No. of Recommendations: 12
Hocus, I too am interested in seeing dialog about your questions progress in a constructive, meaningful way. And to that end, here's my attempt to state what I detect is driving some of your concerns about the SWR. I tried to word this so that I retained your original intent while using what I believe to be common points of agreement for the board. If I messed up, please let me know.

Background
There is a historical safe withdrawal rate (SWR). If the future is similar to the past, then there is a high probability that a portfolio will not run out of money if the SWR is utilized for that given time period and asset allocation. Then there is the actual withdrawal rate (AWR) at which a retiree withdraws his/her money. Although some may assume that the SWR and AWR are one in the same, in fact they are not. The SWR is a good starting place to determine a withdrawal rate, but after analysis of ones personal situation, the AWR could wind up being higher or lower than the SWR. For example, someone who can cover expenses with a small withdrawal rate might choose a lower choose a lower AWR than SWR. Conversely someone who is counting on some future income might elect a larger AWR than SWR.

Problem
In bear market conditions, emotions could cause ERs to change their asset allocation to the point where their AWR is no longer shown to be 'safe' as supported by historical data.

So it begs the questions: 1) What is the probability that this could happen to me during FIRE?(% of the population that will make the make wrong choice and method to predict this behavior) 2)For those potentially impacted, would adjusting the AWR ahead of time mitigate this problem and if so, then how much should the AWR be adjusted?


Solution
I think that question #1 must be answered before considering question #2 and I haven't really ever seen a good answer to it. I've had financial advisors attempt to assess my risk tolerance by asking how much up and downside I was willing to tolerate for a given investment. But guessing what I might do is a poor approach to projecting my future behavior. What is required is the ability to quantify how I actually reacted to past events (both related and unrelated to investments) in order to predict my probable future behavior. In another words, utilize the same rigor one uses when analyzing historical financial data.

Now some may just pooh-pooh this whole notion by saying, “hey face it, early retirement just isn't meant for everyone—if you can't stand the heat...." But it is important for one to assess ones ER readiness level. You may not feel this "heat" until several years into ER, after you've past the point of no return. It's difficult to use work as a “plan B” after you have let your job skills go rusty. Hey, maybe thats the true definition of ER—you know you're really an ER when you can no longer return to your previous occupation <grin>.

So, does anyone out there have any ideas on obtaining data to answer question #1? Do any psych majors hang out here???
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No. of Recommendations: 51
<<So, does anyone out there have any ideas on obtaining data to answer question #1? Do any psych majors hang out here???
>>


I respect the theories intercst has proposed, and they are useful guides to my own behavior and analysis. But I am unwilling to use them as the basis for my financial security in life.

Many times I have noted that I consider myself excessively risk averse. As an observer of my behavior for over fifty years, this is one of the conclusions I have reached when I consider the admonition to "know thyself."

A part of this fact is that I consider that it's reasonable to consider that the world may behave a lot worse than the recent history considered in stock markets returns. No nuclear or biological wars were included in those time frames. Civil war didn't actually divide the nation. It was a golden era by the standards of most nations and most of history. We may get lucky and see that pattern continue ---I sure hope so. But there is some real risk that things can fall apart.

Most especially, I was not willing to retire at the height of a lengthy economic boom and huge runup in stock prices when I left my regular job three years ago. It was clear that we were riding for a fall, and it's impossible to know how far economic fortune will turn when things finally fall apart.

So I would prefer to consider retirement at the bottom of a recession, or perhaps when a recovery is definitely in sight, and it is reasonable to suppose that things aren't going to get a lot worse. If it makes sense for you to retire at that time when you look at your assets and the world, I think your decision is based on a firmer foundation.


Also, I am unwilling to be confined to a particular mix of assets just because their are limited historical data points available for analysis. My experience and judgement influences my choice of assets. Time will tell how wise or foolish that will prove to be, but I am not interested in leaving such decisions to others.

So while I appreciate intercsts theories, I use them as a guide to assist me in making my own decisions.



Seattle Pioneer
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No. of Recommendations: 10
>In bear market conditions, emotions could cause ERs to change their asset allocation to
>the point where their AWR is no longer shown to be 'safe' as supported by historical data.

Emotional responses during bear markets also illustrate why most people will never achieve FIRE in the first place. At work I am constantly hearing 'I have cut back my contributions - its pointless to invest in this environment', or 'I just switched everything into bonds [or the money market fund].' The non-emotional response - maintaining my 20% contribution to stocks every paycheck [plus funding a ROTH] should allow me to FIRE at 55 even at my extraordinarily modest salary.

For a Gen X FIRE wannabe like myself, my behaviour now will have far more impact than proposed 'stock switching' based on historical speculation [hocus - speculation and hypotheticals is as far as it has gone - do the hard work, make it available to us, and you WILL be taken seriously].

Cheers,
madmikeyd
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No. of Recommendations: 1
I was not willing to retire at the height of a lengthy economic boom and huge runup in stock prices when I left my regular job three years ago.

But you didn't retire. You merely left your job to assume another job--albeit part-time and on your own hours--in the same profession. This is a position I have advocated on this board, to the consternation of many. I'm sure it's the way I advocate it that makes people irritable.
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The question of what and who is likely to have an emotional response to someting is interesting.

However, it is more important to ask what is the correct response. I certainly have a lot more money now than I would have had if, since the first of the year, for example, I had been long index funds or just about any mutual fund you could mention. I have made the mistake of not shorting long enough or with enough money, but that is a mistake I intend to learn from.

Right now, 40% HSGFX, 40% DIGFX, and 20% cash looks pretty good, although I intend to put some of that cash into some corporate bond funds shortly. That is about 20% more money than if I had been in an index fund since the beginning of the year.

Going to cash, certain bond funds, and a hedged equity fund, was not an emotional response, but emotionally I feel pretty good about it.
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No. of Recommendations: 16
Patnbj writes,

Problem
In bear market conditions, emotions could cause ERs to change their asset allocation to the point where their AWR is no longer shown to be 'safe' as supported by historical data.

So it begs the questions: 1) What is the probability that this could happen to me during FIRE?(% of the population that will make the make wrong choice and method to predict this behavior) 2)For those potentially impacted, would adjusting the AWR ahead of time mitigate this problem and if so, then how much should the AWR be adjusted?


Absolutely! Reducing your actual withdrawal rate (AWR), no matter what the condition of the stock market, improves your chances of portfolio survival -- and the chances that you'll die with more money than you know what to do with. We don't need any additional research to prove that point.

The two points of contention appear to be 1) "How safe is my actual withdrawal rate?" and 2) "How does my current asset allocation affect the safety of my actual withdrawal rate?" We can use the past 130 years of history to answer both of these questions.

Here are the initial inflation-adjusted withdrawal rates that would have survived in each and every one of the one hundred 30-Year pay out periods from 1871 to 2000 for various asset allocations:

%Stock/%FI "100% safe" WD rate Number of 30-Year periods
. where portfolio went broke
. using a 4% WD rate
.
100%/0% 3.94% 3
74%/26% 4.26% 0
50%/50% 4.03% 0
25%/75% 3.28% 11
0%/100% 2.34% 31

There's no harm in reducing your percentage of stock if that relieves any anxieties you may have, but you must also reduce your withdrawal rate if you want to remain "100% safe". If you want to go all the way down to 0% stock, and keep drawing at 4%, in 31 out of the 100 30-Year periods examined you went broke in less than 30 years.

As gurdison has pointed out several times to the hoci's displeasure, a 2.34% withdrawal rate means you need more than 42 times your annual living expenses to retire with a "100% safe" withdrawal rate. That's a big difference from the 25x expenses one needs for a 4% withdrawal rate.

The hoci proposes that we switch from stock to fixed income at opportune times to improve on the safe withdrawal rate. Many smart and enterprising people have attempted to devise just such a system, but we have no evidence that anyone has achieved long-term success. Someone who perfected just such a market-timing system would quickly amass a great deal of money and we'd see his name listed in the Forbes 400. We wouldn't need any academic studies to "prove" his success -- his name would be right there next to Gates and Buffett.

For every GoofyHoofy and nas90skog who sold their stocks in 1999, there are ten hoci who sold in 1996 and are now scratching their behinds wondering how they are going to feed their families when their 7% CD matures and they can only get 4% on a new one.

Retirees who maintained a fixed asset allocation and rebalance each year aren't having these problems.

intercst
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While I appreciate intercsts theories, I use them as a guide to assist me in making my own decisions.

I agree with every word of that sentence.

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No. of Recommendations: 9
SeattlePioneer:
I was not willing to retire at the height of a lengthy economic boom and huge runup in stock prices when I left my regular job three years ago.

----
CCoy:
But you didn't retire. You merely left your job to assume another job--albeit part-time and on your own hours--in the same profession. This is a position I have advocated on this board, to the consternation of many. I'm sure it's the way I advocate it that makes people irritable.


I'm pretty sure that it was the sanctimonious attitude with which you stated such opinions that rubbed people the wrong way (myself included) rather than the idea of downsizing your job.

I have considered such a path myself and it is currently a fall back option that we (my wife and I) may take if we don't get to the required bucket of assets by the time we need/want to get out of our current work. There are a number of sideline jobs that we could see ourselves doing. Most of these involve using our hobbies to generate some income, using some of our language skills (translation work, interpreting, running some sort of tours for natives in that language etc.), or some contract work in my current profession.

Why don't I just do it now? Because I am building up the bucket of resources at a very large pace in my current job (1 year of retirement income saved for every year of work - soon to rise to 2 years of retirement income for every year of work). There is no way that we can hope to generate one year's worth of retirement income from the above sideline jobs except for the contracting but then it will grow to take up a large amount of my time. Even then I would never be able to save enough to be FI nor RE. It's a trade-off. Perhaps at some point I will be less willing to make it but for now I can and do.

The larger the bucket is (to a certain point anyways - i.e. 25x expected retirement income) the more freedom that I will have to pick and choose what to do with my time. Even if the bucket isn't large enough to completely retire on the more of my income that it provides the greater will be my choice because what I spend my time doing won't necessarily have to provide a great return in monetary terms.

Hyperborea
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No. of Recommendations: 1
Well, here is a successful market timer.

>>>>>

NEW YORK (Reuters) - Master stock market timer Paul Desmond warned clients to get out of stocks ahead of the October 1987 crash. More recently he proclaimed, also correctly, that stocks would carve out new lows this year.

Market timing, as Wall Street lore goes, is a futile exercise for individual investors. But such prescient calls have earned a strong following for Desmond, president of the Florida-based Lowry's Reports Inc., the 64-year-old market timing service that boasts a top notch client list.

<<<<<

http://biz.yahoo.com/rb/020901/column_profile_1.html

In my opinion, it is important to learn from experience, and to recognize one's mistakes. If, for example, I had sold in 1996, I certainly would not have put my money in CDs. I would have put my money into something more liquid. When I was proved wrong, I would have been back in the market.

Any good market timing system has checks and balances to correct mistakes. Mistakes are probably unavoidable, but they do not have to last since 1996.

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No. of Recommendations: 6
joelxwil offers,

Well, here is a successful market timer.

>>>>>

NEW YORK (Reuters) - Master stock market timer Paul Desmond warned clients to get out of stocks ahead of the October 1987 crash. More recently he proclaimed, also correctly, that stocks would carve out new lows this year.

Market timing, as Wall Street lore goes, is a futile exercise for individual investors. But such prescient calls have earned a strong following for Desmond, president of the Florida-based Lowry's Reports Inc., the 64-year-old market timing service that boasts a top notch client list.

<<<<<

http://biz.yahoo.com/rb/020901/column_profile_1.html



I rest my case.

If these people had really been "successfully market-timing" for the past 64 years, they'd be richer than Gates and Buffett combined. <grin>

intercst
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SP writes

Most especially, I was not willing to retire at the height of a lengthy economic boom and huge runup in stock prices when I left my regular job three years ago. It was clear that we were riding for a fall, and it's impossible to know how far economic fortune will turn when things finally fall apart.

So I would prefer to consider retirement at the bottom of a recession, or perhaps when a recovery is definitely in sight, and it is reasonable to suppose that things aren't going to get a lot worse. If it makes sense for you to retire at that time when you look at your assets and the world, I think your decision is based on a firmer foundation.


Wow SP, that makes me think that there just might be a use for market-timing, after all. Not for determining when to buy and sell equities <shudder>, but for timing ones retirement!

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Reducing your actual withdrawal rate (AWR), no matter what the condition of the stock market, improves your chances of portfolio survival

But why do that when there is solid data (such as that in the Bernstein book) showing that you can get a higher safe withdrawal rate by lowering your stock allocation a bit?

Why not explore as many of the easy options first before reaching the point where you need to delay your retirement to accumulate more assets? I agree that way works, but I see no harm in examining the other possibilities too.
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No. of Recommendations: 7
hocus asks,

Reducing your actual withdrawal rate (AWR), no matter what the condition of the stock market, improves your chances of portfolio survival

But why do that when there is solid data (such as that in the Bernstein book) showing that you can get a higher safe withdrawal rate by lowering your stock allocation a bit?

Why not explore as many of the easy options first before reaching the point where you need to delay your retirement to accumulate more assets? I agree that way works, but I see no harm in examining the other possibilities too.


Hocus,

Please read the post that you are responding to.

What do you not understand about this table of numbers? (This is about the forth time I've posted this table and asked you this exact same question.)

%Stock/%FI "100% safe" WD rate Number of 30-Year periods
. where portfolio went broke
. using a 4% WD rate
.
100%/0% 3.94% 3
74%/26% 4.26% 0
50%/50% 4.03% 0
25%/75% 3.28% 11
0%/100% 2.34% 31

For a 30-Year pay out period, a 74% allocation to stock happens to yield the highest safe withdrawal rate. If you have less than a 74% allocation to stock, the withdrawal rate is lower.

The withdrawal rate is 4.26% for 74% stock, 4.03% for 50% stock.

If you don't believe me that 4.26% is a bigger number than 4.03%, please go to the children's section of your local library and get a 3rd grade arithmetic primer. With colorful pictures and large print, they should be able to show you that the number "4" is bigger than the number "3".

intercst


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hocus: But why do that when there is solid data (such as that in the Bernstein book) showing that you can get a higher safe withdrawal rate by lowering your stock allocation a bit?

I don't see where in Bernstein's book he advocates 'reducing' your 80/20 portfolio for a 50 year withdrawal period. And that is what 80/20 is optimal for.

Now for 75/25%, again, Bernstein SPECULATES that (and the book was as of 1999 or 2000, right? before the market decline?) that with the 'high' valuation in 1999 or 2000, that 'future' returns of stocks could be lower? (so could future returns of CDs, and we have already seen that trend as well!!!!!).

However, unless you believe the next 30 years will be 'worser' than ANY 30 year period in the past 130, you have only the SWR based upon history to go by.

If you are not comfortable with 'as worse as any period in history', come up with your own 'worser than' concept, and act according.

You advocate (and only seem to advocate) changing your portfolio allocation drastically and trying to market time. Market timing has been shown to be impossible for 'experts' to do (and the experts almost unanimously concur), yet alone mere 'non experts'.

And since you haven't got a clue yet as to how to change your allocation since you haven't proposed a mechanism , other than 'when it feels right', to do so, that leaves you up the river without a paddle.

So simply reducint your withdrawal rate is guaranteed to improve the probability your asset allocated portfolio will survive.

Just like ONLY taking less than 2.3% from your fixed portfolio will be better if the future is 'worser' than the past.

You seem to go non-linear, saying nothing 'like this' has happened in history. I look to 1929, and see a 90% drop in the market. So far, I haven't seen that, have you? That happened in less than 2 years. And the SWR survived the 1929 crash.

The other bad year to have retired was 1966, I believe.

The gist of what I get out of Bernstein is the future may be 'worser' than any time in recorded financial stock market history, so that may reduce the SWR for ALL portfolios, yours included. Then again, it may not be worser. In 30 years, we will know.


And, as to your 150 posts, only 2 of them actually gave your specific ideas...everything else was whining about people throwing darts at your 'trial balloon' or actually disproving your claims.





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The reasons "experts" object to market timing are (at least):

(1) They have been unsuccessful, and so they don't think anybody can do it just because they have not been able to do it. Scott Burns is a good example of this sort of "thinking".

(2) They do not want investors to pull out of their mutual funds. They like those fees - even at a reduced amount they are better than nothing. Plus, of course, lots of mutual funds would go out of business without a gullible public. Deservedly so.

At any rate, I am happy with the timing I have done so far, and continue to practice what others think is impossible. I have a lot more money for it.

So far as comparing this current situation with the 1929 crash, things could easily turn out differently. The market may never reach previous highs. We could be in for a long period of stagnation in the market. Or not. I am only interested in watching things happen without any preconceptions of what will happen in the next several years. At this time, the situation is clear, just as it is equally clear that you cannot count on history to repeat itself.

From Hussman:

"It's probably accurate to think of the market as "hovering." More like a glider on a warm wind than a rocket on propellant. It has neither the valuations nor the economic fundamentals that could reasonably be expected to drive a sustainable bull market. Nor does it have the unfavorable trend uniformity or increasing risk aversion that typically drives powerful selloffs. There's little investment merit in taking market risk, and little chance that stocks will enjoy a runaway bull market advance. Still, investors have become somewhat less averse to risk in recent weeks, and that tendency is robust enough to give the market modest speculative merit. Accordingly, we remain modestly exposed to market fluctuations. When that evidence shifts, so will our position. And as always, no forecasting is required."

http://hsgfx:reciprocal@www.hussman.com/hussman/members/updates/latest.htm

He will update his views today or tomorrow.
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hocus: But why do that when there is solid data (such as that in the Bernstein book) showing that you can get a higher safe withdrawal rate by lowering your stock allocation a bit?

See, I told you so! hocus has the secret to a real, personal safe withdrawal rate that exceeds that which has been achieved historically while featuring a lower stock allocation. Furthermore, it is supported by Bernstein who also tells hocus that those with a high stock allocation can not expect more than 2.5% safe withdrawal rate. Now the rest of you just shut up and let hocus tell us how to achieve these miracles.

Prometheuss
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here's from Hussman

quote:

Again, our investment discipline is not one of prediction but identification. The fact that trend uniformity is favorable should not be mistaken for a forecast that the market will move higher. This may seem bizarre, but it works like this: when valuations have been unfavorable and trend uniformity has been favorable, as reflected in the current Market Climate, stocks have historically advanced at an average rate of about 15% annualized.

Now, this looks fairly impressive until you realize that it averages to only about 0.3% per week. Meanwhile, the weekly volatility (standard deviation) of returns in this Climate has been about 1.6% a week. So that average weekly gain is swamped by random volatility, and is not statistically significant even on the weakest criteria. Since we have no forecast as to when a given Climate will shift, or how long it will prevail, there is no statistically significant forecast that we can attach to any Climate.

So apart from a small, unreliable, and statistically insignificant tendency for the market to advance over the coming week, we have absolutely no expectation for future market direction at all.


And this is the great wisdom of your market timer????? Absolutely no expectation for future market direction at all!!!!

I'm not impressed.

Should I be???



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I'm pretty sure that it was the sanctimonious attitude with which you stated such opinions that rubbed people the wrong way (myself included) rather than the idea of downsizing your job.

The moment I hit the submit button, I realized I didn't say that right. What I often sense on this board is a mood of desperation where people are gritting their teeth and hanging on to their sucky jobs until the day that they can retire early. What is hardly ever touched upon is how someone can retire early and still enjoy the road to getting there by finding something else that satisfies.

Seattle Pioneer seems to still enjoy plumbing, but on his own terms, so bravo for him. I had to find a completely different line of work, so bravo for me. But no way would I--nor did I--put up with a sucky job once I reached the point where it sucked.

I'm sorry that I came off santimonious, but day after day I read celebratory posts about people exploiting their employers--just because you feel exploited doesn't mean you are entitled to become an exploiter--and I wonder why people don't use the good brains God gave them to improve their situation.

Hyperborea, you despise your job. But if you think that the future upside is worth the dread you now feel, who am I to say you shouldn't keep on keepin' on. But you sound very smart and talented. Have you explored another line of work that you'll enjoy doing and still make sufficient money to meet your goal of RE?
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for hocus to digest:

from Malkiel ,A Random Walk Down Wall STreet, p 162

"Using technical analysis formarket timeingisespecially dangerious. Since there is a long term uptrend in the stock market, it can be very risky to be in cash. AN investor who frequency carriers a large cash position to avoid periods of market decline is very likely to be out of the market during some periods when it rallies smartly. During the decade of the 1980s, the S & P 500index provided a very handsome total return of 17.6%. But,an invesotr who happened to be out of the market and missed just the ten best days of the decade - out of a total of 2526 trading days - was up only 12.6%. The point is taht market timers risk misssing the infrequent large sprints that are the big contributors to performance.

The implications of this analysis are simple. If past prices contain little or no useful infomration forthe prediction of future prices,there is no point in following anny technical trading rule for timing the purchases and sales of securities. A simple policy of buying and holding will be at least as good as any technical procedure.

endquote.

second quote, p 214


But is it possible that some fund managers (Hussman for this particular example) are consistently beter than the rest? ARe funds results precdictable from past performance? Is there really a hot hand pehenomenon that has insprired thousands of advertising campaigns and turned a nubmer of mutual fund managers into legends during the 1970s and 1980s? The facts are disappointing. The evidence suggests that there was a good deal of consistency in mutual fund results during the 1970s. good performaing funds tended to continue to perform well, at least over the near term. Unfortunately, these persistent relationsships did not continue tohold during the 1980s and 1990s. Investors would not have been able to earn superior returns by purchasing funds whose recent performance was above average. Indeed, a variety ofstrategies involving purchasing of top performaing funds , have sharpl underperformned the broad market indexes during the 1980s and early 1990s.

endquote.

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No. of Recommendations: 12
During the decade of the 1980s, the S & P 500index provided a very handsome total return of 17.6%. But,an invesotr who happened to be out of the market and missed just the ten best days of the decade - out of a total of 2526 trading days - was up only 12.6%.

Does anyone else find this hoary and oft cited example as absurd as I do?

I note that if I had managed to miss just the single worst day (October 19, 1987), I could have avoided losing 22.6% of the value of my portfolio.

I also note that if I miss the Good Humor truck coming by, I don't get any ice cream.

I don't get the point of the example of saying "If you missed the best days, your results would be down." Well OF COURSE THEY WOULD.

Obsessing about "the 10 best days" is as irrelevant as debating Anna Nicole Smith's IQ. Nobody can "time" in and out that way, and only a fool would try. On the other hand, it is possible to look at the overall characteristics of the market and make a decision whether it seems "overvalued" or "undervalued" and make investment decisions and portfolio adjustments accordingly. I'm sure of it.

People do it every day when they're buying a house. Some people are talking about "bubble" in real estate right now, today, and are making a decision on "the market" as it relates to their individual investment. Are they right? Time will tell. Do you believe it's impossible to "time" this too? Or should we just "always be in it?"

Heck, I can "market time" my purchase of a new car based on what I perceive as available supply and demand, the overall economy, and the health of the industry in general. I might be wrong and find myself waiting around for a rebate that never happens, but so what? What makes you think you can't change portfolio allocations based on a bit of intellectual exercise?
 
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Goofyhoofy asks,

Heck, I can "market time" my purchase of a new car based on what I perceive as available supply and demand, the overall economy, and the health of the industry in general. I might be wrong and find myself waiting around for a rebate that never happens, but so what? What makes you think you can't change portfolio allocations based on a bit of intellectual exercise?

Of course you can try, but where is the evidence that large numbers of people are doing this successfully, and for an extended period of time?

If there was a reliable method of accomplishing this, wouldn't every mutual fund manager be doing it?

intercst
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goofyh:

note that if I had managed to miss just the single worst day (October 19, 1987), I could have avoided losing 22.6% of the value of my portfolio.

Great..now you show us somebody who missed ONLY the 10 worst days of the 1980 decade, and we both will agree he is the expert!. Care to name one?

Not only that, if you were in a taxable account, and had loads of cap gains (say your portfolio had gone up by 8 or 10, not hard to do at a mere 10.8%/yr annual compounding rate which doubles every 7.2 years), now you sell, pay 20% tax on your gain, and YOUR NET GAIN for being out of the market is 2%! and if you didn't jump back in right away, you even blew that...if you waited until the market had gone up 3 or 5%, you would be BEHIND, no?

so much for your wonderful claim.....shot full of holes, as much as the hocus hypothesis....

I don't get the point of the example of saying "If you missed the best days, your results would be down." Well OF COURSE THEY WOULD.

Yes, but missing just those ten days would cost you 50%, yes 50% of all the gains in the market in those entire ten years. You obsess about a 22% drop. YOu could have given up a 50% additional gain, still compouding away.......

Nobody can "time" in and out that way, and only a fool would try.

We agree....

And there are lots of fools who tried, missed just those ten days, and are 50% behind the index. Not so great results in my book. Do we agree? Oh, sure, some managed to sell, but most didn't manage to BUY BACK IN before those avoided losses also became 'avoided gains'!


On the other hand, it is possible to look at the overall characteristics of the market and make a decision whether it seems "overvalued" or "undervalued" and make investment decisions and portfolio adjustments accordingly. I'm sure of it.

Great.....people like Malkiel who have been looking at the market for 50 years have yet to find ANYONE who can consistently do it, one decade after another. They all vanish into obscurity once their 'magic' wears off. BUt each new one has a following that lasts until they blow it big time.....


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Telegraph:

Great..now you show us somebody who missed ONLY the 10 worst days of the 1980 decade, and we both will agree he is the expert!. Care to name one?

What goofy is trying to say that you so conveniently try to ignore, is that if you are going to assume that a market timer is going to miss the 10 best days, you at least owe them the consideration that they will also be able to miss the 10 worst days. Nobody has to be perfect. They just have to be right more than they are wrong. When you are wrong, admit it and change. When you are right, ride it for all its worth. In the last 30 months, I have made one right call (much like intercsts DELL and your whatever tech stocks) that will allow me to be a blithering idiot for a very long period of time before it ever catches up to me. O f course, I don't plan on becoming that stupid.

nas90skog
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intercst:

The hoci proposes that we switch from stock to fixed income at opportune times to improve on the safe withdrawal rate.

It occurs to me that the inability of people to recognize this has been the reason that this debate has been bogged down. When hocus was saying that one could get a higher SWR with a more balanced allocation, I didn't take it to mean holding that over a 30 year period unless the future was going to be worse. Nor did I ever think he wanted or advocated staying 100% anything.

Now that it may be universally recognized, we can begin the mischaracterization and misinformation barrage towards the evil "market timers".

Many smart and enterprising people have attempted to devise just such a system, but we have no evidence that anyone has achieved long-term success. Someone who perfected just such a market-timing system would quickly amass a great deal of money and we'd see his name listed in the Forbes 400. We wouldn't need any academic studies to "prove" his success -- his name would be right there next to Gates and Buffett.

A smart and enterprising person understands that a market by nature requires a diversity of opinion. Publishing a system that works would destroy that diversity and the system along with it. He would also realize that there is no perfect system that would allow him to bet the farm and become the richest person in the world. It is about being right more than wrong.

For every GoofyHoofy and nas90skog who sold their stocks in 1999, there are ten hoci who sold in 1996 and are now scratching their behinds wondering how they are going to feed their families when their 7% CD matures and they can only get 4% on a new one.

This is an anecdotal mischaracterization. There are a lot of people who made and kept a lot of money in the last 5-6 years. Just because they bought CD's or fixed income assets when they thought the market was going down, doesn't mean they can't buy stocks when they think they are going to go up.

Retirees who maintained a fixed asset allocation and rebalance each year aren't having these problems.

They have lost a large chunk of their portfolio. Not the same problem, but perhaps a more strenuous problem for many. How many on this board made it to FIRE with a strict adherence to "The Study". Many, I believe rode in on the backs of a few good tech stocks. How many are now 75% in index funds. Are you? When you rebalance, how do you decide what to sell? If news becomes available that clearly demonstrates that some of your individual equities are in trouble, would you not sell some of those? If you are going to exercise that kind of subjectivity, then the kind some of us are advocating which isn't much more than that regardless how many may mischaracterize it as "market timing" can't be unacceptable.

I find it noteworthy that when it comes to FIRE, we don't follow the crowd and are a unique breed, but when it comes to managing our portfolios, we follow the crowd and are nothing but commoners.

Put blind faith in "The Study" if you want. It has historical power behind it. If you need that, great. It does require a measure of confidence to believe that you can beat the market and you shouldn't be there if you don't have it.

We know all of the arguments against it. There is no historical data to support doing it. If there was, there would be no market. That presents opportunity to those who are willing to exercise good judgment.

Maybe its the times we live in but this board seems to be so binary or digital. 0/1, on/off, black/white, "Study"/chaos, buy and hold/day trader, equities/income, early retired/working stiff. Between each of these extremes, there is an infinite continuum of possibilities. Lets try to be a little more analog.

Why try and derail a discussion about portfolio management? We all can learn from that.

nas90skog
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Why try to derail a discussion about portfolio management?

And they do it in such immature ways, by changing hocus to "the hoci" and other mean-spirited rebuttals. It's beneath these otherwise smart people.
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nas:

What goofy is trying to say that you so conveniently try to ignore, is that if you are going to assume that a market timer is going to miss the 10 best days, you at least owe them the consideration that they will also be able to miss the 10 worst days. Nobody has to be perfect

And you are right....more than 90% of the 'experts' failed to beat the index in the 1980s (and that is before tax considerations!). They could switch in and out, switch around, move to 'defensive' stocks, sell 'overvalued' stocks, and anything else you propose. More than 90% of them fell flat on their face.

And if you look at the 'hot' funds of the 1980s, just that 10% that 'beat' the index, and look at their performance in the 1990s, how many are there that are still in the top 10%? That leaves you with maybe 1% that have outdone the index for 20 years.

Now, unless you are incredibly lucky, to have bought one of the 1%, without knowing 'which' hot fund was going to first of all be 'hot', and then 'stay' hot, great...you would be fantastically wealthy now....

And the experts have shown, despite 'fundamental analysis', 'technical analysis', 'valuation', curves, charts, and everything else, with billions of dollars of research, massive computer systems, that 99 out of 100 will be wrong (basically less than a random selection) after 20 years in beating the index...

Now you either have to know something that these other experts don't to even be in that 1%.



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nas90skog: Now that it may be universally recognized, we can begin the mischaracterization and misinformation barrage towards the evil "market timers".

It is not that "market timers" are evil, but many of us doubt that anyone has the ability to effectively time the markets. I recognize that there are a wide range of approaches that might fall under the market timing definition ranging from strategic asset allocation all the way down to day trading. I have no concern about making minor adjustments to my asset allocation over time, but I doubt that I have the ability to time my way into and out of the market (e.g., tactical asset allocation). You might be able to do that successfully and if you can then more power to you.

nas90skog: I find it noteworthy that when it comes to FIRE, we don't follow the crowd and are a unique breed, but when it comes to managing our portfolios, we follow the crowd and are nothing but commoners.

It's news to me that establishing an asset allocation and reblancing to maintain that allocation is followng the crowd. From all that I have read, this sort of behavior is unusual. Following the hot investment of the moment is more common. Buying stocks when stocks are hot and selling stocks when they are not is more common. Rebalancing is the opposite behavior.

nas90skog: Put blind faith in "The Study" if you want. It has historical power behind it. If you need that, great. It does require a measure of confidence to believe that you can beat the market and you shouldn't be there if you don't have it.

Who needs to beat the market? Not me. I am shooting for market average returns (even when the markets are down ;-). This has nothing to do with faith in "The Study", blind or otherewise. My faith is in the markets. I have no faith in my own ability to time the markets or select market beating stocks. If anything, "The Study" confirms my faith in the markets past.

I do believe that low cost index funds will track the market (less expenses and tracking error). Futhermore I believe in selecting an allocation among a few funds with different size and value characteristics to provide a hedge against one part of the market underperforming. I fully recognize how this limits my upside potential. That takes care of the equity portion of my portfolio. For the rest I believe in asset classes that are not well correlated with equites.

nas90skog: We know all of the arguments against it. There is no historical data to support doing it. If there was, there would be no market. That presents opportunity to those who are willing to exercise good judgment.

I do not waste time aruing against other approaches untill someone claims that anyone and everyone can do it. The very nature of a market requires this: for every investor who earns a dollar above the average there is an investor who earns a dollar less than the average. If you buy stocks that outperform the market average then someone else must be buying stocks that underperform the market average. The same holds if you are buying and selling in a manner that allows you to time the market and beat the average return. Someone else must be mistiming the market and falling short of the average return.

nas90skog: Maybe its the times we live in but this board seems to be so binary or digital. 0/1, on/off, black/white, "Study"/chaos, buy and hold/day trader, equities/income, early retired/working stiff. Between each of these extremes, there is an infinite continuum of possibilities. Lets try to be a little more analog.

Maybe so. Some things are categorically one thing or another, but many other things belong on a contimuum. The market needs market timers and stock pickers to provide volitility and set prices so that I can harvest market average returns.

Regards,
Prometheuss
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<There's no harm in reducing your percentage of stock if that relieves any anxieties you may have, but you must also reduce your withdrawal rate if you want to remain "100% safe". If you want to go all the way down to 0% stock, and keep drawing at 4%, in 31 out of the 100 30-Year periods examined you went broke in less than 30 years.>


Intercst:

Your chart is very clear and basic. I was wondering if you could fill in a few more values that may show the other side of the coin. IOW, we have spent so much time on worst case historical scenarios that some may have gotten the impression that it represents a typical value over the last 100, 30 year periods. Do you have the mid point and maximum SWR rates and failure rates on the same data?

I think this should demonstrate a point that can get lost in this debate. Namely, typical returns rather than worst case returns would leave one in much better shape. If that were to happen, one could choose to sit on the difference for a "rainy day" or to bump up their SWR.

As always, I think that one should make their initial plans based on the worst case. At the same time I think it is very important to understand the correlation between a higher SWR and the lower probability of success as the rate increases. Of particular interest to me is the Highest SWR for a 0/100 allocation and the number of failures such a rate would have had. I hope that data is readily available to you. If my request is not clear enough, let me know.


BRG

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gurdison asks,

<There's no harm in reducing your percentage of stock if that relieves any anxieties you may have, but you must also reduce your withdrawal rate if you want to remain "100% safe". If you want to go all the way down to 0% stock, and keep drawing at 4%, in 31 out of the 100 30-Year periods examined you went broke in less than 30 years.>


Intercst:

Your chart is very clear and basic. I was wondering if you could fill in a few more values that may show the other side of the coin. IOW, we have spent so much time on worst case historical scenarios that some may have gotten the impression that it represents a typical value over the last 100, 30 year periods. Do you have the mid point and maximum SWR rates and failure rates on the same data?

I think this should demonstrate a point that can get lost in this debate. Namely, typical returns rather than worst case returns would leave one in much better shape. If that were to happen, one could choose to sit on the difference for a "rainy day" or to bump up their SWR.

As always, I think that one should make their initial plans based on the worst case. At the same time I think it is very important to understand the correlation between a higher SWR and the lower probability of success as the rate increases. Of particular interest to me is the Highest SWR for a 0/100 allocation and the number of failures such a rate would have had. I hope that data is readily available to you. If my request is not clear enough, let me know.


I think the data table I prepared for the PE Ratio study that hocus either ignored or didn't understand addresses this question, see link:

http://rehphome.tripod.com/pestudydata.html

Here's the summary and results for the PE Ratio vs. Safe Withdrawal rate study:

http://rehphome.tripod.com/pestudy1.html

The best 30 year period (starting in 1872) would have allowed a 9.28% withdrawal rate from a 100% fixed income portfolio. That 9.28% withdrawal rate only worked in 1 out of the 100 periods examined. The worst 30-Year period (starting in 1939) had a 2.35% withdrawal rate. A withdrawal rate of 2.35% survived in all 100 periods examined.

intercst



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And you are right....more than 90% of the 'experts' failed to beat the index in the 1980s (and that is before tax
considerations!). They could switch in and out, switch around, move to 'defensive' stocks, sell 'overvalued' stocks, and
anything else you propose. More than 90% of them fell flat on their face.

And if you look at the 'hot' funds of the 1980s, just that 10% that 'beat' the index, and look at their performance in the 1990s, how many are there that are still in the top 10%? That leaves you with maybe 1% that have outdone the index for 20 years.

Now, unless you are incredibly lucky, to have bought one of the 1%, without knowing 'which' hot fund was going to first of all be 'hot', and then 'stay' hot, great...you would be fantastically wealthy now....

And the experts have shown, despite 'fundamental analysis', 'technical analysis', 'valuation', curves, charts, and everything else, with billions of dollars of research, massive computer systems, that 99 out of 100 will be wrong (basically less than a random selection) after 20 years in beating the index...

Now you either have to know something that these other experts don't to even be in that 1%.


It is this kind of neanderthal anecdotal crapola that allows people like me to make 7 figures while people like you are losing 7 figures times 2. Pardon my french but if you would quit your yapping (a long shot) and listen (even a longer shot), perhaps you would run across a few ideas that would prevent you from getting your hind quarters handed to you.

nas90skog
my apologies to the board. I was celebrating the one year anniversary of my FIRE with good friends and a nice bottle of Glenmorangie. My tolerance for intolerance has been tempered.








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Prometheuss,

You might be able to do that successfully and if you can then more power to you.

I can assure you that if you choose to do it and I can do it, so can you . I have read many of your posts. You are much smarter than I.

Rebalancing is the opposite behavior.

I would agree. Let's see if we can discuss how to further refine it.

Who needs to beat the market?

One can never be too rich, too thin, or too good looking.

My faith is in the markets. I have no faith in my own ability to time the markets or select market beating stocks. If anything, "The Study" connfirms my faith in the markets past.

Your faith is completely justified and "The Study" won't be questioned. Maybe it is worth the time to see if we can pick up a couple of points on the market.

The very nature of a market requires this: for every investor who earns a dollar above the average there is an investor who earns a dollar less than the average.

I knew there was a pragmatist in the bunch. I grew up in Lake Wobegon where the men are handsome, the women strong and the children above average. I would like to keep it that way. If people are going to lose money in the markets, couldn't we at least discuss how we can be the recipients of their misfortune?

nas90skog

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Telegraph:

Now you either have to know something that these other experts don't to even be in that 1%.

intercst knew Dell. I knew MDT, BSX, STJ. goofyhoofy (whoishetocriticizemyusername) knew AOL. You knew.....well check that WCOM doesn't count. The averages are great. Believe in them. But if you want to build on that, take the advice of Buffet/Munger and look for the mispriced bet. When you find it, let 'er rip. It don't cost nothin' to talk about it.

nas90skog
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nas:

intercst knew Dell. I knew MDT, BSX, STJ. goofyhoofy (whoishetocriticizemyusername) knew AOL. You knew.....well check that WCOM doesn't count. The averages are great. Believe in them. But if you want to build on that, take the advice of Buffet/Munger and look for the mispriced bet. When you find it, let 'er rip. It don't cost nothin' to talk about it.

And T is smiling with GE, QCOM, ORCL, and yes, WCOM. But few called them 'mispriced' bets. I can't complain....made more than 1/3rd million on WCOM in a few years. Didn't bail soon enough this year, and gave up $500,000 paper 'gain' compared to 1999 price.....so? With 20/20 hindsight, I should have sold all I owned in 1998, not 1999 or 2000!

I started with $250,000 or so in total assets (not including house) in 1990. REtired 3.5 years ago. SO you don't think I benefited from having a few 'lucky' picks, plus having some long term buy/holds (like QCOM from early 1990s, and GE from the 1970s)? I did. Would also have done well in just index funds, AND be better diversified today, and not have to make individual decisions about individual stocks.


Yes, I'd have a few more 'millions' if I had bailed out of QCOM at the peak, rather than only selling 10%, (which was still 6-7 times what I had paid for all of it) - and I was 'almost' convinced to sell it all, but didn't; and out of WCOM early before accouting shenanigans did them in. That, and having some WCOM stock stuck in a 401K, that take 3-6 months for a 'transfer' to occur, caught me on that one.... And I knew I 'should have diversified' but never got around to it..... and got bit by the WCOM debacle.

Which is even more reason to put your portfolio on 'automatic' and go indexing for most of it. You don't 'hesitate' to do things. or "not get around to it".


And I'd have another pile of money if I hadn't let my asset allocation reach 85/15%(with a significant percent in WCOM)...... hard lesson, but it won't be repeated on my part.... but seeing that I was previously (2000) living on a 1.5% withdrawal rate, now I'm up to 2.2% withdrawal rate, and the portfolio is now about 70/30.





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I was not willing to retire at the height of a lengthy economic boom and huge runup in stock prices when I left my regular job three years ago.

But you didn't retire. You merely left your job to assume another job--albeit part-time and on your own hours--in the same profession. This is a position I have advocated on this board, to the consternation of many. I'm sure it's the way I advocate it that makes people irritable.


I dont think Seattle has ever said he's retired.

I thought the point was that he is FI. Meaning, that though the data says he "could", he's not comfortable doing so yet. I'm guessing the situation still affords him the same peace of mind and emotional benefits that being retired would.

If he wanted to lay on the couch and watch Springer for the next 10 years, he could. Doing exactly what one wants, with no perceived penalty for not doing even that, sounds like retirment to me. <grin>

Golfwaymore
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Doing exactly what one wants, with no perceived penalty for not doing even that, sounds like retirment to me.

OK, that's a subtle (or maybe not-so-subtle to FIREs) distinction I can get behind. Thanks for pointing that out. SP, am I totally clueless now? :-)
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You may be interested to see Datasnooper's thoughts on the intercst study. I understand his point to be that you really only have something like 4 independent 30-year samples, not the 100 30-year samples you claim. It's unreasonable to ascribe any statistical confidence levels to the withdrawal rates using the overlapping periods. I agree with his criticism as well as his possible solution of repeated sampling of the 130 years of data to construct synthetic 30-year portfolio returns.

Full post here:

http://groups.msn.com/DatasnoopersForum/general.msnw?action=get_message&mview=0&ID_Message=1145&LastModified=4675386877370109164
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You may be interested to see Datasnooper's thoughts on the intercst study.

The reference to DataSnooper reminds me that he fought a battle that went on for months (years?) on the Foolish Four board over the validity of some sort of claim that Motley Fool made about something that I believe was called the Dogs of the Dow strategy (I don't know the precise details).

It was all a huge waste of time, and it left Motley Fool with much more of a black eye than it would have suffered if, the first time its errors were discovered, someone had just stepped forward and said "yeah, it looks like the data is not as 100 percent clear as we once thought it was."

I don't see it as any huge terrible thing to acknowledge a mistake. I made a mistake in a discussion of one aspect of the SWR study in the first thread of this debate, and, when it was pointed out, I offered a full apology to both intercst and the board in general. I sure was glad I did that as the debate progressed because, if I had tried to stick to that incorrect position, it would have hounded me until the end. By acknowledging a small mistake, you get it behind you and your statements on the bigger questions gain more credibility.

The debate at the Foolish Four board was not dissimilar in tone to this one. Absolute outrage that anyone would dare to think that the beloved Motley Fool could make a mistake. They made a mistake. So what? They've done a lot of good things to more than balance it out too. The problem was not the mistake. It was dragging the thing out so long by their failure to acknowledge it.

The same principle applies here. Intercst has overstated the significance of the study results on posts on this board. So what? It's a little mistake made by someone who has made a huge contribution to our collective ability to retire early. Why not get the mistake behind us, and work together on more fun and valuable projects?

Is there no friend of intercst who can come forward and say to him at this point, "hey, it looks like you overstated things a bit on some of those posts you put up. Why not put it behind you and use any new data developed by the board to make your study even more valuable than it already is?"

Is there no one but me that sees this is the way to express true friendship at this point?
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hocus:

The reference to DataSnooper reminds me that he fought a battle that went on for months (years?) on the Foolish Four board over the validity of some sort of claim that Motley Fool made about something that I believe was called the Dogs of the Dow strategy (I don't know the precise details).

It was all a huge waste of time, and it left Motley Fool with much more of a black eye than it would have suffered if, the first time its errors were discovered, someone had just stepped forward and said "yeah, it looks like the data is not as 100 percent clear as we once thought it was."


observation points:

1) The financial wizard hocus, despite 30 volumes of information, failed to miss one of the latest investment 'fads' of the 1990s, the Dogs of the DOW.

For hocus, what you did is buy the 4 worse performing DOW stocks each January....the next January, you sold them, and bought the current worst performing DOW stocks.

The idea was that you bought companies at 'low' valuation...

And the data was 'mined' to show a trend over 10 years, and that one could make money by doing this yearly.....

And for a few more years, the trend worked....then year 2000 happened, and like most other 'systems', it flopped miserably....

2) Any 'system' that people devise and publicly announce is doomed to failure? Why? Assume half the investors buy those stocks....they will run up the price....an even smarter investor will buy them Dec 31, instead of waiting to Jan....so there will be less 'gain' possible. And everyone will 'sell' them at the same time...since everyone is 'selling', and 'no one' is buying, where is the gain going to come from? (oh, all the other people who haven't heard of the Dogs of the DOW theory? ).... and you don't think investment managers with billions and billions aren't going to play the game?

In Bernstein's thinking, the market 'equalizes' itself....the niche that existed gets eliminated.

So what did we learn? that a trend, based upon a few years data, didn't keep 'going'. Yes, it was an interesting trend, and a few people made a few bucks....but like all other 'market timing' systems, it didn't take long to fail (ie, the first down turn in the market!)....

Did that mean the 'data' was wrong???

No, it was those mining it, looking for anomolies to exploit (temporary imbalances in the market), that came up with that 'theory'. That 'theory' was shown to fail. It was discarded. As it should have been.

As to a mistake? Oh....just folks following the latest Wall Street Guru.....Gazarelli? the Motley FOol...they all had their 15 minutes of fame.

But really, hocus, if you missed the Dogs of the DOW, we've got to question your investment advice...





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BigPimpyGuy posts,

You may be interested to see Datasnooper's thoughts on the intercst study. I understand his point to be that you really only have something like 4 independent 30-year samples, not the 100 30-year samples you claim. It's unreasonable to ascribe any statistical confidence levels to the withdrawal rates using the overlapping periods. I agree with his criticism as well as his possible solution of repeated sampling of the 130 years of data to construct synthetic 30-year portfolio returns.

Full post here:

http://groups.msn.com/DatasnoopersForum/general.msnw?action=get_message&mview=0&ID_Message=1145&LastModified=4675386877370109164



That's the reason I claim no "statistical confidence levels to the withdrawal rates" in the study. It simply does what it says it does, find the worst case period in the last 130 years.

Datasnooper also correctly points out in the referenced post that using a Monte Carlo analysis without accounting for the mean-reversion tendencies of stock market returns produces equally "flawed" results.

inercst
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CC: But you didn't retire. You merely left your job to assume another job--albeit part-time and on your own hours--in the same profession.

GWM: I dont think Seattle has ever said he's retired.

I thought the point was that he is FI. Meaning, that though the data says he "could", he's not comfortable doing so yet. I'm guessing the situation still affords him the same peace of mind and emotional benefits that being retired would. ... Doing exactly what one wants, with no perceived penalty for not doing even that, sounds like retirment to me. <grin>


Doing what you want, including working for money, could be construed as a type of retirement. I think SP particularly could be said to be in retirement mode, at least, because his responsibilities to his customers are on a very short term basis. He goes over, fixes it (the first time we hope<g>), and he's done. Takes a day or 2.

DH is "retired" from his company, but I don't consider him retired, though he is FI. He consults 3 days a week, but more importantly, he has long term commitments - up to a year. He would not quit working because of those commitments unless something really awful happened. So he is not in a position to stop on a dime the way SP is.

I probably just muddled things more.

arrete
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I would also note a major difference between the two: F4 was mined from the data in hopes of beating the market while SWR study assumes that the investor obtains market average returns.

The "returns" reported in the SWR study are quite low. No one believes that the "returns" most people will receive from stocks will be 4 percent. In most cases, the returns will be quite a bit higher than that.

But this isn't about returns. This is about safe withdrawal rates. That means that you need to look for the worst case scenario. The worst case scenario is that you start with a high stock allocation and then move away from it when prices drop. Intercst did not factor in the data showing how often this would happen to investors with 80 percent stock allocations, so he has not identified the worst case scenario for any of the years he examined.

The SWR study is the product of data-mining. intercst acknowledges this. He says that it is OK in this case because his is a sort of reverse data-mining; he looks for the worst scenario rather than the best. The problem is that he does not in fact look for the worst case scenario. The worst case is when you start with an 80 percent allocation and then lower it in response to price drops.

We might prefer to say that a 4% withdrawal rate would have survived 30 years for every possible 30 year historical period supported by the data. I think that is what intercst means by 100% I do not think that anyone disagrees with Datasnooper when he says, "In other words there is a non-zero probability that the stock portion of a portfolio drops to zero or close enough such that withdrawals purge the residual." That makes saying "100%" problematic, but that's been acknowledged many times here.

Useful observations, Prometheuss.

The "100 percent" problem is acknowledged at some times and then conveniently forgotten at others. If we agree that the study does not support claims that we are certain that the optimal allocation is 80 percent, we are all in basic agreement. Intercst says it does, and that claim disrupts threads when it is posted to them.

Would you be willing to take intercst aside and explain to him how the study works? I do not mean to adopt a sarcastic tone. But it's clear that you know what the study says, and sidsidsid knows what the study says, and I know what the study says, and lots of other people know what the study says, but intercst does not know what the study says. At least he often pretends to not know what the study says. My take is that he is just joshing us.

If you could get intercst to go along with your understanding, that would allow us to advance the ball a whole bunch.
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hocus:

The worst case is when you start with an 80 percent allocation and then lower it in response to price drops.

Why? I would think, even with the hocus principles applied, that someone with a 100% allocation who panics is going to be worse off than someone with only an 80% allocation!

Can you show us, hocus, why 80% is worse than 100%?

Again, the expert has 'spoken'.....
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Can you show us, hocus, why 80% is worse than 100%?

I'm saying that 80 percent is worse than 50 percent in some circumstances. I didn't hear anyone saying that 100 percent was on the table as a possible optimal allocation.
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hocus: The "returns" reported in the SWR study are quite low. No one believes that the "returns" most people will receive from stocks will be 4 percent. In most cases, the returns will be quite a bit higher than that.

The SWR study does not report returns per se. It uses historical returns and historical inflation data to determine if a particular withdrawal rate would have survived for a particular period of time. The withdrawal rates (e.g., 4%) are low because higher rates exhaust the investment portfolio too soon.

How can you go along with Bernstein when he says that future real returns will be around 3.5% based on Fisher's model and than state that returns will be quite a bit higher than 4%? That sort of logical inconsistency is bizzare.

But this isn't about returns. This is about safe withdrawal rates. That means that you need to look for the worst case scenario. The worst case scenario is that you start with a high stock allocation and then move away from it when prices drop. Intercst did not factor in the data showing how often this would happen to investors with 80 percent stock allocations, so he has not identified the worst case scenario for any of the years he examined.

The level and variability of returns are critical to this discussion. Inflation rates are critical to this discussion. Asset allocation is critical to this discussion. Safe withdrawal rates are all about returns: lower returns require lower withdrawal rates.

There are many scenarios worse than the one you cite, but if that's your scenario then the SWR study framework supports analysis of that behavior. Predicting how many folks will act that way is, however, meaningless for an individual investor.

The SWR study is the product of data-mining. intercst acknowledges this. He says that it is OK in this case because his is a sort of reverse data-mining; he looks for the worst scenario rather than the best. The problem is that he does not in fact look for the worst case scenario. The worst case is when you start with an 80 percent allocation and then lower it in response to price drops.

It does address the worst case. If you market time badly as you describe then your returns will be much lower than market average returns. Put some numbers to it and you are done. Intercst gave you an example when he took the PE timing policy and applied it to the SWR study framework.

The "100 percent" problem is acknowledged at some times and then conveniently forgotten at others. If we agree that the study does not support claims that we are certain that the optimal allocation is 80 percent, we are all in basic agreement. Intercst says it does, and that claim disrupts threads when it is posted to them.

The study allows for a stock allocation ranging from 0% to 100% and for a 40 year pay out period 80% was optimal. Of that we are certain. No one is certain what allocation is optimal for the future and no one claims to know. As best I can tell, only you talk about this ad naseum. I and others have repeatedly told you that you can select any allocation that you like and still apply the study.

Would you be willing to take intercst aside and explain to him how the study works? I do not mean to adopt a sarcastic tone. But it's clear that you know what the study says, and sidsidsid knows what the study says, and I know what the study says, and lots of other people know what the study says, but intercst does not know what the study says. At least he often pretends to not know what the study says. My take is that he is just joshing us.

No. As I pointed out in the past, I have no evidence that intercst does not understand his study or related work in the public domain.

If you could get intercst to go along with your understanding, that would allow us to advance the ball a whole bunch.

I do not care if intercst goes along with my thinking. I manage to post with no concern about what intercst thinks or says.

Prometheuss
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How can you go along with Bernstein when he says that future real returns will be around 3.5% based on Fisher's model and than state that returns will be quite a bit higher than 4%? That sort of logical inconsistency is bizzare.

I don't think so, Prometheuss I do not read him as saying that 3.5 percent returns are a certainty. I believe that he is saying that this is a worst case scenario that is possible given the dividend rate that investors have demanded from stocks on earlier occasions over the past 130 years.

You might do a whole lot better than the worst case scenerio, and probably will. But the safe withdrawal rate comes from looking at the worst case scenerio you can draw from an examination of what happened over the course of the past 130 years.

Predicting how many folks will act that way is, however, meaningless for an individual investor.

It is not meaningless at all. The whole safe withdrawal rate concept is a percentages game. You don't know what is going to happen in the future, but you are using data as to what happened in the past to arrive at some reasonable expectations as to the worst that could possibly happen. Looking at this factor is one step in the process of doing that.

No one is certain what allocation is optimal for the future and no one claims to know.

Then we should stop saying on posts on this board that we are certain of the optimal allocation in the future. When I post on investing topics, my purpose is to provide guidance on how to put together retirement plans that will survive in the future. Given that the SWR study is not relevant to this issue, it is disruptive for it to be cited in these threads.

I have no evidence that intercst does not understand his study or related work in the public domain.

You presented the evidence in your immediately preceding comment! You said that "no one knows what allocation is optimal for the future." Intercst claims to know! He says on threads where the issue is how investors should invest for early reiirements slated to commence in the future that the optimal allocation is 80 percent. But he doesn't know this, as you quite rightly point out. He should stop saying it.

I do not care if intercst goes along with my thinking. I manage to post with no concern about what intercst thinks or says.

That's fine. But this is a good example of why I say that intercst is disruptive but the other posters who disgree with me are not. You acknowledge what the study actually says, Prometheuss. Intercst does not. That is a terribly important distinction.
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I don't think so, Prometheuss I do not read him as saying that 3.5 percent returns are a certainty. I believe that he is saying that this is a worst case scenario that is possible given the dividend rate that investors have demanded from stocks on earlier occasions over the past 130 years.

I never said that Bernstein said that 3.5% returns were certain. Why do you make up things in the middle of a discussion like that? I said that Bernstein says that 3.5% future returns mean that the safe withdrawal rate is 2%. Bernstien says nothing about the past when he makes this claim except to note that past returns have been much higher and that data supporting those higher past returns is misleading if you expect lower returns. Once again you twist a simple statement to say something that it does not.

You can not have it both ways, hocus. Either you expect lower returns or you do not. Either you agree with Bernstein's prediction or you do not.
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I never said that Bernstein said that 3.5% returns were certain. Why do you make up things in the middle of a discussion like that?

Your earlier post is a matter of public record, Prometheuss.

You said that it was "bizarre" that I could posit a return of greater than 4 percent return given Bernstein's positing of a 3.5 percent return. My response was that the two possibilities are not mutually exclusive because his 3.5 percent number is a worst-case scenario while my above 4 percent number was not.

You can not have it both ways, hocus. Either you expect lower returns or you do not.

This is simply not so. You do not need to expect lower returns in order to believe that lower returns are possible as a worst case scenario.
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hocus: You said that it was "bizarre" that I could posit a return of greater than 4 percent return given Bernstein's positing of a 3.5 percent return. My response was that the two possibilities are not mutually exclusive because his 3.5 percent number is a worst-case scenario while my above 4 percent number was not.

No, it was you saying that Bernstein was in accord with your asture analysis when he said that the safe withdrawal rate was 2%. You made the claim several times that the correct rate was 2% and not 4%. I just pointed out that Bernstein got this result by predicting returns of about 3.5%. You claim Bernstein agrees with you, but it seems you do not agree with Bernstein. This has nothing to do with worst-case scenarios and everything to do with your inability to make your own case internally consistent.

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hocus explains,

<<<Prometheuss: I never said that Bernstein said that 3.5% returns were certain. Why do you make up things in the middle of a discussion like that?>>>

Your earlier post is a matter of public record, Prometheuss.

You said that it was "bizarre" that I could posit a return of greater than 4 percent return given Bernstein's positing of a 3.5 percent return. My response was that the two possibilities are not mutually exclusive because his 3.5 percent number is a worst-case scenario while my above 4 percent number was not.

<<<Prometheuss: You can not have it both ways, hocus. Either you expect lower returns or you do not.

This is simply not so. You do not need to expect lower returns in order to believe that lower returns are possible as a worst case scenario.


Just when I didn't think this could get any wackier, hocus proves me wrong. <grin>

Earth to hocus:

Since the safe withdrawal rate is, by definition, is the worst return, why would it matter if you "expected" that [lower] return or "believed that lower returns are possible"?

intercst
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it was you saying that Bernstein was in accord with your asture analysis when he said that the safe withdrawal rate was 2%. You made the claim several times that the correct rate was 2% and not 4%. I just pointed out that Bernstein got this result by predicting returns of about 3.5%. You claim Bernstein agrees with you, but it seems you do not agree with Bernstein. This has nothing to do with worst-case scenarios and everything to do with your inability to make your own case internally consistent.

I can't figure out what you are trying to communicate here, Prometheuss. Perhaps we need to get back to basics.

I say that the safe withdrawal rate for an 80 percent stock allocations appears to be somewhere near 2 percent. Bernstein says the same thing. He says the worst case scenerio for returns is about 3.5 percent. I think that what he says sounds reasonable, but I do not believe that that means that there cannot possibly be returns higher than that. The worst case scenario will not necessarily take place.





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Since the safe withdrawal rate is, by definition, is the worst return, why would it matter if you "expected" that [lower] return or "believed that lower returns are possible"?

I don't think it matters at all. Prometheuss found it "bizarre" that I could expect that some investors might obtain returns of greater than 4 percent even though I express confidence in Bernstein's estimate that the worst case scenario is 3.5 percent. I think it is possible that the worst case scenario will not be realized, and that some investors will obtain returns greater than those possible under the worst case scenario.
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hocus: I can't figure out what you are trying to communicate here, Prometheuss. Perhaps we need to get back to basics.

I say that the safe withdrawal rate for an 80 percent stock allocations appears to be somewhere near 2 percent. Bernstein says the same thing. He says the worst case scenerio for returns is about 3.5 percent. I think that what he says sounds reasonable, but I do not believe that that means that there cannot possibly be returns higher than that. The worst case scenario will not necessarily take place.


Bernstein is not making a worse case prediction when he uses Fisher's model to project returns. Fisher's model is not a worse case prediction. It is an average case prediction. Once again, you confuse two very different concepts.
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prometheuss writes,

<<<<hocus: I can't figure out what you are trying to communicate here, Prometheuss. Perhaps we need to get back to basics.

I say that the safe withdrawal rate for an 80 percent stock allocations appears to be somewhere near 2 percent. Bernstein says the same thing. He says the worst case scenerio for returns is about 3.5 percent. I think that what he says sounds reasonable, but I do not believe that that means that there cannot possibly be returns higher than that. The worst case scenario will not necessarily take place.>>>

Bernstein is not making a worse case prediction when he uses Fisher's model to project returns. Fisher's model is not a worse case prediction. It is an average case prediction. Once again, you confuse two very different concepts.


I'm out of "recs", but that's the whole key to this craziness. We won't get anywhere until hocus understands what he's reading.

intercst
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: P:You can not have it both ways, hocus. Either you expect lower returns or you do not.

hocus: This is simply not so. You do not need to expect lower returns in order to believe that lower returns are possible as a worst case scenario

intercst: Just when I didn't think this could get any wackier, hocus proves me wrong


Hocus is likely one of a few who can lose an argument with himself!....

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Earth to hocus:

Since the safe withdrawal rate is, by definition, is the worst return, why would it matter if you "expected" that [lower] return or "believed that lower returns are possible"?


Because [in his mind] he understands the safe withdraw rate, but wants to be double safe.

If that presumption is correct, and lets say his "personal comfort" doesnt make him feel like "safe" is really "safe", then why doesnt he just discount the withdraw rate by X%, correlating to his "personal comfort" level?

He wouldnt even need 30 binders for that, it'll fit on a post-it note.

Golfwaymore


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golfwaymore asks,

<<<<Earth to hocus:

Since the safe withdrawal rate is, by definition, is the worst return, why would it matter if you "expected" that [lower] return or "believed that lower returns are possible"? >>>

Because [in his mind] he understands the safe withdraw rate, but wants to be double safe.

If that presumption is correct, and lets say his "personal comfort" doesnt make him feel like "safe" is really "safe", then why doesnt he just discount the withdraw rate by X%, correlating to his "personal comfort" level?

He wouldnt even need 30 binders for that, it'll fit on a post-it note.


That would be an easy solution for hocus, but it ignores a critical element of the hocus theory of investing. Even though the last 130 years of stock market data show a 4% safe withdrawal rate for stocks/cash at the efficient frontier and a 2.34% withdrawal rate for 100% CDs, the hocus theory turns history on its head and assumes 4% from CDs and only 2% from stocks. It a regular alternative universe. <grin>

intercst
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Goofy asks What makes you think you can't change portfolio allocations based on a bit of intellectual exercise?
and intercst replies Of course you can try, but where is the evidence that large numbers of people are doing this successfully, and for an extended period of time?

You won't be surprised to find that I'm not interested in "large numbers of people". Most people drive Fords, most don't retire early, and most mutual funds don't win.

However, if I have read this report correctly, (referenced by HowardRoark on another board) it indicates that 10 times more mutual fund managers beat the indexes than pure "luck" would allow, and that is beat with persistence over long periods of time, through varying markets in varying economies, in a sample controlled for actual historical performance and corrected for survivor bias.

"Our findings indicate that the performance of the best and worst managers is not due to luck"
http://www.rhsmith.umd.edu/finance/rwermers/bootstrap.pdf

Do you not think it worth finding out about these outperformers? Or, should everybody just sit back and do nothing?

If there was a reliable method of accomplishing this, wouldn't every mutual fund manager be doing it?

Sure, if you believe in a "magic system" or the tooth fairy. Nobody else is "Peter Lynch", and yet he's written two books clearly outlining "how he did it." Were those a waste of time, just because nobody else has become "Peter Lynch"? Or did some people learn something from them? How about Buffett? Is he a dottering old man, completely out of touch because he discusses his investment philosophies every year in his annual report?

Curiously no mutual fund manager has become Warren Buffett, either, but I still think there's something to learn from him, don't you? Why does everybody get so hepped up about analyzing your investments and making prudent moves which you hope will pay off in the future. Isn't that what we all do?

[This is where telegraph jumps in and posts
IT CAN'T BE DONE
IT CAN'T BE DONE
IT CAN'T BE DONE
IT CAN'T BE DONE]

I note that when I came back to the computer today, there were 263 new posts on this board. I can't possibly read them all, I don't intend to try. In fact, I'm off for a week or maybe two, tomorrow in the RV. Plenty to read, friends to visit in Pittsburgh and elsewhere. I won't be spending a lot of time reading "Why selling in an overvalued market is a bad idea", nor will I be perusing the 74 identical responses from telegraph, who delights in telling everyone why they shouldn't ever try to think.

I'll be back in a while. Hopefully the hocus debate will have ended, but I fear I have a better chance of winning the Tennessee Lottery while I'm away.

(That's a double joke. First, the reader knows that "lottery" odds are always quite small. Second, Tennessee doesn't have a Lottery.)

[The fact that it is technically a double joke does not mean that it is funny, I am aware.])

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Goofyhoofy writes,

Goofy asks What makes you think you can't change portfolio allocations based on a bit of intellectual exercise?
and intercst replies Of course you can try, but where is the evidence that large numbers of people are doing this successfully, and for an extended period of time?

You won't be surprised to find that I'm not interested in "large numbers of people". Most people drive Fords, most don't retire early, and most mutual funds don't win.

However, if I have read this report correctly, (referenced by HowardRoark on another board) it indicates that 10 times more mutual fund managers beat the indexes than pure "luck" would allow, and that is beat with persistence over long periods of time, through varying markets in varying economies, in a sample controlled for actual historical performance and corrected for survivor bias.

"Our findings indicate that the performance of the best and worst managers is not due to luck"
http://www.rhsmith.umd.edu/finance/rwermers/bootstrap.pdf

Do you not think it worth finding out about these outperformers? Or, should everybody just sit back and do nothing?


I read the report you cited, here's the abstract:

We apply an innovative bootstrap statistical technique to examine the performance of the U.S. equity mutual fund industry during the 1962 to 1994 period. SpeciÞcally, we bootstrap the performance measure (iaalphalc) for each fund to determine whether managers of high-alpha funds are simply lucky, or if they possess genuine stockpicking skillsŠthe bootstrap technique is necessary because the alphas have a complex, non-normal distribution. Our results indicate that, controlling
for luck, a sizable minority of managers pick stocks well enough to more than cover their costs. Unfortunately for investors, the bootstrap also conÞrms that many funds have signiÞcantly negative alphas.


I didn't see anywhere in the report where the authors revealed how to find this "sizable minority of managers pick stocks well enough to more than cover their costs" ahead of time. Is there something I missed?

intercst
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nas90skog: I knew there was a pragmatist in the bunch. I grew up in Lake Wobegon where the men are handsome, the women strong and the children above average. I would like to keep it that way. If people are going to lose money in the markets, couldn't we at least discuss how we can be the recipients of their misfortune?

I am sure that everyone would like to be above average. I heard somewhere that a large percentage of automobile drivers think that their driving skills are above average. If I recall correctly, most of those who thought that they were above average thought most other drivers were well below average, though. I started out buying an index fund thinking that average returns would be good enough until I had time to study investing and figure out how to beat the markets.

The more I read, the less confident I became that I could achieve that goal. At first I was attracted to mechanical investing because it fit both my temperment and my background. Playing with stock screens was fun and I learned a little about the quantitative side of the market and individual companies, but I never felt the urge to dump index investing and give it a whirl. So next I spent some time reading and studying fundamental analysis hoping to figure out how to pick the long term winners that I could buy and hold. Suffice it to say that neither Rule Breakers nor Rule Makers lured me away from index investing. I am not saying that mechanical investing and stock selection cannot work, but I am not convinced that luck is not a major component when they are successful.

Prometheuss

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Bernstein is not making a worse case prediction when he uses Fisher's model to project returns. Fisher's model is not a worse case prediction. It is an average case prediction. Once again, you confuse two very different concepts.

What the book says is that "It is unlikely (but not impossible) that the Dow will drop as far as 1,400 at any point in the future, but recall that at least twice in this century U.S. investors indeed did demand a 15 percent discount rate." It is that possibility that brings the withdrawal rate down to 2 percent, as I understand things.

I do not see Bernstein as saying that it is not possible for any investor to earn more than a 4 percent return on stocks going forward. I stand by my statement that is entirely possible, even likely.

I don't see how that possibility in any way should cause one to lose confidence in the Bernstein 2 percent safe withdrawal rate estimate. This concept is based on a worst case scenario coming to pass, and there are many scenarios possible in which the worst case scenario would not come to pass.
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Prometheuss: Bernstein is not making a worse case prediction when he uses Fisher's model to project returns. Fisher's model is not a worse case prediction. It is an average case prediction. Once again, you confuse two very different concepts.

intercst: I'm out of "recs", but that's the whole key to this craziness. We won't get anywhere until hocus understands what he's reading.


Is there something that I do not understand in the sentence that "current retirees may not be entirely safe withdrawing more than 2 percent of the real starting values of their portfolios each year"?

If that statement is an accurate transcription from the Bernstein book, no one can from this point forward have absolute confidence that your estimate of the safe withdrawal rate is the "right" one.

You are entitled to your opinions as to what the correct number is. So am I entitled to mine. Your estimate is not metaphysical truth. It is a reflection of the assumptions incorporated into your study. If those assumptions do not pan out (and no data has been put forward supporting the assumptions) the entire edifice crumbles.

The numbers add up. The logic of saying that using compromised data produces a number that can be asserted with 100 percent certitude does not.



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Hocus is likely one of a few who can lose an argument with himself!....

The game played at this board is called Retire Early. Losing means seeing your retirement go bust. It will be some time before we can sort the winners from the losers.
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You won't be surprised to find that I'm not interested in "large numbers of people". Most people drive Fords, most don't retire early, and most mutual funds don't win.

However, if I have read this report correctly, (referenced by HowardRoark on another board) it indicates that 10 times more mutual fund managers beat the indexes than pure "luck" would allow, and that is beat with persistence over long periods of time, through varying markets in varying economies, in a sample controlled for actual historical performance and corrected for survivor bias.

"Our findings indicate that the performance of the best and worst managers is not due to luck"
http://www.rhsmith.umd.edu/finance/rwermers/bootstrap.pdf


Why would anyone even think it is completely due to luck ? I have made some incredibly stupid investment errors and those errors were almost completely due to my lack of skill, whether it be limited research, not understanding the industry, or simply falling in love with what I "know" and feel comfortable with (tech stocks in my case). Naturally, since mutual fund managers are human, the same would apply to them. They make mistakes as well, but some of them are very good at what they do, and are disciplined enough to do all the research necessary before making an investment, and will often outshine everyone else for a period of time (sometimes a long period of time). Of course, luck always helps as well, but their results are a combination fo both skill and luck.

From the paper referenced above -

Overall, our study provides compelling evidence that, adjusting for all expenses and costs (except for load fees and taxes), the superior alphas of mutual fund stars survive.

I wonder why they didn't take load fees into account ? Nor do they mention what percentage of the top-performers they found had load fees. If many of the top performers had load fees, and they used those load fees to reduce their expenses, then they would have an unfair advantage for this study.

Seems to me that the validity of the study would be greatly improved if they were to subtract out load fees as well. This is doubly true since for many of the years covered by the study, 1962 through 1994, load fees were the rule rather than the exception.
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I wonder why they didn't take load fees into account ? Nor do they mention what percentage of the top-performers they found had load fees. If many of the top performers had load fees, and they used those load fees to reduce their expenses, then they would have an unfair advantage for this study.

Yep, Fidelity had big load fees, and also 'lock ins'....if you didn't stay in the fund for a full five years, your sales charge was based upon the time you were in the fund....up to five years...if the 'hot fund' got not so hot, or the fund manager changed, and your hot guy went elsewhere, it cost you a bundle to bail out.

Not only that, it made chasing the 'hot fund' more expensive..if everytime you moved your money, you paid 5% load fee up front, that kills your return....

and

and will often outshine everyone else for a period of time (sometimes a long period of time)

Yes, Garzarelli was the 'darling'of Wall Street for a few years until she blew it big time. Lock up your money with her, and for 'some period' of time, you are somewhat ahead of the index....then, sooner or later, you fall behind the average.....and you know that with 20/20 hindsight.....

and taxes

Before 401K and IRA, nearly ALL of the mutual fund money of individual investors was not tax deferable....thus, from the 1960s to 1980s, all the individual money was taxable. Those 'hot fund' managers, making all the switches and sales, caused tremendous tax obligations. Cap gains tax was MORE than 20%...short term cap gains at regular income tax rates....reduce their 'gains' by the amount in taxes (sometimes 1/3rd) and they often (and usually ) fell behind the indexes....

Fine for big institutional tax deferred investors, pension plans, and the like..... horrible for individual investors!

Same true today unless your mutual funds are in an IRA or 401K or similar......

Many of us still hold funds from pre 1990 that we could not tax defer..the vehicles for doing so were just not there...(or with a huge limit of $2K/yr when we were saving five or ten times that)...




Oh, them darned details...

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prometheuss

I am sure that everyone would like to be above average.

And we all agree that can't happen.

Suffice it to say that neither Rule Breakers nor Rule Makers lured me away from index investing. I am not saying that mechanical investing and stock selection cannot work, but I am not convinced that luck is not a major component when they are successful.

Index funds have great value. If it is luck to patiently look for "mispriced bets" and then take advantage of them, then your point may be valid. "The system" which doesn't exist, is nothing more than expending the effort to find mispriced bets. If one doesn't want to expend the effort, then they shouldn't do it. I find it well worth the time and effort. Like most things in life, the more effort you put in, the more one is likely to be rewarded.

I don't disagree with your approach to your portfolio. Its just not for me, nor has my way failed me over the past 25 years.

While I respect your point of view and way of communicating it, I sense that this issue is headed in the same direction as the intercst/hocus debates. I understand the merits of your approach and implement much of it into my plan. I also allow for my experience to play a part.

I wish you luck with your investing.

Did some of those other folks really spend the better part of a glorious holiday weekend bickering over this stuff?

naas90skog
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Telegraph"

And T is smiling with GE, QCOM, ORCL, and yes, WCOM. But few called them 'mispriced' bets.

There goes that referring to oneself in the third person again. I've got news for you. They were all mispriced bets.

I agree with you 100%. I have reread your post a few times and agree that you should be in index funds and not mess with your portfolio at all. Your success has been attributable to pure luck. On top of that, anybody who has mishandled their investments to the degree that you have shouldn't even be thinking about more active management.

Revel in your good fortune.

nas90skog
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nas:

.
T: GE, QCOM, ORCL, and yes, WCOM. But few called them 'mispriced' bets.

nas: I've got news for you. They were all mispriced bets.

I have reread your post a few times and agree that you should be in index funds and not mess with your portfolio at all. Your success has been attributable to pure luck. On top of that, anybody who has mishandled their investments to the degree that you have shouldn't even be thinking about more active management.


Really? then everyone else would have noticed that (especially the smart fund managers so often discussed in that thread) that the market differential would have instantly disappeared, no? oh, you say T had insight that others didn't to buy and hold them....????? or was just 'lucky'? ...really matters not, does it...?

Yes, part of it was 'good luck' but a good part of was a) buy and hold b) not chase dot.coms c) buy what you know in industries you know d) buy 'low'....I was buying WCOM 15% below market price with guaranteed buy price...sometimes paying less than 50% of market price for it through employee purchase plan..... e) and putting money into CDs, MMF, five year CD ladder, copr bond funds, REITS, dividend paying stocks (I really like them now!), and most of all, a LBYM lifestyle that allowed me to save 30% of my income.

The 'good luck' part was having $250,000 in TOTAL assets in 1990, which I successfully exited the 1990s with more than 10 times that in assets (and by the way, which I STILL HAVE). But one could say that was the result of 20years of LBYM for the previous 20 years, to allow me to accummulate that much money at that point, no????? In which, case, it really wasn't good luck, but good financial control over my life!

ANd an index investor would have darn nearly the same. So, you could say I was 'lucky' to do like the index, (or in the case of whoever keeps quoting about 'fund managers', had more than 'luck' working for me) <grin>

S, yes, my little portfolio is down quite a bunch(it hit 85%/15 allocation at the peak)......but I'm sure not crying in my Walmart Dr Thunder soda(I'm not a big beer fan) since my SWR rate(based upon DEc 1998 retirement date) is more than I ever made in one year, and 2.5 times what I was spending before I retired (Oh, that LBYM mentality).....

And, yes, if I had been all in index funds, I would be better off today....but where where you and intercst in 1990????? or 1980???when I was accummulating assets????? ah...... it's easy to use 20/20 hindsight to say what you 'shoudda done'...... OK..so I did it the hard way....




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Telegraph,

The 'good luck' part was having $250,000 in TOTAL assets in 1990, which I successfully exited the 1990s with more than 10 times that in assets (and by the way, which I STILL HAVE).

BFD. There are a whole lot of people on this board who have accomplished as much or more under more challenging circumstances who don't post 10 times a day trying to remind the board how astute they are. I'd be far more impressed by someone who could offer advice on how to retain assets rather than constantly hearing from someone who couldn't get out of the way of the runaway freight train known as the 90's bull market. Bask in the glow of watching $2MM disappear because no one would tell you what to do to prevent it. Its called denial.

nas90skog
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nas

You're right...I didn't preserve my nest egg - - I shudda balanced it out every year 1998, 1999, to 75/25 or 70/30...and I didn't ....and it was a costly lesson

But the key is I did retire early (not as early as you), and I'm not crying in my diet Dr Thunder......I didn't retire 'at' the peak, but it was close enough.

But I also didn't set my living expenses at 4% either or start taking that from my portfolio...realizing the market couldn't go up 20%/yr forever....

Now if the DOW goes down to 1200, then a few more of us might be looking for part time work.....just as 'insurance'....
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Instead of looking at running the account down to zero, what about looking at spending a fixed percentage of the value of the account each year. I did some research along those lines and came up with the following results:

Assumptions
30-year horizon
Using Ibbotson market data from 1926 to 2001 (47 30-year periods)
Starting account value of $1 million (all dollar amounts in millions)

Goal was to end the 30 years with at least as much money as you started, not adjusting for inflation.

Historical success rate (HSR) was varied from 50% to 100%. At 50% HSR, ending value was $1 million or better in half the time frames tested (24 of the 47 time frames). The 100% HSR represents the rate that has always worked historically.

Maximum sustainable rate (MSR) is the percentage of total account value that can be withdrawn such that the ending value of the account is at least $1 million in enough time frames to meet the HSR.

AVG Spent is the total amount of money spent over the 30 years, on average.

AVG EV is the average ending value of the account.

HSR MSR AVG Spent AVG EV
50% 9.76% $3.1 $1.2
75% 9.21% $3.2 $1.4
90% 8.63% $3.3 $1.7
100% 7.81% $3.5 $2.2

Those rates are considerably higher than those usually seen. That's because, instead of adjusting withdrawals by the rate of inflation, these numbers assume you will adjust based on market performance.

With this approach you run the risk of diminishing buying power, but in return you virtually eliminate the chance of running completely out of money.

The point is, there's more than one way to run the race.
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intercst in a blast from the past: That's the reason I claim no "statistical confidence levels to the withdrawal rates" in the study. It simply does what it says it does, find the worst case period in the last 130 years.

Datasnooper also correctly points out in the referenced post that using a Monte Carlo analysis without accounting for the mean-reversion tendencies of stock market returns produces equally "flawed" results.


And that is essentially what I said in my response for CC in a lot more detail. The intercst study does not claim to be correct "90% of the time" or "95% of the time" or "99% of the time" over the course of the next few million years. Others have attempted to estimate a level of statistical significance (or alternately to estimate how often it might fail in the future). Those efforts have merit, but are equally flawed because the data is limited and no one has found an underlying model that has predictive power. If data from the last 135 years gives you no comfort, then I doubt that torturing it to death will help. Why bother?

It seems to me that some folks want to repeal the laws of nature in a sense. They want risk free returns sufficient enough to support a 4% or higher withdrawal rate. TANSTAAFL. Life is too short. Accept whatever risk you can stomach and accept the consequences of that choice. Of if you prefer, wish for magic beans so that returns can grow to the clouds.

Promteheuss
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