Outperformance

[halo]

Hypothetcal Questions:

Using Firecalc for a 30 year time period, if the 55% equity portion of the portfolio outperforms the Total Market (S&P 500) by double or triple, by how much would that increase the 95% "safe" withdrawal rate?

For example, if the equities outperform by double the S&P performance, would the 90% "safe" withdrawal rate become roughly 95% "safe?"

Or if the equities outperform by triple the S&P performance, would the 85% "safe" withdrawal rate correspondingly become roughly 95% "safe?"

Is the above a reasonable sliding scale that can be used as a rough guideline? If not, what would be a good rule of thumb in these terms?

Of course, all the usual caveats about not taking Firecalc too literally apply here too, as well as the potential for out-sized risk that may accompany such outperformance. I'm just looking to see how much the equity outperformance I have experienced for the past 6 years may have increased the initial 95% "safe" withdrawal rate (to be annually inflation-adjusted),

(a) if it continues to outperform at double or triple the S&P from this point to the end of the 30-year retirement period OR,

(b) if it just matches the performance of S&P from this point to the end of the 30-year retirement period. (in other words, the first 6 years outperform only)

Any ideas on how to quantify any of this by using Firecalc or otherwise? Thanks for your input.

 

[donheff]

Why even try to calculate this? The results would be off the charts. But the odds of achieving it would be like Lotto.

 

[W2R]

Using Firecalc for a 30 year time period, if the 55% equity portion of the portfolio outperforms the Total Market (S&P 500) by double or triple, by how much would that increase the 95% "safe" withdrawal rate?

FIRECalc allows a couple of options for your portfolio inputs and the last two might be helpful. One of these allows you to input consistent annual market growth of a percentage that you specify, and the other of which allows you to input random performance, with a mean total portfolio return of a percentage that you specify.

But if the various portfolio input options do not suit you, FIRECalc states: "(The choices available are those for which we have suitable historical data. When we obtain more data, we will add additional options.)"

So, that is what you get. Seems to me you want a factor by which to multiply the withdrawal rate given as FIRECalc output. It seems to me that that means that YOU are trying to model on top of what FIRECalc provides you, and I would not rely on such a result.

 

[Midpack]

What are these investments that are going to beat the S&P by double or triple over a 30 year period - never mind? If I understand you correctly, you're asking a question that can't be calculated meaningfully as you ask it.

History would suggest that an investment with that kind of upside potential would be considerably more volatile and therefore have considerable downside risk as well. To assume it would simply follow the S&P with double or triple the "amplitude" isn't a safe assumption, I would think the asset(s) would have a completely different series of returns than the S&P. And IMO there is no such investment you could identify in advance.

You'll indeed have higher highs and a higher mean, but the lows might come into play more often too. Your probability of success may not go up at all, might even go down - and I'm fairly certain no rule of thumb will apply.

 

[jdw_fire]

What are these investments that are going to beat the S&P by double or triple over a 30 year period - never mind? If I understand you correctly, you're asking a question that can't be calculated meaningfully as you ask it.

History would suggest that an investment with that kind of upside potential would be considerably more volatile and therefore have considerable downside risk as well. To assume it would simply follow the S&P with double or triple the "amplitude" isn't a safe assumption, I would think the asset would have a completely different series of returns than the S&P. And IMO there is no such investment you could identify in advance.

You'll indeed have higher highs and a higher mean, but the lows might come into play more often too. Your probability of success may not go up at all, might even go down - and I'm fairly certain no rule of thumb will apply.

doesnt it sound like he is talking about 1 of those funds that uses options/futures to produce 2x or 3x the S&P performance (up and down)?

 

[ziggy29]

For example, if the equities outperform by double the S&P performance....

I don't think even Warren Buffett has done that over the course of his investing career.

 

[samclem]

I'm just looking to see how much the equity outperformance I have experienced for the past 6 years may have increased the initial 95% "safe" withdrawal rate (to be annually inflation-adjusted)
. . .
(b) if it just matches the performance of S&P from this point to the end of the 30-year retirement period. (in other words, the first 6 years outperform only)

FIRECALC can answer this part of your question. Just run two FIRECALC cases:
1) with a starting value of your equities as they are now (after your six years of outperformance)
2) with a starting value of what your equities would have been worth if they'd instead been invested in the S&P 500 for the last 6 years.

Use your same asset mix in retirement in both cases, and your same desired withdrawal amount. The difference in survival rate will tell you the significance of your last 6 years of outperformance.

Some obeservations:
- You've outperformed this one index. There are an unlimited number of equity mixes that investors use that incorproate varing amounts of things that aren't in the S&P 500 --foreing stocks, small stocks, etc. Your equities almost surely underperformed some mixes of assets and even some available indexes.
- It's probably misleading any rate to express your performance as "outperforming by triple the performance of the S&P 500." It's not a useful way of expressing the relationship between two bundles of stocks (unless someone is putting together a sales brochure). It's more useful to express the difference between the two bundles of equities in terms of the the % difference in their growth rates. (e.g. "my stocks had an average growth rate of 6% per year, compared to the trhe S&Ps 2% annual rate). Expressing things as you've done is not useful: If the S&P returns -2% in a year and your stocks return +4%, by what multiple would you say you outperformed the S&P?
- Don't forget to include dividends when you are computing total return.

- The whole question is cause for worry.
-- You outperformance is extremely unlikely to persist at the present rate very long.
-- The voloatility of an investement that outperforms the S&P by even a few % per year is likely to be, umh, "breathtaking."
-- I worry that a sales pitch is either coming or has already been received somewhere in this whole thing.

 

[halo]

sanclem asks:

"If the S&P returns -2% in a year and your stocks return +4%, by what multiple would you say you outperformed the S&P?"

The multiple of such outperformance would be 3. 3X the performance of the S&P, right? If this is not the case, please explain. Thanks.

 

[samclem]

sanclem asks:


The multiple of such outperformance would be 3. 3X the performance of the S&P, right? If this is not the case, please explain. Thanks.

No, I don't think that's right.

The "outperformance multiple" is not a useful way of describing the difference in two portfolios/asset bundles. It doesn't mean anything.

Examples:
1) Bundle A returned 0%, Bundle B returned 1%. By what multiple did B outperform A? Answer: an infinite amount (that's the amount by which you'd need to multiply A's return in order to approach B's return). Is that useful?

2 )Bundle A returned -2%, Bundle B returned +4%. By what multiple did B outperform A? Answer: -2. Is that a useful description of their relative returns?

I think if you stick to using the absolute difference in returns (e.g. "Bundle A produced returns averaging 3% per year higher than the returns of Bundle B") everyone will have a much easier time understanding what you are saying.

 

[Meadbh]

I don't think this is a useful metric, because we have no absolute zero. As a corollary, is 30 degrees three times hotter than 10 degrees? No. If we were dealing with an investment that could only yield positive returns, the metric would have meaning.

 

[halo]

Thanks for your reply, sanclem.

In your example 2):

2 )Bundle A returned -2%, Bundle B returned +4%.

In your opinion, would it be correct to say that Bundle B produced returns averaging 6% higher than the returns of Bundle A?

If this is not right, what would be the correct way to state a quantitative comparison of Bundle B's superior performance relative to Bundle A in your Example 2)?

Here's another example: Bundle A returned 10%, Bundle B returned 20%. Even though it's somewhat counter-intuitive, you're saying that in this case it is NOT correct to say that Bundle B produced double (or 2X) the returns of Bundle A, right? Again, why not? What would be the correct way to compare these two returns?

Thank you again.

 

[samclem]

In your opinion, would it be correct to say that Bundle B produced returns averaging 6% higher than the returns of Bundle A?

Yes, in my opinion this would be a satisfactory way of expressing it. To be absolutely clear, the best way to say it (IMO) is "The average return of Bundle B was 6% more per year than the average annual return of Bundle A." That prevents a possible misinterpretation if the listener was using the perspective that you had in the initial post.

Meadbh brings up a good point--we need a Rankin or Kelvin scale for investing!