Gone4Good said:
Your assertion that using 3-4 years of market data to project a 1 yr retirement is the same as using 130 yrs of data to project a 30-40yr retirement assumes that the cycles that are apparent over short periods, are equally apparent over long periods.
No. For 3-4 year cycles, I am saying there is not enough data to derive the next year (although, I think some research does suggest that actually some derivations could be done to a limited degree - and this is only BECAUSE we had a lot of samples of this length).
For longer periods, I am saying there is NOT ENOUGH data to decide whether 130 yrs of data tells us something about the performance of the next 35-year period.
If that is true, you should be able to list them. If you can't list them, then the comparison is invalid.
Are you aware of any larger-scale cycles that 4-year presidential one, or unknown-number-of-years business one? Who knows what other cyclical or
acyclical evens may or may not affect market performance over the next 30-40 years? Are you sure there are no prolonged bear markets that can last for 100 years? Do you have any data to back that up?
Said another way, I know precisely why I wouldn't use 3-4 years of financial market data to make projections.
I assume it's because you've see enough of them to know they are not very predictable.
The same is not true for longer periods.
I don't think we've seen enough of them to make this conclusion.
dex said:
What are the scenarios and how are they significant?
I still don't get your question. How about a 50-year bear market with deflation along the way as one of countless examples? How about (inflation - 1)% average market returns for the next 50 years? It's significant because that would ruin a portfolio or a plan derived on the premise of the past 130 years. How likely is it? I don't know - I don't enough data to tell you. Is it less than 50% likely? I don't know - I don't enough data to tell you.
dex said:
smjsl said:
There is the same number of samples and same error rate in both. In 100/30-year case and in 10/3-year case, the only difference is scale (i.e. 10 years vs 1 year). The rest is the same...
Research statistics, error rates and related topics and you will see the error in the above.
dex, I will disregard your arrogant comment and try to explain my position again in the hopes of getting a better reply with an actual explanation of what you are thinking. Since you did not say, I suspect you are thinking in the first case you have 10 times as many samples as in the second. But you don't, because your samples all have to be intervals of time 10 times larger as well.
It's analogous to the following two problems having the same number of samples and other statistical information:
(1) You have a dice with numbers 1,2,3,4,5,6. You throw it 10 times and have to predict the expected value of the next 3 throws.
(2) You have a dice with numbers 10,20,30,40,50,60. You throw it 10 times and have to predict the expected value of the next 3 throws.
Units are different but the rest is the same. Same thing with retirement problem - in one case your "dice" outcomes are measured with 1 year interval based on outcomes of 3-4 years, in the other it's measured in 35 years based on outcomes of 90-130 years.