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Michael
Joined: 28 Sep 2005
Posts: 253
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 Posted: Fri Feb 10, 2006 12:52 pm Post subject: |
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| KenM wrote: | ...... which sounds to be an absolute - diversify and you avoid failure of a portfolio .... no caveats? no doubts? no possibility of failure?
I've read both Bernstein books and I agree most definitely that a diversified portfolio is better in all respects but from what I can remember it's all about averages over long periods of time - Trinity was about averages over long periods of time and a 4% SWR worked for an LC portfolio until we got to 2000 ...... there must be circumstances where a diversified portfolio can fail. The naive investor in me would like to believe I can be complacent with a diversified portfolio and 4% SWR for the next 30 to 40 years with no worries except nuclear war etc- the sceptical investor in me cannot accept any buy&hold diversified portfolio until I've got some idea of under what sort of scenarios failure might occur ......
From your previous figures the Y2K S&P500 portfolio is at high risk of failure after the S&P dropped about 50% over 3 years and went back up 50% over the subsequent 3 years. If I take Coffeehouse as a typical diversified portfolio - 10% each of LC, LCv, SC, SCv, REITS, Int'l and 40% FI - is anyone really willing to tell me that, short of nuclear war or complete economic collapse, this sort of portfolio can never drop 50% in 3 years and then go back up 50% for the next 3? I'd make an entirely arbitrary guess and say that the chances of that happening to Coffeehouse in 2006 is about 1 in 5 ..... anyone want to say that the odds are so low that they can be ignored? (Please note - lots of rhetorical questions - I don't really expect answers  ) |
One thing is for certain. Over the past 3 years lots of asset classes have risen substantially that normally don’t rise together. For example, equities (int’l), commodities, real estate and long term bonds. If they can go up together, they sure can go down together as well.
| Quote: | | am I the only one who thinks that, in most cases, cutting back expenditure from 4% to, say, 2.5% for a couple of years in down years is a waste of time? |
Certainly not alone. I’m beginning to think that 4% is far too much to be truly “safe” regardless of the probabilities. So for now, for me the keys to this are: asset preservation, expense control, and tax reduction.
Michael |
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raddr
Site Admin
Joined: 22 Jun 2004
Posts: 4735
Location: Texas
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| Posted: Fri Feb 10, 2006 2:04 pm Post subject: |
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| Quote: | | ...... which sounds to be an absolute - diversify and you avoid failure of a portfolio .... no caveats? no doubts? no possibility of failure? |
Ken, there are no absolutes here. The future 100% safe withdrawal is, unfortunately, 0%. At the risk of sounding like a broken record, diversification will make you much less likely to take a lethal portfolio hit in the crucial early years but any investment you make carries risk, including hiding your money under a mattress. 
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raddr
Site Admin
Joined: 22 Jun 2004
Posts: 4735
Location: Texas
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| Posted: Fri Feb 10, 2006 2:06 pm Post subject: |
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| Quote: | | If they can go up together, they sure can go down together as well. |
Yes, but some will go down more than others. If you are not diversified you run the risk of holding all your eggs in the leakiest basket.
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"I brew therefore I am."
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Norbert Schlenker
Joined: 11 May 2005
Posts: 92
Location: The Dry Side of the Wet Coast
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| Posted: Fri Feb 10, 2006 4:23 pm Post subject: |
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| KenM wrote: | | Norbert Schlenker wrote: | ....... them's the breaks. Life is not a bowl of cherries, financially or otherwise.
...... not even if there's a slick sales pitch that promises it.
Every investor has to learn that. Why would raddr's example be exempt? Why should raddr's example be exempt? |
As you said, this may sound a bit smartass but it's not intended that way.
Although I'd emphasise I've never seen a slick sales pitch promising a 4% SWR, a potential retiree would find on just about every sensible, well respected (the ones that I respect anyway, including your own) financial website and internet board something similar to the following which is from your own site at http://www.libra-investments.com/di08.htm :- | Quote: | | The historical evidence is that you can take roughly 4% from the starting value of an investment portfolio, raising it each year by the inflation rate, without running into disaster. History is not a perfect guide to the future, but barring nuclear war, natural disasters, or complete economic collapse, 4% should be your guide. |
..... and that was the sort of thing being said about a Trinity style portfolio and it appears people believed it and acted on it and a Y2K retiree now is at high risk of disaster even though nothing has occurred that comes anywhere near the severity of nuclear war or complete economic collapse. |
I'm sure raddr is going to keep tracking the fabled Y2K Trinity retiree until disaster occurs or the danger passes. If the disaster that raddr predicts actually occurs, then we'll know that Trinity's 4% lower bound was too high. If not - and there is still a significant probability that it will not - then all the handwringing will turn out to be have just been handwringing.
Even with all the ugliness of markets over the past six years, even with only 60% of the real value of the standard portfolio left in place, disaster is by no means certain. Yeah, maybe I'm Pollyanna. But maybe you're all Jeremiah.
| Quote: | | The naive (which covers just about 98% of us) but intelligent investor doing his/her due diligence would find noone mentions that every investor using 4% WR as a guide has to learn about bad breaks or bowls of cherries ...... just things like complete economic collapse. |
Fair comment. Without a little adverbial qualification, it sounds quite confident. OTOH, how confident are you that current fiscal and trade deficits in the US won't lead to complete collapse within the stated time frame anyway, making this entire argument moot? (Bernstein, in his Retirement Calculator from Hell articles, argues that looking for better than 80% safety over long periods is not justified by the historical record.)
| Quote: | | Current conventional wisdom appears to be still high equity portfolios; TSM or diversified stock indexes and 4% WR as a guide but not the Trinity style S&P500 based portfolio ..... perhaps also mentioning that if things turn out not so well then a retiree may have to cut back expenditure for a couple of years while the portfolio returns to a reasonable level. A couple of rhetorical questions ..... am I the only one who, considering current market conditions, doesn't find it difficult to imagine a scenario where 2006 retirees with a diversified portfolio and 4% WR might not find themselves in 6 years time in a similar situation as Y2K retirees now find with a Trinity style portfolio? |
Beats me as to whether you're the only one. I certainly don't agree with you.
The killer in all these withdrawal studies is not returns. It's volatility. Trinity looks at a 75% S&P500, 25% cash portfolio (~15% volatility historically), which had ~5% average real returns over the study period and concludes that a 4% SWR works over 30 years, i.e. at 15% volatility, you can draw ~1% less than your long run expected return. At 0% volatility, you can draw ~2.5% more than your long run expected return and still survive 30 years.
Now you can't get to 0% volatility but there are things you can do. Raddr's commodity foray is one way. Diversifying internationally is another well accepted way. A 100% equity portfolio, diversified internationally, typically has something around 12% volatility instead of the S&P's 20%. Cut that with 25% cash, and you're down around 9%.
The relationship between vol and SWR isn't actually linear, but it's a reasonable first approximation. If 0% volatility gets you an SWR of return + 2.5% and 15% gets you an SWR of return - 1%, then 9% gets you an SWR ~0.5% above the long run expected real return. With 75% equities - better diversified than just US large cap - and 25% cash, I think the expected real return is still above 4%, even if you're a Gordon disciple to the core and pessimistic about both the US economy and market valuations. A 4% SWR is thus a no-brainer in my view. (It really is a no brainer because, with TIPS yields at 2%, 4.4% over 30 years is close to a sure thing.)
Michael, I haven't responded directly to you but I hope you find some meat to chew on in the above.
Tmeri, it's worth switching mentally to raddr's presentation using real $. Once you've made the switch, even though it's a little work the first time, everything is much clearer. I think raddr shouldn't even accommodate requests like yours. |
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caseynshan
Joined: 25 Jun 2004
Posts: 266
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| Posted: Fri Feb 10, 2006 6:05 pm Post subject: |
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Thanks for letting me listen in and learn from you smart folk
Looking at these returns you show...
Commercial Composite
Return
2000 -5.4
2001 -8.3
2002 -16.4
2003 21.5
2004 8.3
2005 4.1
2006 47
It sure looks like you would have been ok (or at least better off) with the coffehouse portfolio, but then again that is hindsight... not a lot of people pushing value tilted portfolios in 2000
1998 6.88%
1999 8.30%
2000 7.25%
2001 1.88%
2002 -5.55%
2003 23.56%
2004 14.18%
2005 5.97 |
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raddr
Site Admin
Joined: 22 Jun 2004
Posts: 4735
Location: Texas
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| Posted: Fri Feb 10, 2006 6:16 pm Post subject: |
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Hi Casey,
| Quote: | | It sure looks like you would have been ok (or at least better off) with the coffehouse portfolio, but then again that is hindsight... not a lot of people pushing value tilted portfolios in 2000 |
Right you are. Back in 2000 the talk was that you only needed the S&P500 or a TSM fund, both of which at the time were thought to be diversified enough. This talk was due to an obvious case of "recency" - i.e. hopping on the bandwagon of a recently outperforming asset class. I think by now investors have for the most part learned their lesson about the inferiority of holding a single asset class for a long retirement - at least until the next bubble hits.
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"I brew therefore I am."
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tmeri
Joined: 08 Mar 2005
Posts: 167
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| Posted: Fri Feb 10, 2006 10:10 pm Post subject: |
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| raddr wrote: |
| Code: | Commercial Composite
CPI S&P500 Paper Return Withdrawal Portfolio
2000 3.4 -9.1 6.8 -5.4 40 906
2001 1.6 -11.9 3.7 -8.3 41 789
2002 2.4 -22.1 1.8 -16.4 42 618
2003 1.7 28.7 1.2 21.5 43 707
2004 3 10.9 1.7 8.3 44 722
2005 3.4 4.7 3.3 4.1 45 706
2006 47 |
As you can see, the retiree is now withdrawing 47K from a 706K portfolio, i.e. the exact same as taking 40K from the 599K portfolio in the constant-dollar original example. This works out to about a 6.7% withdrawal rate for 2006 any way you look at it. The same dreary analysis applies to this set of numbers as it does the inflation-adjusted numbers that I prefer to work with. BTW, if you run the numbers yourself, and I encourage you to do so, remember to subtract 20 or so basis points for expenses. Hope this helps! |
That helps very much. Having the raw data is even more important than the frame of reference. Part of the goal is to be able to calculate this for my own portfolio, which of course is different from any others. But having the raw data and being able to follow your calculations are very helpful to that end.
Thanks so much! May your tribe increase. |
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raddr
Site Admin
Joined: 22 Jun 2004
Posts: 4735
Location: Texas
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| Posted: Sat Feb 11, 2006 8:40 am Post subject: |
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I think that one other important fact should be empahsized here for those of you who place great value on historical SWR studies like the one from Trinity. Aside from the fact that we didn't even have an investable stock index for most of the historical record and investing costs would've been much higher than the studies suggest, there is the problem of too little data at the margins. By this I mean that of the 130 or so years we have data for only two times did we start any study period at valuations anywhere near what we saw in 2000 or even now in 2006. So basically we have two data points, one from 1929 and the other from 1966 that showed a 4% SWR for a relatively short period of time for an early retiree (30 years). If you look at the numbers you will see that both portfolios were decimated even if they did survive. If the returns sequences had been slightly different the resulting "100% safe" SWR could've easily been 3.5% or even less. Look here for more info on sequencing:
http://raddr-pages.com/research/Sequence.htm
So basically we have two data points at the margin. Both of these occured at times where valuations were actually lower than what we've seen recently. Both are only theoretical because of lack of accounting for underestimation of the actual costs of investing if the strategy had been carried out in real time.
I think that looking at history is invaluable and provides a good reality check for investors but IMO way too much significance is provided to the data at the margins.
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"I brew therefore I am."
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wanderer
Joined: 28 Jun 2004
Posts: 1598
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| Posted: Sat Feb 11, 2006 9:42 am Post subject: |
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I think that one other important fact should be empahsized here for those of you who place great value on historical SWR studies like the one from Trinity. Aside from the fact that we didn't even have an investable stock index for most of the historical record and investing costs would've been much higher than the studies suggest, there is the problem of too little data at the margins. By this I mean that of the 130 or so years we have data for only two times did we start any study period at valuations anywhere near what we saw in 2000 or even now in 2006. So basically we have two data points, one from 1929 and the other from 1966 that showed a 4% SWR for a relatively short period of time for an early retiree (30 years). If you look at the numbers you will see that both portfolios were decimated even if they did survive. If the returns sequences had been slightly different the resulting "100% safe" SWR could've easily been 3.5% or even less. Look here for more info on sequencing:
http://raddr-pages.com/research/Sequence.htm
So basically we have two data points at the margin. Both of these occured at times where valuations were actually lower than what we've seen recently. Both are only theoretical because of lack of accounting for underestimation of the actual costs of investing if the strategy had been carried out in real time.
I think that looking at history is invaluable and provides a good reality check for investors but IMO way too much significance is provided to the data at the margins.
That's a pretty succinct version of the version I play by. I think I am at about a 1.7% draw (at least by the end of this year). That being said,my ankle is acting up again so maybe I need to jump ship, risky or not... |
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unclemick
Joined: 24 Jun 2004
Posts: 383
Location: MO
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| Posted: Sat Feb 11, 2006 11:18 am Post subject: |
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Love reading this stuff
Damping SD, current yield (a tad over 3%) and reducing taxes(high % in trad IRA) are my big dogs at 12 yrs into ER and an old bugger at 62.
Back in 2000 - ????2.5% current yield and the subsequent dip 2000-03 was er ah interesting.
Could I have spent more - with a different mix of asset classes - yes - in hindsight.
To paraphrase Yogi - dividends and interest are real money.
Of course pushing current yield too hard can get one into lower growth expected return wise.
Current yield/expected return/correlation of asset classes - names have changed somewhat over the decades - but it's still the old Ben Graham quest for value and margin of safety.
heh heh heh - like I said - love reading this stuff. |
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lazyday
Joined: 24 Jan 2005
Posts: 1031
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| Posted: Sat Feb 11, 2006 12:05 pm Post subject: |
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| wanderer wrote: | | That's a pretty succinct version of the version I play by. I think I am at about a 1.7% draw (at least by the end of this year). That being said,my ankle is acting up again so maybe I need to jump ship, risky or not... |
Wow, 1.7% is too low even for me!
I haven't had to decide on a cutoff yet, but by then I would have increased spending. (And have quit long ago unless I enjoyed my job.)
Then again, my spending level is probably much lower than most, and more would be nice. If more spending wouldn't make me much happier, then I'd likely keep the security of an extremely low WR.
Are you thinking of living somewhere more expensive in retirement? |
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wanderer
Joined: 28 Jun 2004
Posts: 1598
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| Posted: Sat Feb 11, 2006 12:18 pm Post subject: |
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Wow, 1.7% is too low even for me!
Well, if I outlive it, I guess it was stupid. But I am fearful. I have a GF with a very serious illness (diabetes Type I - sihtty). But she is a Dutch national so if worse comes to worse we could move there. Pretty good place for those with a chronic illness.
But we both love France, Middle East, Greece, etc. Maybe live there. Or Morocco. Or Thailand/Malaysia. Think Malaysia would be better but I have to see them (keeps getting postponed - for mostly good reasons).
And we have some enjoyable working years left (inshaallah).
I think I was a bit like KenM. Could have bare bonesed at 41. Glad I stuck araound (esp. since a lot of the assets went bye bye with divorce). Also have a fair amount of kids costs which will somewhat (30%-40%)disappear if I retire. Like KenM I found a couple of occupations and avocations I liked - the academia gig and editing - both of which can be done in exotic locales.
I will likely finish my days overseas. Hopefully not as besotted as the Westerners KenM runs into in BKK, but you never know... |
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Michael
Joined: 28 Sep 2005
Posts: 253
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| Posted: Sat Feb 11, 2006 1:42 pm Post subject: |
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| Quote: | | I think I am at about a 1.7% draw |
And I was thinking that 3% would be a god number to shoot for.
| Quote: | | Well, if I outlive it, I guess it was stupid |
.
My grandfather always said to hope for the best but plan for the worst. ‘Tis better to save too much and leave something behind than run out of money and then – well, I just don’t know, but it wouldn’t be pretty. I need to reset my sights on 3%.
| Quote: | | I will likely finish my days overseas. Hopefully not as besotted as the Westerners KenM runs into in BKK, but you never know... |
A worthy goal indeed: overseas and besotted, but not too much 
I just need to say that this is the most incredible board. Worldy, wise, articulate, demanding, high financial IQ, not much BS. It’s going to take some work just to keep up here. 
Regards, Michael |
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lazyday
Joined: 24 Jan 2005
Posts: 1031
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| Posted: Sat Feb 11, 2006 8:07 pm Post subject: |
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| wanderer wrote: | | Well, if I outlive it, I guess it was stupid. |
I'm not saying that! If you like your job, have concerns/fear or don't like risk, and have unpredicitable medical expenses (more so than some), or for many other reasons, working in spite of a really low WR can make sense.
Especially liking the job.
| Michael wrote: | | And I was thinking that 3% would be a god number to shoot for. |
I haven't done much study on this, but suspect that the difference between 3% and 4% is quite large for survivability. Even if you're quite young and not loading up on bonds. |
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wanderer
Joined: 28 Jun 2004
Posts: 1598
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| Posted: Sat Feb 11, 2006 9:58 pm Post subject: |
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I'm not saying that!
Oops. That came out wrong. All I meant is that there are some folks, whose jobs are Dilbertesque and really hate their work. Work was a four letter word. And I have had jobs like that. Just not now. And, of course I have some less than appealing things in my job, but I really haven't had a better gig - quality of life-wise.
In fact, one of the problems is that I have so much time off. I have about a month at Dec/Jan and 3.5 months May/Aug. And this doesn't count the fact that I can do most fo what I need to at work in 3 long days (so four days a week off). For these reasons I consider myself semi-retired. All this means I can visit my kids but that leaves m away from GF for a month at a time... not what I want in my love realtionship.
That's also part of why I have started consulting (lots of down time between kid visits). It has started small - less than $10k per annum - but very few hrs (say 50). Now, it has the potential to double my salary. We shall see. Bird in the hand and all that...
Also, taking in washing, I can move to a bit more traditional higher equity concentration (it's hard watching others make 12% when I make 2%). OTOH, with the recent declines, it's nice to have cash around to pick up stuff (I'm not shopping yet). |
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