No. of Recommendations: 32
intercst wrote: hocus has been telling us for a year now that you can reliably take a 4% withdrawal from a 100% fixed income portfolio.

This type of BS has been the largest contributor to the circus-like atmosphere that has surrounded hocus for the last year. Intercst, of course, isn't the only one to make statements like this. In fact they come so fast and furious from so many different people that a casual reader would swear they are true.

From hocus' 'My Plan' post (http://boards.fool.com/Message.asp?mid=17246781 )

excerpt:

<<<
Investments:

1) TIPS at 3.5 percent in tax-protected accounts

2) ibonds at 3.4 percent in non-protected accounts (not taxed until cashed in)

3) Certificates of Deposit still held from pre-retirement days (and, thus, held at higher rates than those available today.). The CDs are being phased out as they come due into other investment classes. I expect to move a portion of the CD money into stocks. If stock prices came down, I would move it all into stocks.

Stock Allocation Goal: My goal is to get to a 50 percent stock allocation. I initially made the zero percent allocation to stocks for two reasons:

(1) I accumulated all of my retirement stash in a short amount of time. It was nine years from having zero in the bank to retirement date. So any stock purchases made in anticipation of retirement would not have been "for the long term." My worst nightmare was that, one year short of my retirement date, stocks would go into a downturn. I was not counting the months until retirement, I was counting the weeks. There was no way I wanted to take the risk of losses that could put off the retirement date for years.

(2) Stocks were at extreme levels of overvaluation at the time I began accumulating large sums for investment. I preferred to put money ultimately to be allocated for stocks into safe investment classes until stocks could be purchased at prices closer to average valuations. That way, I can purchase many more shares for the same portion of my retirement stash. Once I find reasonable purchase points, I intend to hold the stocks for the long term (no "timing" in and out of the market).

>>>

Not listed there, but mentioned elsewhere in the post is the fact that he owns his home. So real estate can be added to the list.

So he has TIPS and I-bonds and real estate. All are inflation protected assets that do not fit under the 'Fixed Income' category. He also has a plan to buy stocks when valuations are closer to average. Here's a news flash: they are still overvalued.

In my post 'The Hocus Plan: 2% SWR?? (http://boards.fool.com/Message.asp?mid=18200598 ) I examined the effects of a stock switching strategy similar to the one described by hocus. My conclusion: history backs hocus up, his valuation based switching strategy from 0% stocks to 50% stocks worked in the past, and in fact beat the static 'optimal allocation'.

Hocus is the only person I know (if only via message board) who has completely opted out of participation in the stock market bubble. And you know what? He has benefited immensely from doing so. So why can't the 10-15 people who like to spout the cr@p like the quote above just grow up and lay off the elementary school tactics.

Geez!

Ben
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Frankly, the more people that follow the loony "hocus plan" the better I like it.

I'm NOT in favor of MORE retired people in the USA. I'm in favor of LESS retired people.

The more people that continue to work and consume means a far better FIRE-life for me <grin>.

I encourage EVERYBODY to follow the "hocus plan".
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Ben,

Your linked post refers a strategy of switching from 50% stocks to 0% stocks when PE-10 (a P/E measure based on 10 years of earnings data rather than just trailing 12 months) is above 18.

Where did 18 come from? Is it the value that best fits the historical data? Or is there some other basis for picking it?

dan
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Greetings, Galagan :-)

You wrote:
Your linked post refers a strategy of switching from 50% stocks to 0% stocks when PE-10 (a P/E measure based on 10 years of earnings data rather than just trailing 12 months) is above 18.

Where did 18 come from? Is it the value that best fits the historical data? Or is there some other basis for picking it?


You are referring to this post, I think:
http://boards.fool.com/Message.asp?mid=18200598

In hindsight, I didn't write very clearly. PE-10 of 18 was the first data point that I checked, and I chose that one because it subjectively seemed 'close to average valuations' of 15.5. If you look at the post further you'll see I examine switching at PE-10 of 14 through 21. All had an equivalent or higher SWR as the static allocation.

Here's that data again:

PE HSWR
14 3.44
15 3.42
16 3.36
17 3.50
18 3.40
19 3.32
20 3.37
21 3.38

The static and 'optimal' allocation for a 50 year withdrawal was
64/36 S&P/FI and that produced a SWR of 3.31%

Ben
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In hindsight, I didn't write very clearly. PE-10 of 18 was the first data point that I checked, and I chose that one because it subjectively seemed 'close to average valuations' of 15.5. If you look at the post further you'll see I examine switching at PE-10 of 14 through 21. All had an equivalent or higher SWR as the static allocation.

Here's that data again:

PE HSWR
14 3.44
15 3.42
16 3.36
17 3.50
18 3.40
19 3.32
20 3.37
21 3.38

The static and 'optimal' allocation for a 50 year withdrawal was
64/36 S&P/FI and that produced a SWR of 3.31%

********************

Does any of this take into account the level of interest rates? If not, then I'd be hestant to draw any conclusions whatsoever.
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Ben, thanks for the reply.

Just to clarify, we're talking about withdrawals over 50 years and not 30 or 40, and so that's why the SWR based on the REHP study is 3.31 percent and not somewhere closer to the oft-mentioned 4 percent, right?

The conclusion you draw is that you can produce a slightly higher SWR through a timing strategy than by straight static investment. Some will say that raising your SWR from 3.31% to 3.4% or 3.5% isn't significant.

But am I also right that we're still not really comparing the same thing, because you chose to switch from 0-100 to 50-50 based on simplicity of calculation and not based on that being the optimal switch? Is the possibility still open that you might find a better switching mechanism that would produce a still-higher SWR?

Thanks for your help.

dan
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brewer12345 wrote:

Does any of this take into account the level of interest rates? If not, then I'd be hestant to draw any conclusions whatsoever.

To borrow a page from the REHP dogma crowd, interest rates are included in the analysis to the extent that they have varied through the 130 years of stock market data covered in intercst's spreadsheet. And they are reflected in the inflation adjustment made each year to the withdrawal amount.

If you are leaning on the 'Fed Model' to justify current stock market overvaluations, you should reconsider. Read this paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=381480
Paper was discussed here: http://nofeeboards.com/boards/viewtopic.php?t=713

Short form: stock market yield is 'real' (already inflation adjusted), so there is no need to adjust stock valuations as interest rates change.

Regards,
Ben
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Galagan wrote:

Just to clarify, we're talking about withdrawals over 50 years and not 30 or 40, and so that's why the SWR based on the REHP study is 3.31 percent and not somewhere closer to the oft-mentioned 4 percent, right?

Right.

The conclusion you draw is that you can produce a slightly higher SWR through a timing strategy than by straight static investment. Some will say that raising your SWR from 3.31% to 3.4% or 3.5% isn't significant.

But am I also right that we're still not really comparing the same thing, because you chose to switch from 0-100 to 50-50 based on simplicity of calculation and not based on that being the optimal switch? Is the possibility still open that you might find a better switching mechanism that would produce a still-higher SWR?


I've examined some other datapoints. Nothing huge jumps out. I've collected my posts on the subject here: http://nofeeboards.com/boards/viewtopic.php?t=215

One thing to keep in mind though: the valuation based switching will help in a stock market crash caused by a valuation bubble, but not one caused by general economic distress like found in the 1970s. So when doing the hSWR switching studies, if the switch greatly improves the 1929 era results, then the worst period just becomes the 1966 era results which are less susceptible to being improved by valuation switching.

Year 2000 era results, however, should be tremendously improved by the switching, as valuations were dramatically worse than even the 1929 era, and the options available like TIPS and I-bonds were superior options to flat Fixed Income instruments. That is still somewhat conjecture.

Regards,

Ben
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Sorry to keep tossing questions, but I'm curious.

Year 2000 era results, however, should be tremendously improved by the switching, as valuations were dramatically worse than even the 1929 era.

At what point would this strategy have gotten you out of the market? I know that at least some valuation-based models took people out extremely early, and so one missed most of the up-move as well as the down-move.

Also, would this strategy still have you with no stock exposure today even after the significant fall in prices?

I presume there are multiple answers depending on which level you pick to switch, but I'd be curious even with a rough idea of when the switch might have been made.

thanks,
dan
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<<Does any of this take into account the level of interest rates? If not, then I'd be hestant to draw any conclusions whatsoever. >>

To borrow a page from the REHP dogma crowd, interest rates are included in the analysis to the extent that they have varied through the 130 years of stock market data covered in intercst's spreadsheet. And they are reflected in the inflation adjustment made each year to the withdrawal amount.


Actually, this is a good question and a very interesting comment. Especially interesting today since the I-bond rates for the next 6 months (for 30 year bonds) were just set this morning. I went to the government bond site this morning looking for the latest rates and noticed that they have lowered the fixed rate to 1.1%. Then I promptly came here to post it, but noticed that someone beat me to it.

Anyway, the I-bonds interest rate is a combination of a fixed and variable component, based on CPI (inflation). Now interestingly enough, the "fixed" rate seems to have varied even more than the "variable" part has. I know that the fixed rate of a previously purchased I-bond never changes, but for the purposes of analysis, this has to be somehow taken into consideration unless you assume that a person only purchased I-bonds once during the 50 year withdrawal period (which I think is impossible since they only last for 30 years). Actually, if I recall correctly, the fixed portion has varied between 1.1% and 3.6%, currently at the low point.

How has the variation in I-bond rates (fixed rate only since the variable rate tracks inflation anyway) been accounted for in a study of SWR for a potfolio including I-bonds ?

Since there isn't much history of I-bond fixed rates, I suppose the only way to do it would be to have some sort of limited monte carlo approach in which a bunch of random changes (perhaps using historical min and max numbers to bound the changes) in that rate could be taken into account.

I suppose this problem also affects TIPS similarly.
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galagan wrote:

Ben wrote: "Year 2000 era results, however, should be tremendously improved by the switching, as valuations were dramatically worse than even the 1929 era."

At what point would this strategy have gotten you out of the market? I know that at least some valuation-based models took people out extremely early, and so one missed most of the up-move as well as the down-move.

Also, would this strategy still have you with no stock exposure today even after the significant fall in prices?

I presume there are multiple answers depending on which level you pick to switch, but I'd be curious even with a rough idea of when the switch might have been made.


You've answered yourself pretty much. Any valuation based switching that relied on being out of (or reducing exposure to) the market as the market approached levels that were 'very high' in the past would have had you out (or at decreased allocation) no later than mid 1995, and possibly as early as 1991. And you'd still be a the lower allocation now.

You can browse the historical record here: http://www.econ.yale.edu/~shiller/data/ie_data.htm to get a clear picture of how the valuations changed.

I personally tend to lean towards a reduced allocation, but not a 0% allocation when overvaluation hits, because then you can still get the 'rebalancing bonus'. I also tend towards finding other classes of equities with higher predicted return rather than defaulting to 'FI'

Ben
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Let's see....

Hocus says he needs $30,000 after tax to live.

He says his wife will make $4000, and I will assume that is after taxes (like FICA and SS) which still is a 'gotcha').

He says he will try to make $10,000/yr for his plan to work frem freelancing. Hopefully more, but he says his 'plan will work' at just $10,000.

He says he has a $400,000 stash.

Now help me.....if I take $30,000, subtract $4000, then subtract $10,000, my calculator shows $16,000 that he nees to withdraw from his nest egg.

That would be $16,000 out of a $400,000 nest egg, or 4% annual wiwthdrawal rate.

Now, how can ANYONE argue that he is not taking out 4% out of his ALL CD/bond portfolio?

By his own words, and even using 'hocus math', it comes out to 4%?

What am I missing?

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bensolar: intercst wrote: hocus has been telling us for a year now that you can reliably take a 4% withdrawal from a 100% fixed income portfolio.

This type of BS has been the largest contributor to the circus-like atmosphere that has surrounded hocus for the last year. Intercst, of course, isn't the only one to make statements like this. In fact they come so fast and furious from so many different people that a casual reader would swear they are true.

From hocus' 'My Plan' post (http://boards.fool.com/Message.asp?mid=17246781 )



I find it difficult AFTER reading the ** hocus ** post where he says he IS taking 4% out, that you would go to the trouble of continuing the same BS about his withdrawal rate. It is plain for everyone to see. Or calculate. I suspect you didn't calculate it yourself. I note YKW never bothered to post, in that post, what $16,000 a year out of $400,000 a year is, in withdrawal rate.

The continual inability of folks to apply the "BS detector" using 3rd grade math to the posts of YKW is leading to the circus atmosphere here IMHO.



WOuld you care to show us how hocus is NOT taking 4% out in his plan?



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By his own words, and even using 'hocus math', it comes out to 4%?
What am I missing?


Good intent.


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WOuld you care to show us how hocus is NOT taking 4% out in his plan?

Would you care to show us how any fair-minded person could come to any conclusion other than that you are deliberatly trying to sow confusion on this board?
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Ben wrote,

This type of BS has been the largest contributor to the circus-like atmosphere that has surrounded hocus for the last year. Intercst, of course, isn't the only one to make statements like this. In fact they come so fast and furious from so many different people that a casual reader would swear they are true.

Ben, I appreciate your attempt to clarify the Hocus plan. I would agree with you that a lot of BS has been flying around in the last year surrounding hocus in the last year. He's thrown his share of it around too, saying that a 4% SWR from a 75 stock/25 bond will certaintly fail.

However I wouldn't categorize the Intercst statement as a part of that BS.

TIPS, ibonds, and CDs? Come on, I think you are splitting hairs not to describe those as fixed income assets! Even though TIPS and ibonds are inflation protected you'd be hard-pressed to draw a yield that would allow a 4% SWR rate over the long haul. In addition, most people are not in the position to count their personal residence as a part of the portfolio because they would have to willing to sell in order to cash in on it.

Hocus is the only person I know (if only via message board) who has completely opted out of participation in the stock market bubble. And you know what? He has benefited immensely from doing so.

Just because Hocus opted out of the stock market and benefited from it in the short run, I don't think this is any reason to give his plan an endorsement. There's that old saying that even a broken clock gives the right twice a day. Hocus says he wants to stay out of stocks until prices are closer to average valuations. The trouble is that by that time those stocks might be a lot more expensive to buy...




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Would you care to show us how any fair-minded person could come to any conclusion other than that you are deliberatly trying to sow confusion on this board?


No, we are just trying to establish the facts.

You have posted that you are, according to your plan, taking a 4% withdrawal rate out of an all bond/CD portfolio.

You have also posted that you have yet to buy any stocks or bonds.

By your own words, the argument has been settled.

There is no confusion.

In fact, there is 'clarity' now that someone bothered to use 3rd grade math on your figures.

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I would agree with you that a lot of BS has been flying around in the last year surrounding hocus in the last year. He's thrown his share of it around too, saying that a 4% SWR from a 75 stock/25 bond will certaintly fail.

This is a false statement.

Every post put up here goes into an archive. If you think you can back up that claim, workwayless, please do so. If you cannot, I ask that you begin shooting striaght with this board community.
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No, we are just trying to establish the facts.

Not you, Telegraph.

You are trying to confuse everyone as to the nature of the facts.

There's a difference.
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Greetings, workwayless

However I wouldn't categorize the Intercst statement as a part of that BS.

TIPS, ibonds, and CDs? Come on, I think you are splitting hairs not to describe those as fixed income assets! Even though TIPS and ibonds are inflation protected you'd be hard-pressed to draw a yield that would allow a 4% SWR rate over the long haul.


How is it splitting hairs to say that inflation adjusted securities are not Fixed Income securities. They are not fixed! They vary! Here is intercst's analysis of the utility of TIPS: http://rehphome.tripod.com/safetips.html

He found that inflation adjusted securities with the coupon available when hocus retired provided a higher SWR than the 'optimal' stock/FI mix. Read it yourself.

In addition, most people are not in the position to count their personal residence as a part of the portfolio because they would have to willing to sell in order to cash in on it.

While he can't count the residence as part of the assets from which he makes a withdrawal, it is an asset of which the value varies with inflation. And it can be liquified later in life through any one of many strategies like downsizing, reverse mortgage, etc ...

Regards,
Ben
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"While he can't count the residence as part of the assets from which he makes a withdrawal, it is an asset of which the value varies with inflation. And it can be liquified later in life through any one of many strategies like downsizing, reverse mortgage, etc ..."

Isn't it 'liquefied' every month he doesn't have to pay rent?
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"While he can't count the residence as part of the assets from which he makes a withdrawal, it is an asset of which the value varies with inflation. And it can be liquified later in life through any one of many strategies like downsizing, reverse mortgage, etc ..."
-------

Isn't it 'liquefied' every month he doesn't have to pay rent?


You could certainly set the "books" up to show the phantom "income" from the home but you would also need the phantom "costs" of the phantom "rent". They would balance out and leave no net change. If I needed $30K per annum and my home was providing $1K / month in phantom "income" then I also had $1K / month in phantom "rent" and so I still needed $30K / annum.

Hyperborea
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Hocus says he wants to stay out of stocks until prices are closer to average valuations. The trouble is that by that time those stocks might be a lot more expensive to buy...


How's that possible?
Do you think that stocks will stay up in the air for the next decades so they will drag the average valuation upward?
Truth is, stocks have always swung around certain average valuations, like P/E 15 or so. Sometimes they were above, sometimes below.
There are probably fundamental economic reasons for this kind of valuation, like the return on a dollar invested in a company.
Why do you assume that we've now established a new higher level?
History is a tough opponent to beat. In all likelihood stocks will eventually swing back to far lower valuations, below the long-term average.
That would mean a steep drop, something like 40-50%, or alternatively an extended period of stagnation.
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