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I noticed this post on the BMW method board just now:

I could post my thoughts over there, but I really don't want to annoy the board members there. Rather, I want to address the question of whether this is sound retirement advice here, with people more interested in the general topic of retirement savings.

I've seen a few posts by BuildMWell along the same lines as this post. Honestly, it feels like reading a post from 1999, or a common naive post from a newcomer to RE who think that if inflation is 4% and the S&P return is 10%, you can safely withdraw 6% indefinitely, whereas Intercst's study shows that a market downturn or a bump in inflation will probably destroy your savings.

But, the argument goes, if you're following the BMW method, you're not investing in the S&P 500. I'm pretty skeptical of the BMW approach for reasons that aren't important right now. But for the purposes of discussion, let's assume that you have a system that reliably outperforms the S&P 500.

He states that if the system returns 15%, and inflation is 2.5% (is it really that low over the long haul?) you can withdraw 10% safely. That's right, 10%. $60K / year from $600K. That seems like awfully naive reasoning to me. Because normally when you talk about a system returning 15%, you're talking about CAGR over a multi-year period. This reasoning requires that it always return at least 15%, with no significant losses during the early years.

To take a forced example, suppose we lose 50% in the first year, stay there for a year, and gain 200% in the third year, for a cumulative CAGR of 15%.

Year 1: $600 -> $300K, spend $60K, $240K left.
Year 2: $240K -> $240K, spend $60K, $180K left.
Year 3: $180K -> $540K, spend $60K, $480K left.

This is clearly a pretty serious loss, and the death spiral isn't hard to see with just a few numbers. Yeah, it's very unrealistic, but I'm trying illustrate how much a few bad years can affect your total capital if you withdraw a big chunk during a down period without resorting to 30+ years of numbers and boring you, the reader.

Can any system promise no down years, no significant losses? But wait, the BMW method is a value approach. It doesn't buy overvalued stocks that are going to drop. Doesn't that protect against losses?

Leaving aside whether charting historical returns is really enough information to protect you, the unforeseen happens. Sometimes companies take serious downturns because something happens to the business, or a competitor manages to pull a rabbit out of a hat.

It happens that I have my own value-based approach to stock investing, and it's served me quite well in the last 6 years. I've consistently done better than the S&P 500, and I have yet to lose money over an entire year using it. It's actually kind of scary how steady my gains of been, I keep waiting for the other shoe to drop.

It's awfully tempting to think I don't need quite as much money as I think I do for true financial independence. BuildMWell's post is the devil whispering in my ear. "You're smarter than the S&P 500. You can do better than Intercst's simulations. You won't have a big downturn."

Except that, you know, some of my stocks have lost money. The method is nothing like 100% predictive. Yeah, I made money during 2001-2003 while the S&P was still dropping, but will I do that the next time? I hardly know.

- Gus
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