Update: equity recovery from SP500 lows

[Lsbcal]

I know you have been breathlessly waiting for this 3rd quarter update. This is my chart for SP500 equity returns from the market lows of the past.

Of course, it is not predictive but should be a reasonable historical perspective.

Minor thought: I added my personal "worry" point with the red arrow. It is 61 months out from the lows and was a point to have sold in 1937, 1987, and 2008. I know this thought is decending into technical analysis and not predictive of the future. But if we have a spurt up (rising slope) and I've achieved my numbers for my retirement age, I just might take some off the table around April 2014. Not saying anyone else should do this. It depends a lot on your situation and allocations. Go ahead, and mention your opinion . Buy and hold is probably the way most will proceed.

 

[haha]

I hope you will have all kinds of good luck with this. But to me it looks very unlikely to be helpful.

Ha

 

[Lsbcal]

I should mention more of my thought process. I'm thinking that I might reduce my equity allocation to reduce risk. I still regret having even 55% in equities coming into 2008. At the start of 2008 we had a good stash and it was gut wrenching to watch it take such a hit.

Right now the FIRECalc simulations look good for our nest egg at even a 4% withdrawal rate. I have 65% equities and I might go down to 55 or even 40%. If I do this, when and how? I just thought maybe this was a decent way of doing risk reduction i.e. reducing equities (not just rebalancing) as we continue on a business and general economic recovery.

The market probably will continue on up in irregular fashion in 2014 and we're still 6 months away from April 2014 (the 61 month point of the recovery). Timing any kind of equity decline has low probability of success. So I'm not planning on hitting a home run with this method, just avoiding being tagged out, so to speak.

Other's thoughts? Go ahead I can even take contrary opinions as long as they are expressed nicely.

 

[haha]

Right now the FIRECalc simulations look good for our nest egg at even a 4% withdrawal rate. I have 65% equities and I might go down to 55 or even 40%. If I do this, when and how? I just thought maybe this was a decent way of doing risk reduction i.e. reducing equities (not just rebalancing) as we continue on a business and general economic recovery.

I completely agree that reducing equities is a good way of reducing risk for many of us. I just thought that your graphs that gave what I thought was your reasoning were an indirect approach to what I think you are trying to achieve. IMO, what matters most is valuation, not how far we are from a bottom. After all, all bottoms are not made equal.

Any market timing tends to be very severely frowned on here, though not by me.

Ha

 

[MDJO]

I prefer to focus on the correct asset allocation, although I try to plan my buying and selling with market conditions in mind. I am retired with 75% equity, 25% fixed and cash. I can go at least five years without touching my equity position, so I feel like I can "ride out" most market declines.

Does your 4% withdrawal still work with a 40% equity postion? If so, would you consider going there now? No need to take any more risk than you need.....

 

[Lsbcal]

I prefer to focus on the correct asset allocation, although I try to plan my buying and selling with market conditions in mind. I am retired with 75% equity, 25% fixed and cash. I can go at least five years without touching my equity position, so I feel like I can "ride out" most market declines.

I guess 25% FI without rebalancing might well guarantee a 5 year period of withdrawals without touching the equity.

Does your 4% withdrawal still work with a 40% equity postion? If so, would you consider going there now? No need to take any more risk than you need.....

Good question. In general the answer is yes, a 40% equity position would give us a good standard of living according to FIRECalc. But there is a tradeoff. The simulations for constant percentage of portfolio withdrawal show that we would have to accept on average about a 10% lower per year withdrawal if equity is lowered.

Here is an example, not our actual numbers, to illustrate the point. With 65/35 the 4% of portfolio spending amount allowed on average is 80000 per year (including SS). For the 40/60 the 4% of portfolio would allow a spending of maybe 73000 per year. I got these relative numbers by running FIRECalc and using the spreadsheet output for analysis.

During a severe decline, the equity rich portfolio took a bigger hit as expected so some years spending (until equity recovery) would be lower then using a bond rich portfolio.

 

[M Paquette]

Minor thought: I added my personal "worry" point with the red arrow. It is 61 months out from the lows and was a point to have sold in 1937, 1987, and 2008. I know this thought is decending into technical analysis and not predictive of the future. But if we have a spurt up (rising slope) and I've achieved my numbers for my retirement age, I just might take some off the table around April 2014. Not saying anyone else should do this. It depends a lot on your situation and allocations. Go ahead, and mention your opinion . Buy and hold is probably the way most will proceed.

Buy and hold with annual reallocation only if needed.

I've seen this sort of data before. Folks that talk in terms of cyclical and secular bull and bear cycles have often pointed out that we are in a secular (10-20 year) bear market (often with "yeahbut... Inflation correct the index and we are still below the 2000 highs..."), and that after the Big Bottom in a secular bear market (like the 2009 bottom) there is usually one more cyclic bear market at (handwave) half the depth of the big dip about 60 months afterward, before the secular bear market ends and a new secular bull market starts.

I think your chart is showing their talking point. I'm not smart enough to make the two decisions (when to sell, and when to buy) for market timing.

I do know that if someone brings up the cyclical and secular bear market thing, and then starts to talk about Kondratieff waves or The Grand Supercycle, that I should back away slowly...

(And I still love that blue bunny avatar!)

 

[Onward]

I know you have been breathlessly waiting for this 3rd quarter update.

Not exactly breathless, but I have been waiting for it. Thanks, as always.

Historical perspective is very valuable, IMO, even if it's not directly predictive.

 

[ERD50]

.... With 65/35 the 4% of portfolio spending amount allowed on average is 80000 per year (including SS). For the 40/60 the 4% of portfolio would allow a spending of maybe 73000 per year. ...

I don't understand this. 4% is 4%. How can your AA affect what 4% of your portfolio is, and what does SS have to do with it?

-ERD50

 

[ERD50]

...
Any market timing tends to be very severely frowned on here, though not by me.

Ha

I'm always interested on hearing reasoned thoughts on market valuations, and I think others are as well. So hopefully, a few frowns won't keep you from posting your thoughts.

I'll admit to being a bit of a chicken for any market timing at this stage, I fear getting out at the wrong time, and never being able to determine an entry point. But I still would like to hear others thoughts on this.

-ERD50

 

[pb4uski]

I don't understand this. 4% is 4%. How can your AA affect what 4% of your portfolio is, and what does SS have to do with it?

-ERD50

I think what OP is saying is that the sum of SS and withdrawals are $80k and $73k. I suspect that OP has fixed the failure rate (not the WR) and is backing into the level of spending that equates to a specified failure rate and then adding SS to that level of withdrawals. That is what it sounds like to me.

 

[Lsbcal]

I don't understand this. 4% is 4%. How can your AA affect what 4% of your portfolio is, and what does SS have to do with it?

-ERD50

Here is perhaps a better explanation of what I was trying to say. Assume 2 portfolios run in FIRECalc with 10 years to get the max number of cycles since 1925.
A) 65/35 allocation with the withdrawal rate set to 4% of the current portfolio. SS is also set during the 10 years simulated.
B) same as (A) but 40/60 allocation.

Now I get the spreadsheet results. There are 10 years across the top and about 77 years of rows (retirements from 1925 to 2001). I average all of end-of-year portfolio numbers and multiply by 4%. That is the average yearly income.

I compare the average yearly incomes for A and B. As mentioned above and find that on average A beats B by around 11% more spending per year. No surprise there as we know equity rich portfolios have historically provided higher returns.

I can also look at some sequences that were particularly bad or memorable. Like from 2001 to 2010. We expect to see quite a bit of difference in behavior because that was a great bond period. In fact, portfolio B does have a better sequence then A with higher spending levels allowed. But that is an anomalous period. The more likely result is that A beats B on average. For short periods of bear markets, of course B declines less then A.

 

[ERD50]

...
A) 65/35 allocation with the withdrawal rate set to 4%. SS is also set during the 10 years simulated.
B) same as (A) but 40/60 allocation. ...

Still not making sense to me.

Or are you saying your WR is set to 4% of portfolio (not an initial 4%, adjusted for inflation each year)? That is, using the "Percentage of Remaining Portfolio:" setting on the 'Spending Models" tab? Usually, when someone says a "4% WR", they mean the inflation adjusted method, as that is the FIRECalc default and the Trinity Study methodology. If you are doing that, then you are just looking at the average portfolio balance.

FIRECalc is probably a little fuzzy on this point, but a constant 4% of portfolio is, I think, an allowed spend number. So if you have SS, you are drawing less than 4% of the portfolio. So the draw-down on a falling portfolio isn't so extreme - in reality, dividends might provide all the income needed, and no/little actual selling of equities will be needed.


-ERD50

 

[Lsbcal]

Still not making sense to me.

Or are you saying your WR is set to 4% of portfolio (not an initial 4%, adjusted for inflation each year)? That is, using the "Percentage of Remaining Portfolio:" setting on the 'Spending Models" tab?

I corrected my post to make that point (in blue) clearer as you mention here. Sorry about not getting this across.

Taking 4% (or maybe a bit less) is my current withdrawal strategy. Probably just doing it because that is enough to keep DW happy.

 

[haha]

Taking 4% (or maybe a bit less) is my current withdrawal strategy. Probably just doing it because that is enough to keep DW happy.

Do you mean taking ~4% of the prior years ending portfolio balance? IOW, what is your ~4% multiplied by?

Ha

 

[Lsbcal]

Do you mean taking ~4% of the prior years ending portfolio balance? IOW, what is your ~4% multiplied by?

Ha

Yes, the blue is what I mean.

This year it will probably be 3.7% or so. But only 3.3% of the current (today's value) portfolio because of great returns this year. Hence my nervousness about letting a good thing go to my head.

 

[gcgang]

I know you have been breathlessly waiting for this 3rd quarter update. This is my chart for SP500 equity returns from the market lows of the past.

Of course, it is not predictive but should be a reasonable historical perspective.

Minor thought: I added my personal "worry" point with the red arrow. It is 61 months out from the lows and was a point to have sold in 1937, 1987, and 2008. I know this thought is decending into technical analysis and not predictive of the future. But if we have a spurt up (rising slope) and I've achieved my numbers for my retirement age, I just might take some off the table around April 2014. Not saying anyone else should do this. It depends a lot on your situation and allocations. Go ahead, and mention your opinion . Buy and hold is probably the way most will proceed.

You sold at the red arrow in 1937? You must be smart....and old.

 

[Lsbcal]

You sold at the red arrow in 1937? You must be smart....and old.

Well I was -11 years old back then.

But there was one guy who talks about these times. He said that things were going great, and then they weren't. The decline seemed to come out of nowhere. See this book for details: Amazon.com: The Great Depression: A Diary eBook: Benjamin Roth, James Ledbetter, Daniel B. Roth: Books

I was around in the 1987 crash. Most of that decline happened in just 5 or so trading days in October 1987.

Let's hope we have a normal October and politicians do what we expect them to do -- the right thing in the end.

 

[MDJO]

Yes, the blue is what I mean.

This year it will probably be 3.7% or so. But only 3.3% of the current (today's value) portfolio because of great returns this year. Hence my nervousness about letting a good thing go to my head.

3.3% or 3.7% would be very conservative for my strategy and probably not make my DW happy. If my projections work out, I am taking 4 to 5% in my early retirement years, dropping to 3% after taking SS starting in late 60's or as late as 70. If you can keep DW happy with 3.3%, go for it.

 

[Lsbcal]

3.3% or 3.7% would be very conservative for my strategy and probably not make my DW happy. If my projections work out, I am taking 4 to 5% in my early retirement years, dropping to 3% after taking SS starting in late 60's or as late as 70. If you can keep DW happy with 3.3%, go for it.

One thing that is sometimes missing from our comments here is our life circumstances. That spending number depends on so many factors so it cannot be taken in isolation.

We did substantially what you are saying you will do. Before we took SS, our spending was from 5% to as high as 6.8% (in 2009 partly do to the 2008 crash). Still did OK even through the 2008 crash. My projections are based on taking SS and keeping DW happy.