell stocks and hold more cash instead since cash does not produce potential capital gains . in fact in a bad downturn interest rates usually get cut .

you have to up your cash allocation at the expense of your stock allocations to maintain that same volatility swing .

If you were comfortable with a 50/50 mix of stocks and bonds you may have to go to a 40/60 or 35/65 mix of stocks and cash to get those swings back in line.

think about it, to keep your portfolio in the same volatility range you need to allocate more money to cash and tie it up at near zero than you would have to put in to bonds to accomplish the same volatility objective..

thats crazy, your stocks can go up so much more off-setting any drop in bond prices so why would you want to pull money out of your stocks to increase cash when less money in bonds protects you the same.

so what if bonds fall, the extra money still in stocks will make up most of that if not all of it and then some.

you can not use same allocation of stocks and cash as you had in stocks and bonds and expect the same swings in a downturn..

 

[Bikerdude]

My personal takeaway is that the fixed 60% stocks / 40% bills strategy appears to do nearly as well and the simplicity of this approach tilts the scales in its favor. But then I'm not a financial advisor...

And considering that you must be correct on determining current stock valuations. I'm sure I can find credible articles now stating that stocks are overvalued, fairly valued and undervalued.

 

[pb4uski]

....I do find it somewhat odd that they are making a career out of retirement research yet are not retired themselves....

Those who can do.....those who can't....

 

[karluk]

I enjoy reading about these alternative approaches to portfolio management, but I think it's rather obvious that Kitces and Pfau come from academic backgrounds, where one's reputation is made by publishing a large number of well-researched papers, rather than dealing with clients in the real world. Their suggested approach to valuation based investing has the same weakness as all other such approaches - it requires nerves of steel to increase stock allocations from 30% to 60% after the market has crashed and valuations are starting to look attractive again. Some people, including some on this forum, can keep their emotions in check and make these huge reallocations after a major market meltdown, but for the average investor this is an insane approach to portfolio management. It assumes decision making that requires huge leaps of faith, that may easily backfire, and is to be implemented by retirees, whose lack of earned income will render them unable to recover from missteps.

There was a recent thread about Bill Bernstein, who has gone in exactly the opposite direction, based on observing his own clients' behavior in 2008. He is intentionally advocating non-optimal conservative portfolios, hoping to prevent his clients from the engaging in the kind of panic selling he saw back then. Maybe he is being excessively cautious, but at least his advice has a chance to work in the real world.

 

[Focus]

And considering that you must be correct on determining current stock valuations. I'm sure I can find credible articles now stating that stocks are overvalued, fairly valued and undervalued.

In his post, Kitces explains the system they used to determine this. It's based on the Shiller CAPE (P/E10), which he says is a poor predictor in the short term for market timing but "a remarkably powerful predictor of long-term performance." He says this valuation measure "really is at elevated levels" right now.

 

[ronin]

Some thoughtful analysis of CAPE 10: philosophicaleconomics/capehigh

 

[CaliforniaMan]

Totally agree that if a simpler approach does almost as well, it's a better choice. Because it takes the "fiddling" out of the equation, especially when emotions are high. It's really easy to screw up when you are making extra moves at the same time you are anxious. It's hard enough just to rebalance when things get out of whack!

+1
Of course you can always get a better model as you add parameters. The problem is that as you do, you are fitting to the data. Add more parameters, more decisions points, get better results. The problem is as Audrey1 points out is that there is no way to know when you are adding real insight, rather than just fitting to the data at hand. We know the future will be different, equity prices are not a stationary time series. Fiddling gets more papers written, but for real life simpler is better.

 

[clifp]

I enjoy reading about these alternative approaches to portfolio management, but I think it's rather obvious that Kitces and Pfau come from academic backgrounds, where one's reputation is made by publishing a large number of well-researched papers, rather than dealing with clients in the real world. Their suggested approach to valuation based investing has the same weakness as all other such approaches - it requires nerves of steel to increase stock allocations from 30% to 60% after the market has crashed and valuations are starting to look attractive again. Some people, including some on this forum, can keep their emotions in check and make these huge reallocations after a major market meltdown, but for the average investor this is an insane approach to portfolio management. It assumes decision making that requires huge leaps of faith, that may easily backfire, and is to be implemented by retirees, whose lack of earned income will render them unable to recover from missteps.

There was a recent thread about Bill Bernstein, who has gone in exactly the opposite direction, based on observing his own clients' behavior in 2008. He is intentionally advocating non-optimal conservative portfolios, hoping to prevent his clients from the engaging in the kind of panic selling he saw back then. Maybe he is being excessively cautious, but at least his advice has a chance to work in the real world.

You raise good points there is a world of difference between the behavior of the experienced investors with a ton of INTJ personalities that inhabit these forums and the rest of the world.

Still i have much simpler formula for moving in out of various asset class, listen to Warren Buffett.
In summer of 1999, when said stocks were very over priced especially internet stock, you could nit pick and say he was a year too early but still great advice.

In Oct of 2008 when he said buy stocks, sure he was 5 months too early but..

In 2010 he said that if he only had a few million he'd be buy residential real estate in hard hit markets. If you followed his advice (and especially used leverage) you'd have done very well even as cash buyer I did fine.

For the last few year he has been calling long bond "return free risk" He hasn't be right about the risk yet, but the return part is true.

I know he isn't going to be around that much longer but in the mean time.

 

[mathjak107]

I enjoy reading about these alternative approaches to portfolio management, but I think it's rather obvious that Kitces and Pfau come from academic backgrounds, where one's reputation is made by publishing a large number of well-researched papers, rather than dealing with clients in the real world. Their suggested approach to valuation based investing has the same weakness as all other such approaches - it requires nerves of steel to increase stock allocations from 30% to 60% after the market has crashed and valuations are starting to look attractive again. Some people, including some on this forum, can keep their emotions in check and make these huge reallocations after a major market meltdown, but for the average investor this is an insane approach to portfolio management. It assumes decision making that requires huge leaps of faith, that may easily backfire, and is to be implemented by retirees, whose lack of earned income will render them unable to recover from missteps.

There was a recent thread about Bill Bernstein, who has gone in exactly the opposite direction, based on observing his own clients' behavior in 2008. He is intentionally advocating non-optimal conservative portfolios, hoping to prevent his clients from the engaging in the kind of panic selling he saw back then. Maybe he is being excessively cautious, but at least his advice has a chance to work in the real world.

actually in an interview bill mentioned that the timing now would be poor for his equity-less portfolio because of negative rates on tips and low to no interest.

so much for working in the real world
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"I wrote "Ages of the Investor" as a way to think about the retirement investing process, not as a normative prescription. -

In a perfect world, the TIPS yield curve is positive at all maturites, which are available at least every few years all the way out to, oh, age 110 or so.

But we don't live in that world right now: below 6 years, rates are negative, which means you have to pay >$1.00 to consume $1.00 0-6 years hence. And even if rates rise, there's a gaping maturity hole between 2032 and 2040. Finally there are no maturities beyond 2043. And so forth.

In a perfect world, an inflation-adjusted annuity will never default. There have been no major ones in the past, but you could also have said the same thing about major terrorist events on U.S. soil before 9/11/01, and if the GFC wasn't a wake-up on that one, you're not conscious.

So there are leaps of faith that have to be made; I can't tell you when or whether to buy inflation-protected annuities or a TIPS ladder now. No one can tell you whether that's better than waiting in short-term instruments.

But the LMP/RP framework at least allows you to make an informed decision.

Bill Bernstein