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This post is intended as an amplification to Post 68232, put up by mhtyler yesterday morning in the "I Cashed Out Thread." In my humble opinion, the mhtyler post is the second most important post ever placed on this board (my #1 favorite is the one that started the "For Art's Sake" thread). The reason is that it expresses a subtle concept that it would be easy for many to miss, but which I believe to be of tremendous significance in putting togther a workable Retire Early plan.

I have tried in my fumbling way several times to make the point that Mark made in his post yesterday, but I don't believe I have been able to communicate the thought clearly as of yet. I'd like to take note of what he said here, and then toss out for consideration a little mental exercise that I hope may be of use to some in seeing the implications of Mark's argument.

The purpose of Mark's post was to defend another poster's strategy of lowering his stock allocation because of the effect that falling prices have had on the viability of his Retire Early plan. Intercst faulted the other poster's decision to take money out of stocks, arguing that there would be a financial price to be paid for this "emotional" decision. Mark faulted this response as excessively "abstract."

I should let Mark speak for himself, as he makes the point more clearly than I ever have:

The cash vs equity issue is so often discussed as though it was a fly in amber that cannot or should not be changed to fit the market. For someone with a 3M nest egg living on 1%, a 33% loss means you've got 2 million left and your next years withdrawal is what...2%? What about the guy with 1M who was withdrawal is 4% and who's nest egg is now 600 thou???

RE philosophy starts looking ridiculously abstract at that point. (my idea to put this in bold)

I don't doubt the over all efficiency of the 70/30 rule, but its one you
have to be well heeled to sustain in hard times. For the person in the first example it is NOT hard times, its a bump in the road. For the person in the second example it's a bloody heart wrenching disaster. Them thats got, gets.


I know that there have been some who have been perplexed when I have argued that there is not one safe withdrawal rate, but many, that the safe withdrawal rate varies according to the personal circumstances of the particular investor at issue. What I like about Mark's post is that he takes the concept that I have been trying to get across and conveys it in down-to-earth terms. He is not directly saying that there are different safe withdrawal rates for different investors. But he is speaking from the same premise that caused me to make that claim.

What he is saying, in my view, is that it is an artificial exercise to look at historical data regarding what sort of withdrawal rate applies for stocks without factoring in the practical reality that stocks are always owned by people, and people respond differently to different circumstances depending on their particular life goals and financial circumstances. Ignore this factor, and you are looking at only half of what goes into the calculation of a safe withdrawal rate. You can come up with a number without considering this factor. intecst has done that. But that number will have little similarity to the safe withdrawal rate that will apply in the real world.

The safe withdrawal rate study, as currently presented, is, in Mark's words, an "abstract" exercise. It is of some theoretical interest. I have noted on the boards many times how I have used the numbers in the study to guide my own investment strategies. It has value. Where it falls apart is when you try to use the conclusions of the study to guide investment decisions in the real world. As a purely theoretical document not considering factors that are important to the determination of safe withdrawal rates in the real world, it cannot be put to that purpose with the expectation that it will produce good results. The Safe Withdrawal Rate study has value as an intellectual exercise, but not as a practical investment-planning tool.

A Mental Exercise I've Come Up With to Illustrate Mark's Point

A man comes to you with an "investing" proposition. He says that he will ask you to guess whether a coin will come up heads or tails. If your guess is correct, he will pay you $200,000. To play, you must agree that, if your guess is incorrect, you will pay him $100,000.

The odds of the bet are clearly favorable. He is offering you two-to-one odds for a bet with a 50-50 chance of going either way. Still, I believe that there are circumstances in which you would be making a big investment strategy mistake to take the bet.

Let's say that you have been saving for early retirement for 12 years, and that you are two months from reaching your goal. Reaching your goal will mean that you will be able to spend more time with your wife and kids, who have had little of your time for the past 12 years. If you "win" the bet, you will be able to retire two months sooner than if you did not play. That's a small gain. But if you lose the bet, you will have to delay your retirement for several years. That's a big loss. You are being offered a very bad investment proposition.

Now, let's change the scenario a bit. Let's say that you are offered the same proposition, but that you have $10 million in accumulated assets and have already been early retired for years. Your only reason for wanting to invest for a bigger return on your assets is to be able to give more money to your favorite charity.

In this circumstance, I see the bet as an appealing proposition. If you lose the bet, you remain early retired and you still have lots of assets to give to your charity. If you win the bet, you get to increase your contribution to the charity this year by $200,000. In this scenario, the downside is far less than in the earlier one. Thus, the upside--which is considerble--is more worth pursuing.

Now, let's consider another change. You are offered the same proposition as above, but with a condition attached. In order to take the gamble, you must be willing to take it ten times in a row. You can't just accept a $100,000 loss and walk away. You must continue to play with the chance in your mind that you will lose $1,000,000 before the game is through. Let's assume here that, were it not for this investment proposition, you would have the assets needed to early retire in two month's time, and that that amount is exactly $1 million. By taking the bet, you risk turning your financial circumstances from heavenly to hellish. You are taking the chance of going from complete financial independence to complete bankruptcy in the time it takes to toss a coin ten times.

Your first thought is that the bet is not worth taking. But then you see a study examining how similar coin tosses have gone in the past. You see that the odds of losing out on 10 picks in a row are slim. And you see that, getting a two-for-one return for each time you get a correct pick, your wealth can build more quickly in the coin-toss investment class than in any other you know of. So you accept the proposition, and the coin toss begins.

Your picks fail on the first four tosses, and your net worth is now down to $600,000. You have nowhere near what you previously calculated you will need to live on for the rest of your life. You are wondering how to tell you kids to forget about college, how to tell your wife that you need to move into a far smaller house, how many years or decades your early retirement is going to end up being delayed because of your misplaced confidence in the study. You are feeling sick about your mistake, kicking yourself for ever having done anything to jeopardize the financial independence you had worked for decades to win for yourself. While you are in this frantic, self-critical mood, the man who offered you the investment proposition comes forward with a new idea.

He says that, while you are obligated at this point to play the coin toss game six more times, and risk total bankruptcy, he is willing to let you out of your promise if you are willing to pay for the privilege. His price is $200,000. Give up another $200,000, and you will be permitted to keep $400,000 as the starting stakes in your effort to build financial independence for yourself a second time.

You look at the study again, It suggests that you are crazy to pay $200,000 to be released from the bet. The study says that the two-for-one odds are very good odds for this bet, and you should not be willing to pay anything to get out of the coin-toss investment class. But then you remember how your earlier decision to follow the study's recommendations turned out. It caused you to lose in two minutes wealth that it had taken you decades to accumulate. You decide that it's well worth the $200,000 payment to at least limit the damage you will suffer for your earlier mistake (you clearly see is as such now). You pay the $200,000, and begin walking off to return to your job, which you now do not expect to be able to retire from for many many years.

Before you are out of earshot, you see the man offering the unusual investment proposition walk up to another potential investor and ask him whether he would like to play. He says yes, and you remain a few moments to see how things turn out. Your jaw drops open as the new investor makes four straight correct picks, winning $800,000 for himself. Money that "should" have been yours. So the result predicted by the study, that in the long run people guessing the result of the coin toss will get it right 50 percent of the time, turns out to be accurate in a theoretical sense afterall. It just didn't do much good for your hopes of being able to enjoy an early retirement in this lifetime.

The stock market over time will pay the sort of returns shown in the data used to put together the Safe Withdrawal Rate study, I believe. There's no guarantee of that, but I believe it is a reasonable presumption. It is NOT a reasonable presumption, however, to say that any one investor or any group of investors can assume safety in a decision to make 4 percent annual withdrawals from a Retire Early stash with an 80 percent stock allocation to support a retirement beginning at a time of overvaluation comparable to the level applicable today.

To know what sort of safe withdrawal applies to real-life investors, you need to know what sort of investors they are. That's what determines how they will respond to the price drops that make the high growth associated with this asset class possible. Not all investors will respond the same. Those with $10 million in assets will respond differently than those with $1 million. Those with 40 percent stock allocations will respond differently than those with 80 percent stock allocations. The historical data suggests that what you do before the stock price drops is the biggest factor that determines how you will respond when they do.

What the historical data suggests is that the worst possible way to prepare is to go with a big stock allocation at a time of extreme overvaluation. The historical data suggests that most investors that do that WILL NOT remain fully invested in stocks as their portfolios diminish. I can't predict the future. I can't say that it is not different this time. All I can do is report what the historical data says. It says the opposite of what the Safe Withdrawal Rate study presumes.

Investors who follow the recommendations of the Safe Withdrawal Rate study are putting themselves at risk of experiencing the worst that the stock market can dish out. I am not saying that they will indeed experience the worst. I am saying that the risk that they will experience it is far greater than zero percent. And I am saying that the presumption of the study that any one particular investor will not diminish hs or her level of stock market participation in the event that he or she experiences the worst flies in the face of all historical evidence. This is not a study that tells you what sort of safe withdrawal rate you might get if the future is something like the past. It is one that tells you the sort of rate you might get if the future is nothing at all like the past.

Let's assume for a moment that middle-class investors did not jump out of stocks when prices headed downward. Let's assume that they remained in stocks through thick and thin, as the Safe Withdrawal Rate study presumes they will. In the world in which that assumption is true, the data used to determine the safe withdrawal rates would not be the same. If the middle-class investors who left the stock market in the late 1970s and early 1980s had never done so, but had remained fully invested in stocks, you would not have seen the high stock market returns that you saw in the late 1990s. The reason is that there would not have been new money avaiable to invest in stocks at that time.

Bear markets are a necessary precondition for bull markets. You can't have the latter without the former. If by some wild chance the presumptions of the safe withdrawal rate study were shown to be accurate, stock prices would zoom in the few years following as investors left all the inferior investment classes for the one that offers both the best growth potential and the highest safe withdrawal rate as well. At that point, prices would be so high that stocks from that point forward would provide extremely low long-term returns, lower than what stocks have ever offered in the real world in the past.

The presumptions you make in a study always influence the results you produce. The assumption that investors will this time behave in ways that they never have before in recorded history is not a safe presumption. It is a highly hazardous one. It's likelihood of coming true is small. The returns produced by making highly hazardous assumptions are not "safe" returns. They are highly hazardous returns. Some investors will obtain the 4 percent annual withdrawals promised by the study, but they will do so by taking on large risks. Few investors have enough slack in their portfolios to be able to obtain that sort of withdrawal rate safely in stocks at today's prices. That is not to say that it is not possible to obtain a 4 percent safe withdrawal rate in investments classes offering lower growth potential, or that it is not possible to obtain 4 percent safe withdrawals from stocks at other valuation levels.

The study works its magic trick by considering one effect of risk, that it produces high returns, and ignoring another, that it causes people to jump in and out of asset classes. But the historical data shows that the one effect generally goes with the other. If you want to assume that investors will remain in the asset class you are examining, you have to study an asset class that the historical data shows people do not jump in and out of much.

I do not consider risk a bad thing. Risk is often associated with high investment returns, and I like high returns, so, in the right circumstances, I am willing to purchase assets offering considerable levels of risk. However, I think that risk needs to be controlled. Knowing the accruate safe withdrawal rate for stocks for people in my particular circumstances would help me better control risk in developing my investment strategies. My dilemma is that, at this point, it's clear to me that my safe withdrawal rate for stocks is a number below 4 percent but it's not clear to me exactly how much below. If it is somewhere near 3 percent, it may be time for me to begin moving small amounts of money into stocks. If it is 2 percent or lower, I'm probably better off staying out of stocks for the time-being.

My hope is that at some point the board will lose interest in debates about whether stocks are better than other investment class or not. It's a debate that could continue until the end of time and never be resolved. It can never be resolved because it is a nonsense question. There is no answer to the question "which investment class is best?" They are all best at serving the paricular purposes which they were created to serve. You need to know what you goals are to know which investment class is best for you.

Each individual poster addressing the question of "Which investment class is really best?" uses the same data to support his or her arguments, but each approaches the question from an entirely different perspective, a perspective influenced greatly by his or her particular financial circumstances and life goals. They are doing the right thing to do so--it's absurd to try to analyze investment possibilities without allowing these factors some influence--but the fact that each person is working from different understandings of what constitutes investment "success" makes it unlikely that they will convince many others that they are "right."

For one person to take his or her definition of investment success and impose it as dogma on the rest of the board is a receipe for frustrated and unproductive dialogue. It may or may not be that the 4 percent number is the true Safe Withdrawal Rate for intercst. He has a lot more assets than me, and I believe that having more assets moves your Safe Withdrawal Rate up, so I am willing to accept that his Safe Withdrawal Rate on a stock allocation of 80 percent at today's prices may be somewhere in the neighborhood of 4 percent. I know that mine is nothing close to that figure.

I'd like to be able to have a dialogue on the subject of Retire Early investing with people like Mark and any others who have come to the realization that the Safe Withdrawal Rates often discussed on this board are not the Safe Withdrawal Rates that apply to them. If there are others who would like to have such a debate, please let me know (by e-mail if you prefer not to reveal yourself on the board) and I will try over the course of the next six months or so to make it possible.

Perhaps there are ways that the majority of this board could agree to allow a minority to have their discussions in peace, without regular assertions of the presumed greater wisdom of the majority position. Perhaps there is a need for a separate board to discuss only the question of Retire Early investing for those who do not accept the view of the majority of this board. If the group wanting a new sort of discussion s small enough, perhaps it would be better to put together a list of people who will trade e-mails on the subject, and not have the material posted on a public board. Perhaps there is not enough interest in such a discussion today to make it a worthwhile endeavor at this point, and we should hold off for six months or a year and reassess the level of interest then.

I'm open to various possibilities. Whatever works. I believe, though, that any community of people seeking to understand how to achievce financial independence early in life at some point needs to address itself to the queston of how to invest in ways that will make that possibility a realistic one in more than just an abstract "on paper" sense.
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Perhaps there are ways that the majority of this board could agree to allow a minority to have their discussions in peace, without regular assertions of the presumed greater wisdom of the majority position.

I hear this kind of comment (in some form or another) on just about every board I frequent. If you were to go off and make your own board, eventually someone would begin posting something that was contrary to the conventional wisdom of your board and the wise men of your board would try to convince him that his ideas had no merit.

I like to hear all of the discussions. I can decide for myself after reading all of the arguments (hopefully these arguments will be presented respectfully) what is wheat and what is chaff.

I guess what I'm saying is that I really wouldn't want to see the dialogue you are promoting leave this board for other pastures. Thick skins promote great discussions. Besides, you never know when "one of them" might say something to spark an additional idea for your way of thinking.

My $.02

Draggon
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hocus writes,

The study works its magic trick by considering one effect of risk, that it produces high returns, and ignoring another, that it causes people to jump in and out of asset classes. But the historical data shows that the one effect generally goes with the other. If you want to assume that investors will remain in the asset class you are examining, you have to study an asset class that the historical data shows people do not jump in and out of much.

What is the safe withdrawal rate for "people who jump in and out of asset classes"? Most of the research I've seen shows they get much lower returns.

I agree with hocus that most people can't adopt a disciplined investment strategy without letting their emotions get the best of them. Eurotrash01 posted a link a few days ago that suggests that no more than 10% of the population (the "Mastermind" type in the CBSMarketWatch article) is psychologically suited to long-term buy and hold investing. Our REHP Personality Survey showed that personality type appeared 20 times more frequently among the people who've successfully retired early than the general population, see link:

http://boards.fool.com/Message.asp?mid=17380633

Does that mean that the other 90% can't retire early? It depends. It probably means they have to change their behavior, which I admit is a very difficult thing to do.

It's probably similiar to solving the AIDS problem in Africa. You'll never get 90% of the men in Africa to use condoms and reduce the transmission of AIDS. The 10% who reject the behavior of the masses will survive, the 90% that "go with the flow" won't.

The world's been working like that since the beginning.

intercst
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hocus, I don't think that the main disagreement you have with intercst or galeno or many of the people on this board is that they are being too abstract. That's what you keep saying, but I don't think that is it.

Rather, I think that you think of REHP as an idea that can be relatively widely adopted and wish to encourage that, while intercst is willing to let people work things out for themselves. For many of the people on this board, being able to stick with the same asset allocation, keeping to the plan in the face of the obstacles IS realistic. It is a matter of individual tolerance if you are able to stick to the plan or not. While it may be perfectly reasonable for the man in your example to take the deal to get out of the coin tosses, and while you may see it as the realistic example, there are people who won't throw in the towel at that point.

Many people on this board believe they are the type that does not throw in the towel. Are they right or is it just hubris? Who knows. Time may tell.

But because they are only most closely concerned with their own plans, their own progress, they feel no need to come up with another study to show them what would happen if they jump in and out of the market based on their fears. The current study suffices.

You are concerned with popularizing the FIRE concept. Good for you. Certainly we all have appreciated the books that have opened our eyes to these ideas. intercst's website has been quite good on this account. But there are limits to how much information you can provide that will be applicable to a wide audience. I believe that intercst has been fairly good at providing the evidence, but I think he means (and certainly I do) for people to interpret that data themselves.

Yes, people should truly decide on their asset allocation based on their comfort level. But how do we know how much risk they can stand? How do we know how many years of losses with which they can handle?

These sorts of questions will vary between people extensively. So much depends on them, as well.

So most of the posters on this board are willing to work on their own answers to these questions and their own plan, and leave the same work to others. In the end, this means that people have to spend a fair amount of time working with spreadsheets if they want to make up their own plans. Since people are generally so uncomfortable with that, it means that far fewer people will get the concrete benefits of the Home Page and the concepts on this board.

But many of the people on this board are fine with that. Their interests lie in discussing their own plans and refining them, and in discussing it with likeminded people. Many don't think it would work even if you could refine it enough for the majority.

fg
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Eurotrash01 posted a link a few days ago that suggests that no more than 10% of the population (the "Mastermind" type in the CBSMarketWatch article) is psychologically suited to long-term buy and hold investing.

Intercst:

It seems that we agree that there are a variety of investment personalities and that the investment personality one possesses plays a big role in the returns he or she obtains from stocks. The source of disagreement seems to be that you are of the personality type that this article describes as Masterminds, that I am not, and that investment strategies that make sense for those in the one group do not generally make sense for those in the other.

I wonder if it would be possible to work out an arrangement where people posting on investment threads note whether they are in the Mastermind group or not. There could be a general board convention that comments made by Masterminds are intended to apply only to other Masterminds and that comments made by non-Masterminds apply only to other non-Masterminds.

I have no desire to stop Masterminds from having discussions among themselves as to what sort of investment strategies work best for people possessing this particular personality type. What I am trying to do is to find a way to communicate with other non-Masterminds about how we should go about making investment decisions.

I share your sense that Masterminds make up a large percentage of the board, but I want a place for the minority to be able to exchange views without people jumping into their threads and making comments that make no sense in the context of the issues they are trying to address. Mastermind strategies don't work for non-Masterminds, so it doesn't help our discussions for Masterminds to tell us how they would go about putting together a Retire Early investment strategy.

My sense is that you believe that non-Masterminds don't have much hope of retiring early in any event. Perhaps you are right, perhaps not. Personally, I think not. But all I ask is that the non-Masterminds be allowed to try to come up with investment strategies that make sense for people stuck with the non-Mastermind way of thinking and acting. We may be a small percentage of the board's population, but we are 90 percent of the nation's population. We (I hope and believe that the count of non-Masterminds on this board is some number greater than one) want a place to trade ideas of how to achieve early financial independence too.

In other words, the non-Masterminds (if I may dare to speak for them for a moment here) will agree not to interject non-Mastermind dogma into discussions that Masterminds are trying to have among themselves if Masterminds will agree not to interject Mastermind dogma into discussions that non-Masterminds are trying to have among themselves.

Deal?


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Does that mean that the other 90% can't retire early? It depends. It probably means they have to change their behavior, which I admit is a very difficult thing to do.

It's probably similiar to solving the AIDS problem in Africa. You'll never get 90% of the men in Africa to use condoms and reduce the transmission of AIDS. The 10% who reject the behavior of the masses will survive, the 90% that "go with the flow" won't.


So, does this mean that the only way to avoid getting AIDS is to retire early? Does this mean that people who retire early can have unprotected sex with differnet partners every day, with complete assurance that they won't get AIDS? If this is the case, then I would suspect that many more folks will adopt a long-term buy and hold approach, although I'm not sure what will be bought and held.
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Intercst wrote, "I agree with hocus that most people can't adopt a disciplined investment strategy without letting their emotions get the best of them. Eurotrash01 posted a link a few days ago that suggests that no more than 10% of the population (the "Mastermind" type in the CBSMarketWatch article) is psychologically suited to long-term buy and hold investing."

There is no denying the emotional issues, but it should not be used to mask practical needs:

If someone with a net worth of 4,000,000 dollars and another with 1,000,000 each draw 40,000 in expenses (1% and 4% respectively) then the former need never wonder what his psychological type is while the latter may grapple with it daily. The former may be a disciplined investor, but he will likely never know.

Here is the more practical side:

If you have more money, you can afford more risk, and therefore reap greater returns. Therefore the Safe Withdrawal Rate and its concomitant asset allocations must have a wealth/expense baseline below which it becomes riskier to be more "efficient".

Businesses...and I speak from experience...operate just that way. In hard times they reduce expenses, eliminate less profitable enterprises, and maximize those areas where money can be made. CEO's who do so are _not_ chided for responding emotionaly to the market, but are commended for their fiscal sensabilities.

Mark

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intercst wrote:
What is the safe withdrawal rate for "people who jump in and out of asset classes"? Most of the research I've seen shows they get much lower returns.

I agree with hocus that most people can't adopt a disciplined investment strategy without letting their emotions get the best of them. Eurotrash01 posted a link a few days ago that suggests that no more than 10% of the population (the "Mastermind" type in the CBSMarketWatch article) is psychologically suited to long-term buy and hold investing. Our REHP Personality Survey showed that personality type appeared 20 times more frequently among the people who've successfully retired early than the general population, see link:

http://boards.fool.com/Message.asp?mid=17380633

Does that mean that the other 90% can't retire early? It depends. It probably means they have to change their behavior, which I admit is a very difficult thing to do.

It's probably similiar to solving the AIDS problem in Africa. You'll never get 90% of the men in Africa to use condoms and reduce the transmission of AIDS. The 10% who reject the behavior of the masses will survive, the 90% that "go with the flow" won't.

The world's been working like that since the beginning.


Absolutely on the mark AGAIN intercst!! hocus may have an unusual skill for writing...but the more posts of his I read, the more convinced I become that hocus is like my 350 lb friend who is desperate to lose weight but wants to do it his way, i.e. by using the Big Mac and beer diet and TV remote control exercise plan.

When I try to explain to him that I am slim and in great physical condition because I eat mostly fruits and vegetables, do an hour of exercise per day, and limit my intake of alcoholic beverages, he refuses to listen to me or says, "I refuse to eat like a rabbit and I HATE to exercise. I usually terminate the discussion by saying: OK, then get used to being fat and sick.

I have little understanding of psychological testing and personality types. When I want to do something, I find a person who is successful at it and copy his methods. But, I guess that's just too simple a method for some on this board <grin>.
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But galeno, hocus is not like your friend. He has been successful in RE. He even shares much of the practice and theory that you do (certainly he LBHM, and he invests). He just doesn't do *precisely* what you do. He even agrees that you should be in the stock market, he just doesn't want to have the same asset allocation that you do.

I think hocus brings up interesting issues to discuss, and I think I at least can benefit from his perspective. But that's not to say that I share his perspective or will entirely agree with him.

Hey, hocus, any chance I can get in on your NMM discussions, even if I probably qualify as a MM?

fg :-)
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RusNellius wrote:
So, does this mean that the only way to avoid getting AIDS is to retire early? Does this mean that people who retire early can have unprotected sex with differnet partners every day, with complete assurance that they won't get AIDS? If this is the case, then I would suspect that many more folks will adopt a long-term buy and hold approach, although I'm not sure what will be bought and held.

This is correct! Only masterminds can retire early and enjoy unprotected sex with different, supermodel-type partners everyday with complete assurance that they won't get AIDS.

The rest of you will have to work until you drop. You may only have five minutes of protected sex with your spouse once a month if you're lucky and behave. You must be fat. You will be required to join the Republican party of the United States of America if you are a male or be a rabid feminist if you are a female.
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Hocus said, "I have no desire to stop Masterminds from having discussions among themselves as to what sort of investment strategies work best for people possessing this particular personality type. "

I make the point that if your net worth is $10,000,000 instead of $1,000,000 you ARE a "mastermind" regardless of your psychological makeup.

Set aside the emotional issues though and consider the "efficient frontier" as a "one size fits all" solution and it becomes problematic. At the low end the risk becomes a matter of survival rather than merely a loss or a reduced return. That's _not_ merely an emotional issue but a tangible consequence.

The guy with 10 million can sell his big house and his foreign sports car in hard times...he will have many options to reduce expenses against his losses or reduced earnings. At the low end you may not be able to reduce expenses further, and have to return to work.

The richer you are, the more "efficient" you can afford to be.

Mark

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ResNullius asks,

<<<<Does that mean that the other 90% can't retire early? It depends. It probably means they have to change their behavior, which I admit is a very difficult thing to do.

It's probably similiar to solving the AIDS problem in Africa. You'll never get 90% of the men in Africa to use condoms and reduce the transmission of AIDS. The 10% who reject the behavior of the masses will survive, the 90% that "go with the flow" won't.>>>>

So, does this mean that the only way to avoid getting AIDS is to retire early? Does this mean that people who retire early can have unprotected sex with differnet partners every day, with complete assurance that they won't get AIDS? If this is the case, then I would suspect that many more folks will adopt a long-term buy and hold approach, although I'm not sure what will be bought and held.


Very funny. <grin>

Hocus made the point that most people aren't rational investors, so we need to find a way for the non-rational majority to retire early.

I'm merely making the point that this presents a similiar problem to preventing non-rational Africans from getting the AIDS virus.

Without a change in behavior, it ain't going to happen.

intercst
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The guy with 10 million can sell his big house and his foreign sports car in hard times...he will have many options to reduce expenses against his losses or reduced earnings. At the low end you may not be able to reduce expenses further, and have to return to work.

The guy with 1 million can sell his small house, and his cheap 10-year old Toyota in hard times...he also has many options to reduce expenses against his losses or reduced earnings.

He can then move to Costa Rica and get 20% or more per year on his fixed-income dollar investments. He will then achieve automatic Mastermind status and can enjoy daily unprotected (kinky) sex with extremely good-looking young women and never get AIDS.
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galeno writes,

<<<<RusNellius wrote:
So, does this mean that the only way to avoid getting AIDS is to retire early? Does this mean that people who retire early can have unprotected sex with differnet partners every day, with complete assurance that they won't get AIDS? If this is the case, then I would suspect that many more folks will adopt a long-term buy and hold approach, although I'm not sure what will be bought and held.>>>>

This is correct! Only masterminds can retire early and enjoy unprotected sex with different, supermodel-type partners everyday with complete assurance that they won't get AIDS.


I have to admit I like galeno's response to this post much more than my own. <grin>

intercst
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mhtyler writes,

Hocus said, "I have no desire to stop Masterminds from having discussions among themselves as to what sort of investment strategies work best for people possessing this particular personality type. "

I make the point that if your net worth is $10,000,000 instead of $1,000,000 you ARE a "mastermind" regardless of your psychological makeup.

Set aside the emotional issues though and consider the "efficient frontier" as a "one size fits all" solution and it becomes problematic. At the low end the risk becomes a matter of survival rather than merely a loss or a reduced return. That's _not_ merely an emotional issue but a tangible consequence.

The guy with 10 million can sell his big house and his foreign sports car in hard times...he will have many options to reduce expenses against his losses or reduced earnings. At the low end you may not be able to reduce expenses further, and have to return to work.

The richer you are, the more "efficient" you can afford to be.


And the less "efficient" you are, the richer you need to be to achieve a "100% safe" withdrawal rate. If you look at the safe withdrawal calculator, 75% S&P500/25% cash gets you a 4% "100% safe" withdrawal. A 100% cash investor needs to limit his withdrawals to a bit more than 2% to survive 30-years.

Inefficient investors need almost twice as much money to retire early.

intercst
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hocus writes,

In other words, the non-Masterminds (if I may dare to speak for them for a moment here) will agree not to interject non-Mastermind dogma into discussions that Masterminds are trying to have among themselves if Masterminds will agree not to interject Mastermind dogma into discussions that non-Masterminds are trying to have among themselves.


Come on, if you post on an active message board you have to expect people are going to comment. It's up to you to decide what to read or ignore.

As I've written before, I ignore about half of the posts that appear on the REHP board. Am I offended that there are so many messages that appear here that don't hold my interest? Not at all. They may be of interest to other participants on the board.

Maybe can ask the Motley Fool to come up with a special "Mastermind" charm that appears on the message listing so that it will be easier for the non-Masterminds to ignore those posts. <grin>

intercst
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Intercst wrote, "Inefficient investors need almost twice as much money to retire early."

Your point assumes that an investor is either, "1" efficient, or "0" inefficient when the reality is that all portfolios fluctuate.

I'm suggesting that at the low end an investor might reduce expenses and rebalance their portfolio conservatively in extended down markets to preserve a baseline level of wealth, and develop back towards a more securities based strategy as light appears at the end of the tunnel.

Such an approach is likely to be less efficient, but may very well avert disaster for retirees at the low end. The safe withdrawal rates and the analysis of efficient investment is a fabulous work, but what use is it to employ it dogmatically? Businesses don't behave that way in the market, and what is your retirement, but your business?

Certainly for the well heeled investor who has the option to maintain great flexability in their expenses there would be less incentive to vary. They can play the averages better because they have more cards to play.

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intercst wrote:
Maybe can ask the Motley Fool to come up with a special "Mastermind" charm that appears on the message listing so that it will be easier for the non-Masterminds to ignore those posts. <grin>

We could do it locally. All participants on the REHP board of the superior Mastermind category can put a -MM after their screen name such as intercst-MM or galeno-MM. After all, we don't want a bunch of wannabes filching our M&Ms right??
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hocus made the point that most people aren't rational investors....

Intercst:

I don't say that you do this with bad intent, but this sort of comment is exactly the sort of thing that sends investments threads in a bad direction, in my view. I did not make the point that most people aren't rational investors. You are the one saying that most people are not rational investors.

It's hard for me to understand how you remain under the misimpression that this is what I believe after all the back and forths we have had on this subject over the years. I am happy to explain why this is not so if you really don't yet understand. But if you only engage in these sorts of misrepresentations in a effort to bait me, I wish you would stop. It's an unfortunate distraction from a discussion that might profit both of us if allowed to go forward.

All I am agreeing with you about is that different investors have different personalities, and that one's personality influences one's investment decision. In the posts I made proposing a "truce" between Masterminds and non-Masterminds, I made an effort to refrain from making value judgments as to which sort of investment personality is the "rational" one, for obvious reasons. Despite my best efforts in this regard, I think that most on the board can guess which I think it is. It's not the one saying that people are "irrational" to want to protect some portion of their life savings from market declines.

Many on the board would say that it's no big deal that some Masterminds repeatedly misstate the postions taken by non-Masterminds in an effort to win small debating points. But it is a big deal if your goal is to communicate at all effectively on an issue of some complexity and if you are putting forward a view not shared by most of those likely to be exposed to the message.

The usual way these threads develop is that a non-Mastermind makes a post, offering a thought on investing that makes sense from the non-Mastermind perspective but not from the Mastermind perspective. A Mastermind jumps in and says something to the effect of "Oh, no, that's completely wrong" but does so by completely misstating the non-Mastermind position or by relying on some piece of Mastermind dogma that anyone involved in the debate knows is not shared by non-Masterminds. The non-Mastermind corrects the mistatement, and a Mastermind comes back with another complete misrepresentation of some other aspect of the non-Mastermind post.

After five or six back-and-forth posts of this type, all but the two or three posters directly involved in the thread have lost track of the original point and moved their focus to more rewarding threads. These sorts of Mastermind posts add zero value to the effort to discover effective ways to invest for early retirement, in my view. Their only effect is to divert discussions before they have an opportunity to bear any fruit.

As I said, I don't say that this is intentional. It may be that Masterminds are so sure of their own dogma that they can't imagine that anyone could possibly have a different perspective. I do. I believe what I am saying, and I would like to be able to share some of my thoughts with others of like mind or similar mind without distracting comments being interjected before those discussions get rolling.

I think it's safe for all Masterminds on the board to rest assured that the non-Masterminds are fully aware of any conventional pro-stock logic before posts show up reiterating it once more. We know that timing is bad, bad, bad. We know to always, always, always buy on the dips. We know that stocks are both the best growth investment and the safest investment of them all to boot. We know that price earnings ratios and all other ways of assessing value do not work, not even a little bit. We know about the wisdom of buying and holding, regardless of price.

We know all this, or at least we know how firmly you believe it, so you do not need to jump in and remind us when we are trying to begin a discussion going in an entirely different direction. You probably know all the arguments I am going to make before I make them too (at least those that are made after the distracting posts go up and the debate become a back and forth to "prove" one side "right" and the other "wrong"), so you probably feel the same frustration when I make points that make sense from my perspective.

So I ask again. Are the Masterminds of the board--intercst in particular--willing to agree to an understanding that non-Masterminds should be permitted to have their own discussions without having them waylaid by assertions of Mastermind dogma if non-Masterminds are willing to agree to the reverse understannding in return? That seems to me a constructive way of allowing a hundred flowers of debate to bloom.

As for FriendlyGirl's question, "May a Mastermind listen in on non-Mastermind discussions, " as far as I am concerned, everyone is invited to the non-Mastermind party. As with any party, however, there are certain norms of civil behavior that partygoers are expected to comply with as the price of admission.

The purpose of the non-Mastermind debate is to learn, not to win debating points. If you have genuine questions, feel free to ask them. If you have comments to make that you believe will help the non-Masterminds see errors in their thinking, please put them forward. But if all you have to bring to the debate is yet another stale reiteration of a point that every non-Mastermind has heard a thousand times in the past, please keep it to yourself or post it on a Mastermind thread, where it will be appreciated by the group seeking to discuss the subject under debate.

Those sorts of comments serve no constructive purpose on a non-Mastermind thread. You are not going to convince us you are right by saying things that only a Mastermind believes, so why not just allow us the talk we are trying to conduct among ourselves? I'm not saying that you, FriendlyGirl have ever made the kind of comment to which I am referring. I am trying to explain why I believe there is a need for certain rules of fairness to be recognized that would govern postings by Masterminds on non-Mastermind threads.

I understand that it may not be possible for this sort of rule to be honored on this particular board at this particular time. It could be done that way if there were more than a few on the board who expressed a desire that it be done. But if that sort of desire is not expressed, the rule will apply in some other context, on another Motley Fool board at this time, or on this board at some future time, or on an e-mail list, or in some other venue. The discussion will take place at some point because it's too important to put off forever. And the discussion can't go forward unless the Masterminds listening in to it are willing to behave in such a way that the learning process can proceed.

When the debate does get going, my hope is that the non-Masterminds will be welcoming, within the limits described above, of well-intended Mastermind contributions. If it turns out that they are not, then too bad for the non-Masterminds. It is possible, given human nature, that if the day comes when the non-Masterminds have majority control of a discussion forum, that they will put forward the same sort of distractions to protect their dogmas as the Masterminds do here today. If they do, my belief is that they will do more harm to themselves in the long run than to anyone else.
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<I think that you think of REHP as an idea that can be relatively widely adopted and wish to encourage that...For many of the people on this board, being able to stick with the same asset allocation, keeping to the plan in the face of the obstacles IS realistic. It is a matter of individual tolerance if you are able to stick to the plan or not.

You are concerned with popularizing the FIRE concept. Good for you. But there are limits to how much information you can provide that will be applicable to a wide audience...In the end, this means that people have to spend a fair amount of time working with spreadsheets if they want to make up their own plans. Since people are generally so uncomfortable with that, it means that far fewer people will get the concrete benefits of the Home Page and the concepts on this board.>


I enjoy these types of discussions. I hope Hocus continues to post even though I disagee with many of his perceptions. It may be noble to try and lay out a framework so that anyone can achieve FI. The problem is that we humans are predisposed to certain types of behavior. Our whole economy is based on the premise that most people will never even get a whiff of FI. Those who would follow a FI strategy are not any more intelligent than the rest of the population. However, I am certain that they are much more disciplined than 95% of the population.

I laughed yesterday when I read about how overwieght Americans are. Blame was being assessed to the fast food industry for pushing the "supersizing" of meals. Of course their previous attempts to market healthier meals did not sell well. These value meals have been very successful. Now some say that Americans should be told that a supersize meal has 600 more calories than a regular one. How much further do you need to dumb down our country? Even Homer Simpson knows that Duff has more calories than Duff Light, but he still wants the "good stuff"!

Another example is transferring balances to get a lower CC interest rate. This advertising blitz is lost on me as I have never carried a balance on a credit card since I got my first one 28 years ago. Obviously, it plays to a large part of the population, just like the "all you can eat buffets". Buying into it leads to throwing in the towel on debt and weight. It takes discipline to avoid it.

Most FI/RE people have the intuitive sense of the benefit of maximizing their income while minimizing their expenses and saving a significant portion of their earnings. Some have to wait for a light bulb to go off (maybe while perusing the REHP). If they see the 4% concept as something to buy into they may be able to modify their behavior to get on track. If they see the argument that 1-2% will be required, they may not even bother reading any more. Why change my ways if I have such a small liklihood of success. It is much easier to not worry about tomorrow. Of course tomorrow has a way of eventually getting here.

Most adherents to the FI/RE philosophy recognize that we have individual differences. I don't think we spend much time agonizing over whether the true rate is 4.1% or 3.8% or whatever. RE does not have to be an all or nothing proposition. Many are more than able to make adjustments as needed, either pulling back on expenses or doing some PT work, or in SP's case a few more furnace repairs <grin>. The fruits of their labor have usually come from not buying into the mass marketing advertisements that are literally eaten up by most Americans.


BRG
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I hope hocus continues to post even though I disagee with many of his perceptions.

Thanks for that thought, Gurdison. I hope that no one has the impression that I expect or even want large numbers of people to agree with everything I say. I don't ask for that. What I am seeking is a chance to offer an opposing viewpoint in an environment in which there is some reasonable chance of the message actually reaching a few other people's ears. I'm also hoping to generate some responses by others who see things along the lines that I do because those comments provide benefits to me personally (by helping me with my Retire Early investment plans).

It should be obvious to all that I love to post. If I am able to come up with any rationalization to persude myself that there is even a small chance that I would be able to communicate a point I consider useful, I'll post. I don't hold out much hope for that at this board anymore, but I do hold out hope that the board might change in time.

The mhtyler post got me going today because it was so perfect an expression of so important a point. It would be great to see posts that follow up on the point made in that one, but I don't really expect it, and I get tired of hearing myself bang the drum when I am the only one playing the nonfashionable song for too long a while.

If they see the 4% concept as something to buy into they may be able to modify their behavior to get on track. If they see the argument that 1-2% will be required, they may not even bother reading any more.

I would not want anyone to think that I am saying that a 4 percent withdrawal rate will not work. I firmly believe that a 4 percent withdrawal rate will work for most, presuming that they make some reasonable effort to allocate their assets in line with what the historical data suggests they will get in way of a long-term return.

There are only a tiny number who can count on a 4 percent withdrawal rate with an 80 percent stock allocation at current prices. But if they are willing to move to investment classes more appproriate for their goals and financial circumstances, most aspiring early retirees can count on a 4 percent withdrawal rate. There's no law that says you must stick with stocks no matter how long doing so delays your retirement.
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Hocus,

YOU are one of the reasons I still read this board. Just thought you should know that. :)

In other words, the non-Masterminds (if I may dare to speak for them for a moment here) will agree not to interject non-Mastermind dogma into discussions that Masterminds are trying to have among themselves if Masterminds will agree not to interject Mastermind dogma into discussions that non-Masterminds are trying to have among themselves.

You are saying that if you have this "magic" buy and hold, stick to your plan, mindset, then you don't have valid input into a discussion about how others should plan for and save for retirement? If that is the case, I don't agree. Furthermore, those who have thought the issues through for the particular case (4% pulled from a 75/25 diversified stock/bond port is "safe") might have some interesting insight into other options. Dare I bring up real estate or other fixed income assets?

In terms of whether your investments/style exactly fit the mold of this magic 4%, I would say that probably nobody on the board has an exact match.

However, the key is not looking at the 4% rate and saying, "that isn't me because xyz reasons." The key is to look at it and say, "That isn't me because of xyz reasons and I am going to have to make the following adjustments..."

Figuring out how to adjustment is what takes the work.

What the historical data suggests is that the worst possible way to prepare is to go with a big stock allocation at a time of extreme overvaluation. The historical data suggests that most investors that do that WILL NOT remain fully invested in stocks as their portfolios diminish. I can't predict the future. I can't say that it is not different this time. All I can do is report what the historical data says. It says the opposite of what the Safe Withdrawal Rate study presumes.

The worst possible course of action is to not invest in the market because you think it is over valued. Anyone who did this during the 90's would have lost out on HUGE gains. If you have been in the S&P for 20 years now, you have 10 times what you started with. Even after the 30+% drop we've gone through. Historically, people have ALWAYS said that the market is over valued and historically the market has ALWAYS continued to go up. Not straight up, but up over the long term it goes up.

In the case of your coin flipping example, you were using a fixed amount of money (+$200k or -$100k). Obviously, the stock market isn't a fixed amount...it varies based on how much you own. So, change the case to +20% or -10%. One coin flip nothing changes if you are starting with $1 mil. +200,000 or -100,000.
W= 1.2 mil.
L= 0.9 mil.

The second coin flip depends on the first. You are either starting with $1.2 mil or $0.9 mil.
WW= 1.44 mil
WL= 1.08 mil
LW= 1.08 mil
LL= 0.81 mil

Given the choice, I'd take this gamble for as many coin flips as I was allowed. If I am the kind of person who can't stand to stay in the game, I'd hire someone else to stay in the game for me.

For the record, I have an investment that has hit the losing (LLLLL...) string and is down 95%+. It is not a large percentage of my portfolio. If it goes to zero, that sucks, but such is life I knew the risks going in. If it recovers, great. Diversity and time are what is needed in investing, but perhaps we should add patience or vision to that list.

justpatrick



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MOSCOW (Reuters) -- Supermodel Cindy Crawford said Thursday she was considering taking a multi-million dollar trip into space with Russian cosmonauts.

"I would go if I could be there and back in a week," Crawford told reporters during a visit to the Russian capital.


Hey galeno, there's hope for you yet.
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I think that you think of REHP as an idea that can be relatively widely adopted and wish to encourage that, while intercst is willing to let people work things out for themselves.

FriendlyGirl:

I agree with most of what you say in your post. The difference in visions that you refer to has been a reality since the first time I posted.

In the old days, this board really was just a place for people to come and talk about the intercst approach to early retirement. There was none of this "FIRE" stuff back then. Because of that, and because I had not followed the intercst approach in all its particulars, I remained in lurker status for a long time before putting up my first post or two.

If you go back and check, you will see that my posts from the beginning were unconventional for this board, although I tried to steer clear of the investment topic, which I quickly identified as a hot button. Ironically, it was intercst who did the most to encourage me to post more frequently. At some point, the board seemed to express a collective view that it liked the idea of a broad discussion agenda, and I became more comfortable posting, while still aware that I was in some important ways an outsider here.

I think you are right that most who come here are happy to work out the details of their early retirement plans on their own. My frustration is that, while that is a perfectly reasonable strategy for those in general agreement with the approach taken in the Safe Withdrawal Rate study, it doesn't work for those, like me, who find that that study (or at least its recommendations section) provides no help.

The non-Masterminds don't have a study to refer to as the starting point in putting together their spreadsheets. If we ever are to have that, and I think we need it, it's going to take years of work to produce it. We seem to see more moving parts in the investment machine than the Masterminds do. I'm confident that the non-Masterminds will find a way to have their discussion, although I can't say that I have figured out what way that is as of yet.

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What is involved here is applying real world solutions to real world problems.

It is very easy to picture an investor who has just retired based on the safe withdrawal study and who has just lost 50% of his money in stocks. He may have been withdrawing only 4% (or so) of his original amount. But his withdrawals have suddenly become 8% of his remaining amount. How likely would he be to stay put? Would it still be prudent for him to trust the study? It probably would. But he would be paying attention to those words on the Gummy Stuff site that the serial (year to year) correlation of stock prices is low. Such a person would certainly feel intense pressure to change his investment style.

Sometimes comments get dismissed (wrongly) because of unstated DEFINITIONS. Precise definitions are always an issue in science and mathematics. But they really cause problems whenever probability and statistics are involved. hocus's issues involve the real world problem of applying the theory. intercst and others will look at a busted retirement and will either say “oops” and walk away or they will ignore it because it did not satisfy something hidden in some arcane mathematical definition. They will say things such as “safe means safe.” Then if 4% turns out to be unsafe...“well, 4% was just the best estimate of the true number...before the new information became available.” Or they might say that 4% was a reasonable number...but that it turned out not to be prudent for you to use it in your particular case. Of course, they never would mention the word “prudent” until after the fact.

I do not know the right words to select. I think of “reasonable, appropriate, prudent” and even that horribly bureaucratic word “actionable.”

I salute mhtyler for accurately describing how businessmen would be treated in the real world. I join friendlygirl and gurdison in wanting to see more discussions along these lines.

Have fun.

John R.

BTW there is room for some MASTERMIND discussions and challenges as well. Dollar cost averaging is often cited as a good approach to handling market fluctuations. It reduces the average cost of shares purchased. But when we have a constant withdrawal rate, it works against us. We sell too many shares when the market is low. Unless, of course, you assume that you never have any idea at all of whether your holdings are priced high or low.

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hocus: "The difference in visions that you refer to has been a reality since the first time I posted.

In the old days, this board really was just a place for people to come and talk about the intercst approach to early retirement. There was none of this "FIRE" stuff back then. Because of that, and because I had not followed the intercst approach in all its particulars, I remained in lurker status for a long time before putting up my first post or two.

If you go back and check, you will see that my posts from the beginning were unconventional for this board, although I tried to steer clear of the investment topic, which I quickly identified as a hot button. Ironically, it was intercst who did the most to encourage me to post more frequently. At some point, the board seemed to express a collective view that it liked the idea of a broad discussion agenda, and I became more comfortable posting, while still aware that I was in some important ways an outsider here.

I think you are right that most who come here are happy to work out the details of their early retirement plans on their own. My frustration is that, while that is a perfectly reasonable strategy for those in general agreement with the approach taken in the Safe Withdrawal Rate study, it doesn't work for those, like me, who find that that study (or at least its recommendations section) provides no help.

The non-Masterminds don't have a study to refer to as the starting point in putting together their spreadsheets. If we ever are to have that, and I think we need it, it's going to take years of work to produce it. We seem to see more moving parts in the investment machine than the Masterminds do. I'm confident that the non-Masterminds will find a way to have their discussion, although I can't say that I have figured out what way that is as of yet."


First, hocus writes well and I hope that he keeps posting because his posts are interesting reading even if I do not agree with all the substance.

Second, and more importantly, "non-Masterminds don't have a study to refer to as the starting point" is, I suspect, largely because they are generally not interested in putting that kind of study together (because they not 'Masterminds') --- but that is sort of exactly what 'Masterminds' are interested in and do.

hocus may well be the exception, but I suspect he is more like the exception that proves the rule.

Just my $0.02. Regards, JAFO


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You are one of the reasons I still read this board.

That's a kind thing for you to say and an encouraging thing for me to hear.

You are saying that if you have this "magic" buy and hold, stick to your plan, mindset, then you don't have valid input into a discussion about how others should plan for and save for retirement?

No, I don't want to exclude anyone from participating in the debate that non-Masterminds need to have amongst themselves. All sorts of people with all sorts of beliefs are capable of all sorts of insights at all sorts of times.

However, I do believe that there needs to be a certain tolerance of opposing viewpoints in place before a fruitful discussion is likely to emerge. Say that an Apple investor goes to the Microsoft board and begins making comments that every executive in that company is a crook and they have never shown any capacity for innovation, and blah, blah, blah. What do you think the chances are that the debate that follows is going to be a productive one?

IThere needs to be at least minimal agreement on some basic questions in order for people to feel free to offer the sorts of throughts that push a discussion forward. If both Microsoft and Apple were going through hard times., and a group comprised half of pro-Apple people and half of pro-Microsoft people formed a board to come up with mututally agreeable ideas for helping the high-tech industry, that might work. There needs to be some common ground, or every discussion turns into sniper attacks.

That's the sort of thing I would like to see here, the chance for debate that benefits both Masterminds and non-Masterminds, not aimed at proving one of those schools of thought right and the other wrong but just aimed at extending knowledge of how to go about achieivng a successful early retirement. I don't agree with those who think the Safe Withdrawal Rate study works. But I don't see them as my enemy. I see them as part of another school of thought of investors seeking results not too far removed from my own.

But the sense I get from posts that come up in response to comments made by non-Masterminds is that non-Masterminds indeed are perceived to be the enemy. You can see it in the post that prompted the mytyler post yesterday. The earlier poster was explaining why he felt a need to lessen his exposure to stocks and intercst jumped in and all but called him stupid for considering such a thing.

I expect that there are others thinking along the lines of that poster at this point, and hearing what they have to say would help us all make plans for changes in stock prices likely to come in the not-too-distant future. But I don't think that posters with those sorts of thoughts are going to feel too encouraged to come forward with their impressions after seeing the comments made in regard to the one who did come forward.

In the most tolerant of environments, it's hard for people to share personal details of their financial histories, especially when the purpose of sharing is to explain that they believe they have made mistakes. When the usual board reaction to those sorts of posts is to scold the posters for their failure to be like the 10 percent of gifted investors for whom Safe Withdrawal Rate study was intended to speak, I don't think you see as many of those sorts of posts as you would otherwise.

And I need to have those sorts of posts show up on the board now and again to have any hope of making my points effectively. One person writing long conceptual posts is boring. It's the experiences of a community of posters that gives the discussions life and blood. No one can stop me from posting words on the board. But it probably is possible for a few committed to doing so to prevent a posting environment coming into place that would allow non-mainstream posts to make a difference.

The worst possible course of action is to not invest in the market because you think it is over valued. Anyone who did this during the 90's would have lost out on HUGE gains.

This isn't the thread in which to get into a long discussion of this issue, but I think that it is easy to exaggerate the losses that may result from not being in the market when it is overvalued. I got out in early 1996, when the DOW was at 5600. I did some quick math in my head a few days ago to estimate where the DOW would have to be for me to get back in without any loss. It doesn't need to go back to 5600 for me to break even because I've been earning returns of 6 percent and 7 percent per year on money I pulled out, which was mostly placed in five-year CDs at prices better than those available today. My quick estimate was that I break even if the DOW goes down to something between 7500 and 8000.

Now, 8,000 is a significant drop from where it is today. However, if you look at the historical data as to how stocks perform from the levels of overvaluation at which they are now, you would find it hard to conclude that a drop well below 8,000 is out of the question. If stocks come down to 8,000, I'll be back in with a small percentage of my assets, and if it goes lower, I'll have more in. Time will tell which approach produces the better return over time. But don't think that missing a few years of 30 percent gains puts you in a postion from which you can never break even. So long as much of those gains are "fluff"--not the result of business profits, but just the effects of a bubble--the odds are good that any losses experienced by being out of stocks will end up being temporary.

Given the choice, I'd take this gamble for as many coin flips as I was allowed.

Maybe you would, JustPatrick. But if it's true for you, and it's true for intercst and it's true for <b<FriendlyGirl, and it's true for Gudison, then there have to be 36 investors for whom it is not true (if you presume that only one out of ten investors are of the Mastermind personality type). We can't all be above-average investors. This isn't Lake Woebegone.

I don't need to wonder whether I am in the elite 10 percent or not. I know for a 100 percent certainty than I am not. There seem to be some on the board that believe that this means that I am not eligible for early retirement. All I can say to that thought is, sorry to disappoint you all. I did it anyway. No one told me the rule before the day I handed in my resignation, so I'll just have to hope that the Retire Early police don't find out about the infraction.
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Non-MasterMinds are generally not interested in putting that kind of study together (because they not 'Masterminds')

JAFO

Masterminds are not the only personality type capable of analyzing data and coming up with reasonable actions to take in response to it.

Here's the section of the CBS MarketWathc article that describes the four types:

1. Freelancers

Profile: Freelancers crave excitement and new experiences. Risk turns them on, makes them feel alive. They're spontaneous, seek immediate results, live for crisis situations, do whatever it takes to solve a problem. They may avoid organizations and regular paychecks. Impulse buyers, they may also overload their credit.

Advice: They find long-range thinking boring. Beating the market today is their kind of challenge. A low 8 percent return won't satisfy them. Frustrations will increase. So get out of day-trading. Forget the market completely! Get your kicks elsewhere: Invest in yourself. Build equity as an entrepreneur: Turn your hobbies into money-makers. Create a business. Develop real estate.

2. Guardians

Profile: Guardians often work in Corporate America, government and other institutions, for regular paychecks. They love structure and organization, belong to clubs, play by the rules and invest in IRAs, 401(k)s and 529 plans for their kids' college. Their portfolios are well diversified in five-star funds, run by established managers with long-term track records, and rebalanced regularly.

Advice: Although threatened, they have an undying faith in the American way of life and our history of overcoming major challenges. Recent studies, however, show they have too much faith in the American way: Saving too little, while expecting overly aggressive returns -- like 19 percent annually in 529 education plans and 16 percent in 401(k) retirement plans. Solution? Tighten your belt. Increase savings. Plan to work longer, retire later.

3. Pathfinders

Profile: Pathfinders are idealists searching for happiness and the meaning of life. They have a strong sense of values, principles, altruism and spirituality. They are people persons and want to make a difference, creating a better world for themselves and others. They are teachers, coaches, journalists, advocates, and champions of all kinds of social causes.

Advice: Pathfinders are less interested in money than personal growth, self-actualization, helping people and social reforms. However, their inattentiveness to personal finances makes them less effective as investors. They may need a spouse or professional adviser managing their finances, while they focus on their life's mission during the coming years of struggle.

4. MasterMinds

Profile: MasterMinds are the rational thinkers. For them knowledge is power. They are natural leaders who need to achieve. They have a vision of their world as an abstract network of systems -- whether social, economic, technological and governmental. Unlike Guardians who maintain the established order, and Pathfinders who focus on people, MasterMinds are impersonal strategic thinkers focused on the system's efficiency. They love theories, analysis and logic, intellectualizing everything.

Advice: In Corporate America MasterMinds are chasing executive positions, often working on new opportunities to enhance the organization, as the long-range planners, scientists, inventors and systems designers in many disciplines. They are super-confident, even bear markets are opportunities to prove themselves and achieve their goals. Stuff like 401(k)s and mere 7 percent to 8 percent returns will never be as important to them as options, performance bonuses, equity positions, and a sense of accomplishment.

end of excerpt.

I am of the Pathfinder type. The article says that I am "less interested in money than personal growth." That's exactly right. That's why, at age 35, my total lifetime savings was the $5,000 I had in a joint checking account with my wife.

But look at what happened in the following nine years. I discovered that achieving financial independence early in life was possible, determined for myself that that was the best way to achieve personal growth, and from that point forward money did matter to me.

I don't believe that there is only one type that is eligible for early retirement. I believe that there are different arguments and strategies that you need to use when dealing with different types. Masterminds may find the intercst approach groovy. That's nice for them. Pathfinders might respond better to some of the things I did.

The point is, why exclude Pathfinders, and the other two personality types for that matter, from the possibility of retiring early in life? You Masterminds seem to think that because your way makes sense for you, everyone that is of a different type should just give up. Well, guess what? There's more than one way to skin a cat.

It's true that a Pathfinder study would not look the same as a Mastermind study. Any study I am involved with is probably going to have fewer numbers and more words. You're being narrow-minded to presume that that is so bad. Investing is not just about numbers. There's more to it than that. There are insights that only Masterminds are capable of, but there are also insights that only Pathfinders are capable of, and I don't doubt for a second that there are insights that only Freelancers are capable of, and insights that only Guardians are capable of.

What is the point of hanging a sign on the Clubhouse door that says "MasterMinds Only--All Others Please Go Away." Perhaps it makes Masterminds more convinced of the merit of their conclusions to never hear an opposing viewpoint. I seriously question whether it makes them better overall investors. Each personality type has drawbacks, including that of the MasterMinds. I would not be surprised someday to learn that your belief that you can figure it all out among yourselves may be your biggest investing capacity drawback when all is said and done.




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Maybe can ask the Motley Fool to come up with a special "Mastermind" charm that appears on the message listing so that it will be easier for the non-Masterminds to ignore those posts. <grin>

Hey, if you guys are going to get one then we Architects (INTP) should get one too. Possibly, the Inventors (ENTP) as well. I would suggest that those two groups are probably just as likely to be able to hold the line and invest rationally as the Masterminds.

Hyperborea
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JAF031 wrote, "Second, and more importantly, "non-Masterminds don't have a study to refer to as the starting point" is, I suspect, largely because they are generally not interested in putting that kind of study together (because they not 'Masterminds') --- but that is sort of exactly what 'Masterminds' are interested in and do."

I have no problem with Intercst's thinking as far as it goes. There it is in black and white: over a period of time your money will do this or that if you hold this mix of assets. However that says nothing about where your money should be in a down market or an up market. In fact by default it disables your ability to judge whether a market is up or down.

It also treats all levels of retirement identically: If I have 2,000,000 or 450,000 the formula remains the same even though the investment dynamics are different.

For example I can easily buy a 5 year jumbo CD and get a less than thrilling 5.5 per cent because I have 100,000 to invest. A smaller investor though wouldn't have the financial clout to get a jumbo rate and would be stuck with something roughly half of that, and yet my approach would be statistically the same as the smaller investor's cash assets. How is that possible?

The guy with 2 million may spend 4 times in expenses as the person with 450k, but in bad times the former may cut expenses that the latter cannot, and yet the w/d rate and asset formula treat there chances as being the same...how can they be???

If I operate a business that makes 1,000,000 a year with 30 per cent operating expenses and you have a 2,000,000 a year business with 15 per cent operating expenses how can I possibly have the same profitability as you?

The Safe Withrawal Formula and asset allocation plan is _not_ flawed, but it is two dimensional. There simply many issues respective of an individual's retirment situation that it can't address.

If your retirement boat is sinking and you decide not to throw freight overboard because 99% of the other boats aren't sinking you've missed an important point. Your retirement is an individual one not a Gestalt.

Mark


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BTW there is room for some MASTERMIND discussions and challenges as well. Dollar cost averaging is often cited as a good approach to handling market fluctuations.

Dollar-cost averaging works better in theory than in fact.

In fact, historically, investing all you can as soon as you can gives better results on average than dollar-cost averaging.

Dollar-cost averaging is most useful as a discipline tool which you use to force yourself to invest regularly with new money from your current income stream - in other words, to force you to invest as soon as you can.

But used as an investment strategy, it's an attempt at market timing without an attempt to predict the market direction. Since the market goes up more than down, your best bet at market timing without a sense of direction is to dive in headfirst as soon as possible.
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hocus complains,

<<<hocus made the point that most people aren't rational investors....>>>>

I don't say that you do this with bad intent, but this sort of comment is exactly the sort of thing that sends investments threads in a bad direction, in my view. I did not make the point that most people aren't rational investors. You are the one saying that most people are not rational investors.


I think we're running into the definitions problem identified by JWR1945 in post #68316.

Hocus wrote in post #68290,

The study works its magic trick by considering one effect of risk, that it produces high returns, and ignoring another, that it causes people to jump in and out of asset classes. But the historical data shows that the one effect generally goes with the other. If you want to assume that investors will remain in the asset class you are examining, you have to study an asset class that the historical data shows people do not jump in and out of much.

intercst responded: What is the safe withdrawal rate for "people who jump in and out of asset classes"? Most of the research I've seen shows they get much lower returns.

Jumping in and out of asset classes is "irrational" since most of the research shows it produces lower returns. If this wasn't irrational the Forbes 400 list of the richest Americans would be populated by individuals who had mastered this "asset jumping" discipline rather than the LTB&H investors that make up the vast majority of the Forbes 400. I agree with your point that many if not most people will jump in and out of asset classes in the face of a decline. Perhaps it's impolite to call this behavior "irrational" (just as many think it's politically incorrect to say that more Africans need to use condoms to stop the spread of AIDS.) Just because everyone does it, doesn't make rational. If you want to invent a new euphanism to describe this type of investor behavior, that's fine. Maybe we can start a contest to decide on the best one. <grin>

hocus from post #68321: But the sense I get from posts that come up in response to comments made by non-Masterminds is that non-Masterminds indeed are perceived to be the enemy. You can see it in the post that prompted the mytyler post yesterday. The earlier poster was explaining why he felt a need to lessen his exposure to stocks and intercst jumped in and all but called him stupid for considering such a thing.

Come-on, I didn't call him stupid, I just pointed out that his action was the exact opposite of what a rational investor would be doing.


In mhtyler's example, a retiree who started out with a 4% withdrawal from a $1 million 80% stock/20% cash portfolio and now was left with only $600,000 left after the market decline. In response to the market decline he sells stock and buys more fixed income assets and says he has improved his position. I have no doubt he probably feels better. But the safe historical withdrawal rate for a 50%/50% stock/cash portfolio is lower than an 80%/20% mix for a 40-year pay out period. Is he now taking a less than 4% withdrawal from the $600,000 portfolio (i.e. less than $24,000/yr instead of $40,000 from the $1 million)? He doesn't say, but I suspect he thought that new asset allocation would actually increase his safe withdrawal rate. Of course, it's impolite to point out that it doesn't.

hocus from post #68315: The non-Masterminds don't have a study to refer to as the starting point in putting together their spreadsheets. If we ever are to have that, and I think we need it, it's going to take years of work to produce it. We seem to see more moving parts in the investment machine than the Masterminds do. I'm confident that the non-Masterminds will find a way to have their discussion, although I can't say that I have figured out what way that is as of yet.

The existing REHP spreadsheet allows both Masterminds and non-Masterminds to investigate the effects of a lower stock allocation. Here's the historical "100% safe" withdrawal rate for a 30-year pay out period for stock allocations from 0% to 100%. I've shown the values for both the Excel spreadsheet and dory36's online calculator.

100% safe withdrawal rates 30-year pay out, CPI, 0.20 exp. ratio
.
....................Excel..............dory36
.
100% S&P500 ........3.94%..............3.73%
75% S&P/25% Cash....4.25...............3.93
50% S&P/50% Cash....4.03...............3.84
75% S&P/75% Cash....3.28...............3.14
100% Cash...........2.34...............2.22

The problem is that hocus wants a spreadsheet that shows he can avoid stocks and still get a 4% withdrawal rate with 100% safety. That hasn't been possible in the past.

Of course, you can just ignore all the historical data and say "this time it's different". I don't know if the experts predicting 2% per annum for the next 20 years have any more credibility than those predicting 20% three years ago, but I doubt it.

intercst
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"Dollar-cost averaging works better in theory than in fact.
In fact, historically, investing all you can as soon as you can gives better results on average than dollar-cost averaging."

I took your advice back in 2000: I lost 300,000 on it. Guess I beat the average, eh?

From my perspective, unless you're still in the magical 90's, dollar cost averaging is a good way to sneak up on Intercsts "efficient frontier" while still maintaining adequate cash assets to meet immediate needs. I found starting with a 70/30 mix more thrilling than profitable.

mark

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Hyperborea writes,

Maybe can ask the Motley Fool to come up with a special "Mastermind" charm that appears on the message listing so that it will be easier for the non-Masterminds to ignore those posts. <grin>

Hey, if you guys are going to get one then we Architects (INTP) should get one too. Possibly, the Inventors (ENTP) as well. I would suggest that those two groups are probably just as likely to be able to hold the line and invest rationally as the Masterminds.


The Mastermind type mentioned in the CBSMarketWatch article covers these four Myers-Briggs personalities ENTJ,ENTP,INTJ,INTP.

intercst
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Hey, if you guys are going to get one then we Architects (INTP) should get one too. Possibly, the Inventors (ENTP) as well. I would suggest that those two groups are probably just as likely to be able to hold the line and invest rationally as the Masterminds.


The Mastermind type mentioned in the CBSMarketWatch article covers these four Myers-Briggs personalities ENTJ,ENTP,INTJ,INTP.


Woo-hoo! I'm in! Where's my little Mastermind symbol? I need to know who to listen to or I might just go and sell all my stock tomorrow and buy some T-Bills with the proceeds.

Hyperborea
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hocus writes,

It's true that a Pathfinder study would not look the same as a Mastermind study. Any study I am involved with is probably going to have fewer numbers and more words. You're being narrow-minded to presume that that is so bad. Investing is not just about numbers. There's more to it than that. There are insights that only Masterminds are capable of, but there are also insights that only Pathfinders are capable of, and I don't doubt for a second that there are insights that only Freelancers are capable of, and insights that only Guardians are capable of.

A retirement investment strategy with fewer numbers, how would that work?

Perhaps that's why the Pathfinder excerpt you quoted offers this advice:

Advice: Pathfinders are less interested in money than personal growth, self-actualization, helping people and social reforms. However, their inattentiveness to personal finances makes them less effective as investors. They may need a spouse or professional adviser managing their finances, while they focus on their life's mission during the coming years of struggle.

Maybe there's an opportunity for Merrill-Lynch here? <grin>

intercst

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mhtyler writes,

For example I can easily buy a 5 year jumbo CD and get a less than thrilling 5.5 per cent because I have 100,000 to invest. A smaller investor though wouldn't have the financial clout to get a jumbo rate and would be stuck with something roughly half of that, and yet my approach would be statistically the same as the smaller investor's cash assets. How is that possible?


I know it's impolite of me to point this out, but that's not true.

The best regular 5-yr CD listed on www.bankrate.com has an APY of 5.35% with a minimum $2,500 deposit. If you only have $500 to invest, you can still get 5.30%.

The best rate for a Jumbo 5-Yr CD was an APY of 5.60%.

If you're holding a 3% CD, you going to the wrong bank. <grin>

intercst
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Intercst writes, "In response to the market decline he sells stock and buys more fixed income assets and says he has improved his position. I have no doubt he probably feels better. But the safe historical withdrawal rate for a 50%/50% stock/cash portfolio is lower than an 80%/20% mix for a 40-year pay out period. Is he now taking a less than 4% withdrawal from the $600,000 portfolio (i.e. less than $24,000/yr instead of $40,000 from the $1 million)? "

You insist on re-framing the examples in absolute terms. If the guy switches to 50/50 stock/cash for 40 years your averages hold true, but that was altogether not my example, nor is it my position.

I'm suggesting that moving some of your finances to a more secure place during down years can lessen your losses although reducing upside, and for those at the lower end of the financial spectrum that may well be politic.

As for reducing the withdrawal rate, _of course you would_ just as any business man reduces operating expenses during a period of loss or reduced profitability.

Why should your retirement business completely ignore short term profitability in favor of the long term if the very survival of your business is at stake?

Mark
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"Dollar-cost averaging works better in theory than in fact.
In fact, historically, investing all you can as soon as you can gives better results on average than dollar-cost averaging."

Dollar cost averaging decreases your risk/volatility. Investing as soon as you can (with an up trend) increases your expected return. But your risk is much greater.

It is always a good idea to look hard for the hidden flaw. mhtyler learned an important lesson.

John R.
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intercst wrote:
The problem is that hocus wants a spreadsheet that shows he can avoid stocks and still get a 4% withdrawal rate with 100% safety. That hasn't been possible in the past.

Of course, you can just ignore all the historical data and say "this time it's different". I don't know if the experts predicting 2% per annum for the next 20 years have any more credibility than those predicting 20% three years ago, but I doubt it.


That's why I compare the "hocus method" with my 350 lb friend who is trying to find some magical way to lose weight on a Big Mac and beer diet coupled with a TV remote control exercise plan.

I think the investment challenge here should be renamed Masterminds vs Master Meatheads. <grin>



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>The Mastermind type mentioned in the CBSMarketWatch article covers these
>four Myers-Briggs personalities ENTJ,ENTP,INTJ,INTP.

Heh heh. Probably not incidentally, these four types also show the greatest concentration of college professors.

Cheers,
madmikeyd
(e/iNTP spoken here)
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"I know it's impolite of me to point this out, but that's not true.

The best regular 5-yr CD listed on www.bankrate.com has an APY of 5.35% with a minimum $2,500 deposit. If you only have $500 to invest, you can still get 5.30%.

The best rate for a Jumbo 5-Yr CD was an APY of 5.60%.

If you're holding a 3% CD, you going to the wrong bank. <grin>

intercst "

I see nothing impolite about the truth, but the fact is that people are not all shopping at bankrate.com, and they are not all getting the optimal rate. Even bankrate.com doesn't have the best rates if you include callables.

Here's a better example then. I was able late last year to lend at an 11% rate with 6pts as a smaller part of a multi-million dollar loan group that was secured with real estate. When I say a smaller part I mean mine was a mere 250k, but they weren't interested in 2500 bucks.

mark
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"Dollar-cost averaging works better in theory than in fact.
In fact, historically, investing all you can as soon as you can gives better results on average than dollar-cost averaging."

I took your advice back in 2000: I lost 300,000 on it. Guess I beat the average, eh?


And if you had averaged in at the same time, you would have lost a bit less.

But slide backward a few years: jump in all at once and you'd now be up, average in and you'd now be down.

By averaging, you're trying to time the market - but without looking at the market. (If you looked at the market and tried to time, you'd either jump in all at once or hold it all in cash until later.) If you aren't going to look at what the market is doing now, you should go with the long-term trend - which is up.

Now if you are averaging in because you have, say, $500 of new money becoming available each month (out of your paycheck perhaps), that's a much different issue from taking a lump sum and choosing to invest only a little bit at a time based SOLELY on your own fears of what the market MIGHT do - without looking at what it IS doing.
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mhtyler writes,

<<<<Intercst writes, "In response to the market decline he sells stock and buys more fixed income assets and says he has improved his position. I have no doubt he probably feels better. But the safe historical withdrawal rate for a 50%/50% stock/cash portfolio is lower than an 80%/20% mix for a 40-year pay out period. Is he now taking a less than 4% withdrawal from the $600,000 portfolio (i.e. less than $24,000/yr instead of $40,000 from the $1 million)? ">>>>

You insist on re-framing the examples in absolute terms. If the guy switches to 50/50 stock/cash for 40 years your averages hold true, but that was altogether not my example, nor is it my position.

I'm suggesting that moving some of your finances to a more secure place during down years can lessen your losses although reducing upside, and for those at the lower end of the financial spectrum that may well be politic.

As for reducing the withdrawal rate, _of course you would_ just as any business man reduces operating expenses during a period of loss or reduced profitability.


Why wait until the down years? Just work a few years longer and go with a 3.5% initial withdrawal rate rather than 4%. Then you can use a lower stock ratio and still be "100% safe".

I'm not aware of any research that shows people improve their position by buying bonds after a big stock decline.

I agree with reducing your withdrawal rate after a decline if that's possible. There are several REHP contributors (dory36, Bob Herlien) who have investigated variable withdrawal rates, see link:

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

intercst
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galeno jokes,

I think the investment challenge here should be renamed Masterminds vs Master Meatheads. <grin>

Wouldn't that get confusing since they're both "MM's". <grin>

intercst
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intercst writes:
Wouldn't that get confusing since they're both "MM's". <grin>

Are we talking "plain" or "peanuts" M&Ms??
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Intercst wrote, "I'm not aware of any research that shows people improve their position by buying bonds after a big stock decline."

I'm not aware of any research, but as I've pointed out, a business would consider your strategy to be the irrational one (I except Amtrak), continuing along a path of unprofitability unabated with no plan to pursue surer profits.

A rich company with a fat bottom line might well agree with you in silence, but a company teetering would take action...always.

mark
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mhtyler writes,

<<<<Intercst wrote, "I'm not aware of any research that shows people improve their position by buying bonds after a big stock decline.">>>

I'm not aware of any research, but as I've pointed out, a business would consider your strategy to be the irrational one (I except Amtrak), continuing along a path of unprofitability unabated with no plan to pursue surer profits.

A rich company with a fat bottom line might well agree with you in silence, but a company teetering would take action...always.


Is the average business any more adept than the average investor? Just because most of them do it, doesn't mean it's rational.

intercst
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intercst wrote, "I'm not aware of any research that shows people improve their position by buying bonds after a big stock decline.

I agree with reducing your withdrawal rate after a decline if that's possible. There are several REHP contributors (dory36, Bob Herlien) who have investigated variable withdrawal rates, see link:

http://rehphome.tripod.com/safesum.html"


One might also consider Gummy's page on sensible withdrawl rates (http://home.golden.net/~pjponzo/sensible_withdrawals.htm -- caution, this site contains extensive MasterMind style analysis with all those scary numbers and such!) which advocates establishing a "Minimum annual withdrawal rate ... just enough to pay the bills (and live on bread and water) ... then only withdraw beyond that if the market is good to us."

Regards,
Prometheuss

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prometheuss writes,

intercst wrote, "I'm not aware of any research that shows people improve their position by buying bonds after a big stock decline.

I agree with reducing your withdrawal rate after a decline if that's possible. There are several REHP contributors (dory36, Bob Herlien) who have investigated variable withdrawal rates, see link:

http://rehphome.tripod.com/safesum.html"

One might also consider Gummy's page on sensible withdrawl rates (http://home.golden.net/~pjponzo/sensible_withdrawals.htm -- caution, this site contains extensive MasterMind style analysis with all those scary numbers and such!) which advocates establishing a "Minimum annual withdrawal rate ... just enough to pay the bills (and live on bread and water) ... then only withdraw beyond that if the market is good to us."


Yes. I think gummy's approach is fine. It's along the lines of the Pay Out Period Reset method or some of the variable withdrawal techniques advanced by dory36 and Bob Herlien.

intercst
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Intercst wrote, "Is the average business any more adept than the average investor? Just because most of them do it, doesn't mean it's rational."

That's a snappy debating point, but claiming that standard tried and true business practices are irrelevant doesn't sway me...but then I don't think you intended it to.

mark
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hocus:

[JAFO] <<<<Non-MasterMinds are generally not interested in putting that kind of study together (because they not 'Masterminds').>>>>

"Masterminds are not the only personality type capable of analyzing data and coming up with reasonable actions to take in response to it."

I did not say incapable (or not capable). I said not interested. There is a big difference between the two, and I chose my phrase with some care.

"Here's the section of the CBS MarketWathc article that describes the four types:"

I parsed these --- my editorial comments will be in brackets.

"1. Freelancers

Profile: They're spontaneous, seek immediate results, live for crisis situations, do whatever it takes to solve a problem.

Advice: They find long-range thinking boring."
[Enough said.]

"2. Guardians

Advice: Recent studies, however, show they have too much faith in the American way: Saving too little, while expecting overly aggressive returns -- like 19 percent annually in 529 education plans and 16 percent in 401(k) retirement plans."
[Too much faith and not enough research]

"3. Pathfinders

Profile: They have a strong sense of values, principles, altruism and spirituality. They are people persons and want to make a difference, creating a better world for themselves and others.

Advice: Pathfinders are less interested in money than personal growth, self-actualization, helping people and social reforms. They may need a spouse or professional adviser managing their finances, [emphasis added] while they focus on their life's mission during the coming years of struggle."
[And we know what most of the regulars here think of professional money managers and what a drag their extra expenses cause to many portfolios. Furthermore, hiring a professional bespeaks a lack of interest in doing it themself.]

I believe that makes its QED WRT to lack of interest, but the board can decide for itself.

"I am of the Pathfinder type. The article says that I am "less interested in money than personal growth." That's exactly right. That's why, at age 35, my total lifetime savings was the $5,000 I had in a joint checking account with my wife."

I will take your word for it. I also know that the MB types are not as mutually exclusive or discrete as many people believe but range on a continuum. The last time I took the real MBI test, it showed scores graded on a 100 point scale 50 (or minus 50, if your prefer) to 0 equally balanced between two traits, to 50 on the other side. Someone who scored closer to 0 or neutral could exhibit behaviors reflecting both traits and even score on the other side of the continuum on a re-test. I am sorry, but I forget the exact margin of error.

"But look at what happened in the following nine years. I discovered that achieving financial independence early in life was possible, determined for myself that that was the best way to achieve personal growth, and from that point forward money did matter to me."

Bully for you. What about those Pathfinders who either do not discover "that achieving financial independence early in life was possible," or determine that it is not possible for them because they cannot change their behavior sufficiently, or "determine for [themself]myself that that {i.e., was the [not] best way to achieve personal growth"? IOW, you now seem to presume that you are entirely representative of all Pathfinders. I am not so sure.

"I don't believe that there is only one type that is eligible for early retirement."

Eligible? I agree.

"I believe that there are different arguments and strategies that you need to use when dealing with different types. Masterminds may find the intercst approach groovy. That's nice for them. Pathfinders might respond better to some of the things I did."

Possibly.

"The point is, why exclude Pathfinders, and the other two personality types for that matter, from the possibility of retiring early in life?"

I doubt that anyone is trying to exclude them from the possibility; certainly I am not. I just tend to doubt the likelihood (as I suspect many others do, also).

"You Masterminds seem to think that because your way makes sense for you, everyone that is of a different type should just give up."

No. That is the inference you appear to draw. What I understand that is for a given starting in retirement year 1, other methods seem to require higher starting balances because they support only lower "safe" withdrawal rates.

Now if one can lower the income required, then the dollar amount necessary may be the same even though the withdrawal rate is lower. This board, it seems to me, does not spend alot of time worrying about what income is required, but instead leaves that to each individual's own pesoanl analysis --- instead it discusses what amount of capital is necessary to support the desired income.

"Well, guess what? There's more than one way to skin a cat."

I am well aware of that, thank you. Again, I would suggest that this board spends far less time in discussing the accumulation phase --- it is looking at what happens once you have gotten there. It is no secret that intercst does not like real estate investments. There are a number of regulars who disagree with him on this point, but it is rarely the central item in long threads and those who favor real estate investing do not appear to me to infer that they are unwelcome on this board, even though their investment strategy is substantially different from that posited by the "safe" WR studies.

"It's true that a Pathfinder study would not look the same as a Mastermind study."

Something we expressly agree on. I also believe that we agree on more than you realize.

"Any study I am involved with is probably going to have fewer numbers and more words. You're being narrow-minded to presume that that is so bad."

You are making an unfounded presumption about me. I have a degree in economics and it was largely qualitative and not quantative study. I like words; I live with words far more than numbers; I wish I were as talented with words as you. I did not continue on because I was not interested in the number crunching required to puruse a M.A. and PhD. And the law is full of people who actively dislike numbers and prefer words.

"Investing is not just about numbers. There's more to it than that."

I agree that investing is not just about numbers. OTOH, investment return and probably success rates is all about numbers.

"There are insights that only Masterminds are capable of, but there are also insights that only Pathfinders are capable of, and I don't doubt for a second that there are insights that only Freelancers are capable of, and insights that only Guardians are capable of."

I agree. But how does it matter in this particular context?

'What is the point of hanging a sign on the Clubhouse door that says "MasterMinds Only--All Others Please Go Away."'

It seems to me that you are the one who suggests that it is "Masterminds Only". You ahve received lots of support in this thread, including from me. Hll, you are one of my favorite posters. I would miss reading your writing.

"Perhaps it makes Masterminds more convinced of the merit of their conclusions to never hear an opposing viewpoint."

I doubt that, BWDIK?

"I seriously question whether it makes them better overall investors."

I do not recall this claim ever being made; certainly I have never made it.

"Each personality type has drawbacks, including that of the MasterMinds."

Agreed.

"I would not be surprised someday to learn that your belief that you can figure it all out among yourselves may be your biggest investing capacity drawback when all is said and done."

Possibly. Certainly the infamous hedge fund blow-ups are possible evidence in support of your belief. I do not believe so, but only time will tell.

Regards, JAFO








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mhtyler:

[JAF031 wrote] <<<"Second, and more importantly, "non-Masterminds don't have a study to refer to as the starting point" is, I suspect, largely because they are generally not interested in putting that kind of study together (because they not 'Masterminds') --- but that is sort of exactly what 'Masterminds' are interested in and do.">>>

"I have no problem with Intercst's thinking as far as it goes. There it is in black and white: over a period of time your money will do this or that if you hold this mix of assets. However that says nothing about where your money should be in a down market or an up market. In fact by default it disables your ability to judge whether a market is up or down.

The Safe Withrawal Formula and asset allocation plan is _not_ flawed, but it is two dimensional. There simply many issues respective of an individual's retirment situation that it can't address."


But the study has never suggested otherwise (and I do not think that intercst has either). If the assumptions in the study, efficient frontier allocation, minimal expense ratio, willingness to tolerate volatility, etc. are not ones that apply to a person, then the studies do not speak very well to that person. It is an analogue to GIGO.

And it is exactly why, whenever I read a real estate appraisal, I always look for the assumptions and qualifications first. If I cannot accept the assumptions or if the qualifications make it too restrictive, the rest of the appraisal will be of little value to me.

"If your retirement boat is sinking and you decide not to throw freight overboard because 99% of the other boats aren't sinking you've missed an important point. Your retirement is an individual one not a Gestalt."

Agreed.

Regards, JAFO


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mhtyler posts,

Intercst wrote, "Is the average business any more adept than the average investor? Just because most of them do it, doesn't mean it's rational."

That's a snappy debating point, but claiming that standard tried and true business practices are irrelevant doesn't sway me...but then I don't think you intended it to.


You're right, I don't expect anything I write to sway people. As TMFPixy often counsels, "Ya makes your choices and ya lives with the results."

Here's some other snappy debating points:

Q: Who was selling on the day of the October 1987 market crash?

A: The average business following "standard tried and true business practices".

Q: Who was buying?

A: Warren Buffett.

Q: Who was selling when the stock market opened after the Sept. 11th attacks?

A: The average business following "standard tried and true business practices".

Q: Who was buying?

A: golfwaymore (I suspect Buffett had to sell to fund some of his reinsurance losses <grin>.)


As galeno pointed out, if you want to be successful, try to copy people who've been successful at what you're trying to accomplish.

intercst



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That's a snappy debating point, but claiming that standard tried and true business practices are irrelevant doesn't sway me...but then I don't think you intended it to.

Maintaining a consistent asset allocation is not at odds with "tried and true business practices". Pension plan managers do not typically sell off a large portion of their equity investments during a market downturn. Insurance companies continue to base their offerings on actuarial data and perceived risk even after a disaster.

Prometheuss
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JAF031 said, "But the study has never suggested otherwise (and I do not think that intercst has either). If the assumptions in the study, efficient frontier allocation, minimal expense ratio, willingness to tolerate volatility, etc. are not ones that apply to a person, then the studies do not speak very well to that person. It is an analogue to GIGO."

On the contrary Intercst has suggested that deviating from the formula is irrational.
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JAF031 said, "But the study has never suggested otherwise (and I do not think that intercst has either). If the assumptions in the study, efficient frontier allocation, minimal expense ratio, willingness to tolerate volatility, etc. are not ones that apply to a person, then the studies do not speak very well to that person. It is an analogue to GIGO."
-------------
On the contrary Intercst has suggested that deviating from the formula is irrational.


I think that it's been stated that it's irrational to expect to get the returns from the "formula" while putting your assets into low risk/low return fixed income. This irrational investment strategy has been proposed by some and it has further been suggested that this will work if you are of the "right" personality type.

Hyperborea
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mhtyler writes

<<<<JAF031 said, "But the study has never suggested otherwise (and I do not think that intercst has either). If the assumptions in the study, efficient frontier allocation, minimal expense ratio, willingness to tolerate volatility, etc. are not ones that apply to a person, then the studies do not speak very well to that person. It is an analogue to GIGO.">>>>

On the contrary Intercst has suggested that deviating from the formula is irrational.


Not quite. intercst suggested that deviating from the formula after a stock market decline is irrational. If you want to start with a higher allocation to bonds and reduce your initial withdrawal rate to reflect the fact that you're short of the efficient frontier, I think that's rational. Changing asset allocations to reflect the stock market's mood is where folks usually get into trouble.

If you're trying to take a 4% withdrawal from a portfolio of 100% CDs, I think that's just nuts. (The historical safe withdrawal for a 30-year pay out period and 100% cash is only 2.3%.)

intercst
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Mastermind Hyperborea writes,

<<<<JAF031 said, "But the study has never suggested otherwise (and I do not think that intercst has either). If the assumptions in the study, efficient frontier allocation, minimal expense ratio, willingness to tolerate volatility, etc. are not ones that apply to a person, then the studies do not speak very well to that person. It is an analogue to GIGO."
-------------
On the contrary Intercst has suggested that deviating from the formula is irrational.>>>>

I think that it's been stated that it's irrational to expect to get the returns from the "formula" while putting your assets into low risk/low return fixed income. This irrational investment strategy has been proposed by some and it has further been suggested that this will work if you are of the "right" personality type.


I couldn't have said it better myself. <grin>

intercst
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I think that it's been stated that it's irrational to expect to get the returns from the "formula" while putting your assets into low risk/low return fixed income. This irrational investment strategy has been proposed by some and it has further been suggested that this will work if you are of the "right" personality type.

I agree. I think it is fair to say that it is irrational to base your withdrawal rate on a "formula" (e.g., the "Retire Early Safe Withdrawal Calculator") which is based on a particular set of assumptions including a particular asset allocation and then decide to deviate significantly from that key assumption about asset allocation without also expecing to change your withdrawal rate (and possibly find a new "formula.")

I think a big undercurrent in the discussion here is the relationship between risk and reward. Some folks want more certainty than what is provided by the "Retire Early Safe Withdrawal Calculator" or similar methods based on historical data, statistical analysis and/or Monte Carlo simulation. There is nothing wrong with that. They can buy an annuity or base their assumptions on a more conservative asset allocation. The immdeiate consequence of that course of action, however, is that they must expect to put away more money for retirement ... unless they can crush the market Motely Fool style ;-)

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I think a big undercurrent in the discussion here is the relationship between risk and reward. Some folks want more certainty than what is provided by the "Retire Early Safe Withdrawal Calculator" or similar methods based on historical data, statistical analysis and/or Monte Carlo simulation. There is nothing wrong with that. They can buy an annuity or base their assumptions on a more conservative asset allocation. The immdeiate consequence of that course of action, however, is that they must expect to put away more money for retirement ... unless they can crush the market Motely Fool style ;-)

Exactly. There is a cost to be paid for lowering your risk and that is generally more years until retirement. I'm willing to get out when I have a reasonably good chance of making it instead of working more years and giving up doing something I've wanted to do for a very long time. If that means that I may have to live with a variable withdrawal (base survival + living + really living) that will depend on market returns then so be it. If things start to look a little bleak I know better than to pull out and really screw up my long term returns. The worst years for risk appear to be the early ones and so if in my first years of retirement the market is down then my wife and I can pick up some easy money using our hobbies or old professions to reduce the withdrawal rate.

I think to some degree hocus is assuming that we "master minds" are oblivious to risk. That isn't true, at least in my case and I imagine for others too. What he doesn't seem to have done is weigh the risks against each other and try to minimize the greatest risk first and then once that is done do what he can to minimize the others. I worry most about long term survivability of the portfolio especially with respect to inflation. So to minimize that risk I want to be invested in the stock market(s) to bring good long term returns.

This does bring some risk particularly short term volatility (which seems to be hocus' biggest fear). To minimize this I plan to use some form of tiered variable withdrawal, a bond ladder in front of the equities (probably with rungs of that ladder only replaced in up-market years), and if things are doing worse then possibly some form of extra income.

Hocus seems to put the risks the other way and worries about short term volatility first and minimizes that by pulling out of equities and then he is, apparently in vain, trying to find some way to mitigate the bigger risk of long term survivability against inflation. If I misstated this then it was unintentional, please correct my impression.

Hyperborea
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Intercst writes, "In response to the market decline he sells stock and buys more fixed income assets and says he has improved his position. I have no doubt he probably feels better. But the safe historical withdrawal rate for a 50%/50% stock/cash portfolio is lower than an 80%/20% mix for a 40-year pay out period. Is he now taking a less than 4% withdrawal from the $600,000 portfolio (i.e. less than $24,000/yr instead of $40,000 from the $1 million)? "

You insist on re-framing the examples in absolute terms. If the guy switches to 50/50 stock/cash for 40 years your averages hold true, but that was altogether not my example, nor is it my position.

I'm suggesting that moving some of your finances to a more secure place during down years can lessen your losses although reducing upside, and for those at the lower end of the financial spectrum that may well be politic.

As for reducing the withdrawal rate, _of course you would_ just as any business man reduces operating expenses during a period of loss or reduced profitability.

Why should your retirement business completely ignore short term profitability in favor of the long term if the very survival of your business is at stake?

Mark


I'll bet we can model this one.
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vickifool writes,

<<<I'm suggesting that moving some of your finances to a more secure place during down years can lessen your losses although reducing upside, and for those at the lower end of the financial spectrum that may well be politic.

As for reducing the withdrawal rate, _of course you would_ just as any business man reduces operating expenses during a period of loss or reduced profitability.

Why should your retirement business completely ignore short term profitability in favor of the long term if the very survival of your business is at stake?

Mark >>>>>

I'll bet we can model this one.


We can. And like the P/E Ratio vs. Safe Withdrawal study I completed less than one month ago, I can tell you the results before hand.

Rebalancing one's portfolio slightly increases the safe withdrawal rate. Rebalancing means that when stocks decline in value, you sell some of your fixed income assets to buy more stock and return your asset allocation to 80%/20%, 70%/30%, or whatever your target is.

mhtyler's proposal is the opposite of this. I guess you'd call it "reverse rebalacing". He suggests that when stocks decline in value, you should sell them and buy bonds. Then later on when stocks have gone through a period of rising prices and you're more at ease with the market, you should sell some of your bonds and buy stocks -- the classic buy high and sell low strategy that has historically met with such great success. <grin>

intercst
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hocus seems to put the risks the other way and worries about short term volatility first and minimizes that by pulling out of equities and then he is, apparently in vain, trying to find some way to mitigate the bigger risk of long term survivability against inflation. If I misstated this then it was unintentional, please correct my impression.

Hyperborea:

Other than the phrase "apparently in vain," I have no problem with what you said here.

I have no unhappiness with the results of my investment strategies to this point in time. A few ideas have worked out a little better than expected, a few a little worse. Overall, the plan is working out a little better than I expected when I resigned from my corporate job in May 2000. I've been able to afford to increase my spending some, and that's been good. But I've had more expenses than I expected, mainly due to the birth of a second child and the health premiums and expenses that came with that. The pluses have more than balanced out the minuses so far, so I don't think that any of my efforts have been in vain.

Maybe the "apparantly in vain" part is a reference to my desire to have the board generate a dialogue that would help me decide whether it makes sense for me to move a small bit of my money (I'm thinking 10 or 20 percent) into stocks at this time. I would like to get some useful feedback ("useful" meaning that it must be advice that makes sense for someone in my circumstances to follow, not just theoretical "on paper" stuff) on that question, and I'm a bit frustrated that it doesn't seem likely that it's going to happen. But it's not a life or death thing. I'll put some more effort into trying to figure that one out myself. Until I do, I'll stick with the default option, which is to wait to buy stocks until they are available at more reasonable prices.

You're right in the part about "hocus seems to put the risks the other way and worries about short-term volatility first." It wouldn't be right to say that I don't care about long-term risks. I care about them a great deal. But short-term volatility is a far more pressing concern for me, and was the priority consideration when I was putting my plan together.

I had my money in stocks before I put together my Retire Early plan. It was when I set a five-year goal of leaving my job that I took my first look at the historical data. When I saw what the odds were of a drop of 30 or 40 percent given the valuation levels that applied in 1996, I knew right away that stocks made no sense for me at that time. I didn't need to do any fancy spreadsheet calculations. It was as clear as these sorts of things can ever be that stocks were completely unsuitable for someone in my cirucmstances. If I had had any doubts about that call, I might have felt a little bad about the subsequennt run-up in prices. But it was not a hard call to make.

If there had been a 30 percent drop at any point in time from 1996 and 2000, and I had been in stocks at the time, that would have meant a delay of at least several years in my resignation from my corporate job. No thanks! The whole motivation in doing this was to escape that job. Why would I want to adopt an invesment strategy that could cause me to double the time it would take me to finance the escape?

You are also right that I am not terribly worried about long-term inflation effects. I certainly am aware of them and factor in inflation's effects in all my investment decisions. But this is not the sort of concern that keeps my up at night, as the possibility of delaying my retirement for several years would have. My bottom line is that I am in a better financial position than most people my age, and expect to remain working well past age 65 (not at a corporate job I don't really want to go to, but at work of my own choosing). So I believe that it will be easy to respond to any unexpected development re inflation. Since I pay more attention to my finances than many, I also expect that I will be aware of the need for any such response years sooner than most of my peers would. So long as I stay on top of things, I don't see that there's any great need for worry here.

If I were heavily in stocks at today's prices, I would be worried. That's because I need the earnings generated by my savings to allow me to continue to live the way I do. If I lost 40 percent of my assets, I would have to go back to a corporate job, where the paycheck would be more steady and bigger than with the work I am doing now. I don't want to do that so that's not the right way for me to go. If someone else is willing to make the sacrifice of staying at their job long enough to be able to "afford" to be in stocks, I'm OK with that. I don't like the idea of them telling me that I should be required to do the same, however. That's for me (and my wife, of course) to decide. I see the board's role--to the extent that it wants to be involved at all--as helping me achieve the goals I seek, not telling me which goals to pursue.

I think it makes perfect sense to address short-term risks first, and long-term risks second. The short-term risks are here now or soon will be. The exact nature and shape of the long-term risks are less certain. Now, I am not saying not to consider long-term risks at all. But I think I have the order right. If I don't have a way to pay the bills due next month (as could happen if I were 80 percent in stocks) I have an urgent problem. If I discover some flaw in my plan that is going to cause me a problem with paying the bills 30 years from now, I have a problem but I also have a lot of time to figure out a way to deal with it. To the extent that I am pressed for time and cannot direct as much attention as I would like to both short-term and long-term risks, I think it makes sense to first deal with the short-term risk and then the long-term stuff. You just can't let the long-term stuff go too long unattended, and I don't believe that I have.

My question about moving into stocks (which started an earlier thread on this general topic) is one of the long-term issues that I have not had time so far to fully analyze myself. That's why I asked for the board's help in determining the safe withdrawal rate for someone in my circumstances. I always knew that I would be moving into stocks (up to a 50 percent allocation, I hope) at some point. So long as ibonds were paying 3.4 percent, there was no need to come up with precise formulas as to when. The deal on ibonds (for those in my circumstances) was so much better than the deal available in stocks that it was a no-brainer as to where to put my money.

When the ibond return fell to 2 percent, it became a brainer. I now can make a reasonable case for someone in my cirucmstances having a stock allocation of 20 percent, even at today's prices. That doesn't mean that moving into stocks is the right thing to do. It just means that it makes sense at this point to make more precise measures of the safe withdrawal rate available with stocks today versus that available through ibonds or CDs. It appears to me to be a pretty close call, so I was looking for some thoughts which might help me make the judgement call.
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Jumping in and out of asset classes is "irrational" since most of the research shows it produces lower returns.

intercst:

My guess is that the research you are referring to here is research that looks at paper returns of stocks, much in the way that your Safe Withdrawal Rate study does. The logical fallacy you are falling victim to here is the idea that because a theoretical model generates a certain result that it is possible for a human being by becoming aware of that model to produce the same result in real life. I have never seen research indicating this to be the case. In order to draw useful conclusions about human behavior, you need research into human behavior.Research into paper behavior doesn't get you what you need.

If you did a research study showing that people who engage in an hour of exercise every day never develop back pain, you would not be right in telling someone that is worried about developing back pain that you have come up with a surefire way to eliminate the risk. You would be right in telling the person about your findings, because they do bear on the question. But it is too far a logical jump to say that the paper study is going to produce results in any particular indivdual case.

You have no way of knowing whether the person you give the advice to will in fact exercise one hour every day for the rest of his life or not. You could add to the value of your research by looking for factors that have a bearing on the issue. For example, if you have a second study that shows that woman who vow to engage in one hour of exercise for life have a 30 percent chance of actually doing so, while men have only a 10 percent chance, you would be right in telling a woman that she has a better chance of avoiding back pain with this approach than a man. But you would be wrong to tell either a man or a woman that his or her chance of ever again experiencing back pain is zero percent.

You would also be wrong in concluding without any evidence that it is the case that an individual who failed to engage in the one hour of exercise after vowing to do so is irrational. What if the individual suffers serious inujuries in a car crash and from that point forward finds it painful to engage in even 10 minutes of exercise? It's not irrational for the person at that point to change his mind about a vow he took when he did not realize how painful it was going to be to carry it through. It's not the person avoiding pain who is being irrational, it's the person expecting that pain should play no role in a person's decision about whether to engage in exercise or not who is.

We know that the pain of drops from extremely overvalued stock values is so great that few investors maintain their former stock allocation in the face of it. If we want to make the Safe Withdrawal Rate study of practical use, what we need at this point is some data on what sorts of circumstances make that experience less painful or more so. Knowing that, we could adjust the theoretical Safe Withdrawal Rate to the extent needed to produce a number that might apply in the real world.

The proposition has been put forward that perhaps an investor's personality type is a big factor in determining whether he is in the 90 percent of investors for which the Safe Withhdrawal Rate study does not apply or the 10 percent for which it does. But do we know this for a fact? Not at all, not at this point. It's a supposition. It needs to be tested before anyone can fairly assert it as true.

For all we really know at this point, it could be that MasterMinds are the group most likely to abandon their plans to remain in stocks once they learn that their theoretical models don't apply in the real world. I'm not saying that this is the case, I'm saying that we are engaging in guesswork at this point in presuming that it is not.

I think that we all should be a little more careful about which groups of investors we characterize as "irrational." When the stock market is finished its work with us, who among us can say with absolute certainty that the truly irrational investor won't end up being the one looking back at him in the mirror?

Come on. I didn't call him stupid, I just pointed out that his action was the exact opposite of what a rational investor would be doing.

OK, intercst. I think that your study is the exact opposite of responsible investment research. But I mean no criticism.

The problem is that hocus wants a spreadsheet that shows he can avoid stocks and still get a 4% withdrawal rate with 100% safety.

What I really want is for each person on this board to be able to determine with confidence what investment allocation will give him or her the best shot at a safe early retirement in the shortest possible amount of time. My expectation is that stocks will form a portion of that allocation for most, but not for all, and that an 80 percent allocation in stocks at today's prices will not be suitable for hardly any. But if the data shows that I am wrong in those expectations, that's OK with me. If it takes stocks to get the safest, quickest early retirement according to the data, I'm OK with that. If it takes something else, I'm OK with that too.

I think it's the idea that the data might reveal that in some circumstances "something else" provides the quickest, safest early retirement that has some people on edge.
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hocus writes,

Jumping in and out of asset classes is "irrational" since most of the research shows it produces lower returns.

intercst:

My guess is that the research you are referring to here is research that looks at paper returns of stocks, much in the way that your Safe Withdrawal Rate study does. The logical fallacy you are falling victim to here is the idea that because a theoretical model generates a certain result that it is possible for a human being by becoming aware of that model to produce the same result in real life. I have never seen research indicating this to be the case. In order to draw useful conclusions about human behavior, you need research into human behavior. Research into paper behavior doesn't get you what you need.


I give up. I guess you're right. <grin>

Going back to my Africans and condoms example. Since 90% of Africans won't use condoms, that means that condoms won't reduce the risk of AIDs in the 10% of Africans that do use condoms. And it's impossible to educate the 90% of Africans that won't use condoms because their personalities prevent them from following the results of the "Condoms reduces AIDS study."

Africans should just keep doing what they're doing and hope that they have the right personality type to magically protect themselves from the AIDS virus without the benefit of a condom.

intercst
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hocus writes,

<<<The problem is that hocus wants a spreadsheet that shows he can avoid stocks and still get a 4% withdrawal rate with 100% safety. >>>

What I really want is for each person on this board to be able to determine with confidence what investment allocation will give him or her the best shot at a safe early retirement in the shortest possible amount of time. My expectation is that stocks will form a portion of that allocation for most, but not for all, and that an 80 percent allocation in stocks at today's prices will not be suitable for hardly any. But if the data shows that I am wrong in those expectations, that's OK with me. If it takes stocks to get the safest, quickest early retirement according to the data, I'm OK with that. If it takes something else, I'm OK with that too.

I think it's the idea that the data might reveal that in some circumstances "something else" provides the quickest, safest early retirement that has some people on edge.


If by "best shot at a safe early retirement" you mean no risk, then you have to invest in low-return Gov't guaranted fixed income assets. The only way to shorten the amount of time required to the amass the required portfolio amount (assuming you're saving the same amount each year from your salary) is to invest in asset classes with greater returns and greater risk, like equities. The REHP study balances these two opposing forces at the efficient frontier to get the maximum safe withdrawal rate for the given pay out period. If you decide you want to have more fixed income assets than the optimal stock/cash ratio you also need to reduce your withdrawal rate to remain 100% safe. A lower withdrawal rate means you'll have to work longer to amass the required amount.

If you want to invest suboptimally for whatever reason and balance that with a lower initial withdrawal rate, that's fine. It's at least rational and the numbers work.

But when you say that different personality types have different safe withdrawal rates. And someone who doesn't understand math can take 4% out of a 100% fixed income portfolio with safety while the historical data shows the safe 30-year withdrawal for that asset allocation is 2.20%, it doesn't make sense.

It's like the African condom man hoping his ignorance will protect him.

intercst
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My guess is that the research you are referring to here is research that looks at paper returns of stocks, much in the way that your Safe Withdrawal Rate study does. The logical fallacy you are falling victim to here is the idea that because a theoretical model generates a certain result that it is possible for a human being by becoming aware of that model to produce the same result in real life. I have never seen research indicating this to be the case. In order to draw useful conclusions about human behavior, you need research into human behavior.Research into paper behavior doesn't get you what you need.

I did not realize that intercst's research on safe withdrawal rates was about human behavior. I missed any conclusions about human behavior in what I have read.

intercst's research shows that a retirement portfolio invested at the optimum asset allocation (using historical returns) will almost always survive 30 years if one takes out 4% or less (again, using historical returns to predict future returns) each year. Your claim that there is a logical fallacy because the model does not generate certain results that you can produce in real life is vacuous.

That research is a guide. The model provides an upper bound on the safe withdrawal rate. Your actual results will vary. As an example, it immediately follows for me from intercst's work that if I want an income in retirement of a certain amount then I need at least 25 times that amount in retirement savings. If the future is like the past then my returns will be more than ample, but even if the future is grim I stand a good chance of getting the income stream that I desire. The price of greater certainty, however, is lower income or increased retirement savings. TANSTAAFL

Regards,
Prometheuss

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You're certainly verbose, hocus :)

I haven't read every post in this thread, but I have a couple comments:

We know that the pain of drops from extremely overvalued stock values is so great that few investors maintain their former stock allocation in the face of it.

Agreed.

If we want to make the Safe Withdrawal Rate study of practical use, what we need at this point is some data on what sorts of circumstances make that experience less painful or more so. Knowing that, we could adjust the theoretical Safe Withdrawal Rate to the extent needed to produce a number that might apply in the real world.

But that's an impossible number to know. For one, everyone's risk tolerence is different, and secondly how do you know what your pain threshold is until you experience pain you can't stand?

But let's try to figure it out. Over the last 30 years, there have been 21 "corrections" (drops of 10% or more) and 8 "Bear markets" (drops of 20% or more). Based on this observation, I would say there will be *plenty* of pain in the future. Plan on at least that much. One caveat, paper losses have no bearing to the pain of real losses and most investors over estimate their risk-tolerance.

My expectation is that stocks will form a portion of that allocation for most, but not for all, and that an 80 percent allocation in stocks at today's prices will not be suitable for hardly any. But if the data shows that I am wrong in those expectations, that's OK with me.

You may well be right, but Peter Lynch did a hypothetical exercise where he invested a $1000/year in the market from 1965 to 1995 at the absolute low point of the market each year. In other words, the absolute best time to buy. Then he invested $1000/year at the high point, the worst time to buy. After 30 years, the crystal ball portfolio returned 11.7%. The hard luck portfolio returned 10.6%. Datasnooper has shown similar data here on TMF. If the search function wasn't a POS I'd find his posts.

I think it's the idea that the data might reveal that in some circumstances "something else" provides the quickest, safest early retirement that has some people on edge.

Maybe, but I humbly submit that by trying to find ways to switch your assests around, you will burn far, far more than 0.1% just in spreads and commissions. I mentioned there were 21 corrections over the last 30 years. But there weren't 21 down years. You have to be very nimble to scoot in and out of stocks without missing the gains. O, you could cushen the blows with an addition of cash, while leaving the majority of your assetts in stocks to pick up the big gains. Intercst has take the latter route, while you're proposing the former. The problem is no one that I know of can time the market reliably. I think what you're proposing is almost impossible for that reason. And Peter Lynch has shown that it might not even be particularly advantageous.

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f you want to invest suboptimally for whatever reason and balance that with a lower initial withdrawal rate, that's fine. It's at least rational and the numbers work.

There is, of course, the Motely Fool's alternative--crush the market. Hocus knows that stocks are over-valued today. In theory, he can use this knowledge to obtain market beating returns. Anyone who knows when the market is under- or over-valued has a huge advantage over the rest of us. He can apply this knowledge to individual stocks or sectors and consistently clean up. The problem with this approach, however, is that it requires even more risk. Hmmmm.

On the other hand, if someone is just uncomfortable with the volatility inherent in equity markets, then his only alternative is to invest a lot less in equities and accept lower returns. But that's what intercst said, isn't it?
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Hocus, thank you for so clearly articulating some things that have been in the back of my mind.

I think that your post begs the question:

- How can the non-Mastermind successfully survive ER?


Here's my thoughts.

OK in the interest of full disclosure--I am a mixture when it comes to money personality. My portfolio most resembles that of a Guardian, however my MBTI is that of a Freelancer. Like the Mastermind, I have the ability to delay gratification, look into the future and am independent. However, my eyes glaze over if I read too much detail about "efficient frontiers", for example. (Come on, I'm not the only one).

Perhaps the extensive research that a Mastermind does is sufficient to allow him/her to think their way through the bad times. That is their coping mechanism. Since I have a mostly non Mastermind personality, I think of the safe withdrawal as a starting factor that I may or may not have to tweak depending on what's happening to my portfolio. And yes this tweaking will partly be based on emotions. In a down market, your true money personality will come out. I wonder if us non Masterminds can anticipate this happening and either use coping mechanisms that fit our personalities or lower the withdrawal rate until it is feels right:


The Pathfinder might cope by tapping into his/her spiritual side perhaps through meditation or yoga. Or lower the withdrawal rate by really questioning the need of all expenses. Perhaps this explains why so many of the out-of-work, ex-dotcommers are volunteering for the Peace corps. I'd say that Joe Dominquez, the author of Your money or your life, was an example of a Pathfinder who was successful at ER.

The Guardian could cope knowing that since they invested using tried and true investment principles, they know that the market will reward them over the the long haul. Or many of them have pensions available to draw on. If they felt the need to lower their withdrawal rate, they could always chose to return to work part-time to make up the difference. This would not be all that unattractive compromise to a Guardian as they tend to feel comfortable in Corporate America.

Now, true to the Freelancer's spirit, he may try any combination of what has been mentioned and/or come up with something totally orginal.

I think that rather than concentrating on which money type is superior, it is far better to know which type you fit into and go from there...




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sykeMOL wrote in post 68374

“Maybe, but I humbly submit that by trying to find ways to switch your assets around, you will burn far, far more than 0.1% just in spreads and commissions. I mentioned there were 21 corrections over the last 30 years. But there weren't 21 down years. You have to be very nimble to scoot in and out of stocks without missing the gains. O, you could cushion the blows with an addition of cash, while leaving the majority of your assets in stocks to pick up the big gains. Intercst has take the latter route, while you're proposing the former. The problem is no one that I know of can time the market reliably. I think what you're proposing is almost impossible for that reason. And Peter Lynch has shown that it might not even be particularly advantageous.”

prometheuss wrote in post 68376

“There is, of course, the Motley Fool's alternative--crush the market. Hocus knows that stocks are over-valued today. In theory, he can use this knowledge to obtain market beating returns. Anyone who knows when the market is under- or over-valued has a huge advantage over the rest of us. He can apply this knowledge to individual stocks or sectors and consistently clean up. The problem with this approach, however, is that it requires even more risk. Hmmmm.”

intercst wrote in post 68353

“Here's some other snappy debating points:

Q: Who was selling on the day of the October 1987 market crash?

A: The average business following "standard tried and true business practices".

Q: Who was buying?

A: Warren Buffett.

Q: Who was selling when the stock market opened after the Sept. 11th attacks?

A: The average business following "standard tried and true business practices".

Q: Who was buying?

A: golfwaymore (I suspect Buffett had to sell to fund some of his reinsurance losses <grin>.)”


The obvious conclusion is that Warren Buffett and golfwaymore are market timers who take enormous risks.

hocus and mhtyler have made some excellent points. Let us pay attention to what they are saying and let us think. There is room for a whole lot of research and productive effort.

John R.



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The obvious conclusion is that Warren Buffett and golfwaymore are market timers who take enormous risks.


Not so.

Both WEB and GWM buy portions of companies on the basis of price, not time. The financial press for the masses confuses the 2 concepts.

DCA-ing or Value Averaging are strategies which are effective for those who know that they can't value a business/collection of businesses. There is nothing inherently wrong with these strategies.

But if you have the advantage of knowing how to value whole businesses conservatively with a margin of safety, go ahead and buy on the basis of price.

For people who understand how to value a business, this is the only way to fly.

Euro
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[I presume that hocus' positio is that that] Since 90% of Africans won't use condoms, that means that condoms won't reduce the risk of AIDs in the 10% of Africans that do use condoms.

intercst:

There were many claims in the early 1960s, backed by research of the sort that supports the Safe Withdrawal Rate study, that providing sex education in the schools would lower the incidence of sexually transmitted diseases in the United States. Since sex education has been adopted, the incidence of sexually transmitted diseases has gone up, not down.

I am not saying that one caused the other. There are other possible explanations for the result. But it is clear that the predictions that the incidence of sexually transmitted disease would go down has been proven false. It was based on "research." Yet it didn't happen. Why?

I can offer a possible explanation, without claiming that I am certain that it is the true reason. It could be that support for sex education was part of a bigger trend in society toward more openness about sex, and that there are higher percentages of the population today having sex, and with a greater number of partners through the course of their lives. If that is so, that would explain why the incidence of sexually transmitted diseases has gone up instead of down, as the research said it "should" have.

If that is what happened, then the researchers arguing that the adoption of sex education would cause the incidence of sexually transmitted diseases to go down were falling victim to the same logical fallacy as is evident in the Safe Withdrawal Rate study. You can't examine something that happened at an earlier time in history, change one of the important factors in causing it to happen, and then predict that it will happen again in exactly the same way in the future. A world in which there is sex education is not the same world as the researchers predicting confidently that sex eduation would bring about a drop in sexually transmitted diseases were looking at when they were putting together their research.

Nor is the world that you looked at in putting together you study the same as the world investors buying stocks today are living in. The investment world has changed in many ways, and one of those ways is that research of the type you have put forward was not available to average middle-class investors before and it is now.
The Safe Withdrawal Rate study is not the only study that has looked at the issue of whether long-term holding periods for stocks makes them more "safe" of an investment class than they would otherwise be. The book Stocks for the Long Run does something similar, and that book has been widely read and discussed in the past 10 years. It is possible that publication of that book, and the transmission of the idea at the core of it (that stocks are safe in the long run) has influenced decisions that middle-class investors have made about stocks in the years since.

I am not saying that this is so. I am saying that it is possible. If it is so, it would explain a fact that is otherwise hard to explain--why have stocks have risen in recent years to levels of overvaluation higher than was ever before achieved in the long time-span covered by the Safe Withdrawal Rate study. If books like Stocks for the Long Run have influenced people's thinking about stocks, that would explain why people in recent years have been willing to pay prices for stocks that they have never been willing to pay before.

Neither Stocks for the Long Run nor the Safe Withdrawal Rate study presents any evidence that human responses to stock price drops has changed in recent years. If the human reaction to price drops has remained the same, and the publications of such books and studies has set up conditions where periods of declining prices need to be longer to bring stocks down to levels of reasonable prices, then it is possible that the Safe Withdrawal Rate study done 20 years from now will show entirely different results from the one we have today.

Again, I am not saying this is true. I'd like to be able to say for sure one way or the other, but I don't think that this board has taken even the preliminary steps that would be needed to answer the question. You need to know not only the side of the equation that produces a high safe withdrawal rate for stocks. You also need to know something about the side of the equation that tends to lower the safe withdrawal rate, the human response to price drops.

I believe that mhtyler has identified one factor with potentially a large effect on the Safe Withdrawal Rate that real people will experience in the real world. Is it true that those with more assets have a higher safe withdrawal rate than those with fewer assets or not? It's a critically important question for anyone using the Safe Withdrawal Rate approach to plan their early retirement.

If the amount of assets you possess is a factor, then we know that the Safe Withdrawal Rate shown in the current study is wrong. The study presents an average Safe Withdrawal Rate. If there are some investors who possess a higher Safe Withdrawal Rate because they hold more in assets than is the average, there must also be some that possess a lower Safe Withdrawal Rate because they possess less in assets than is the average. You can't know your true Safe Withdrawal Rate without identifying the average asset level and determining on which side of average you fall.

FriendlyGirl and some others have suggested that the majority of the board is happy with the Safe Withdrawal Rate study just as it is, and see no need to explore the matter further. That's fine with me. You shouldn't expend energy exploring an issue that you are not personally convinced is important.

What I am asking of withdrawal rate study proponents is not that they join the non-Masterminds in trying to determine the true safe withdrawal rates. All I am asking is that you allow us to examine the issue for ourselves, without interference and distraction from people who take the current Safe Withdrawal Rate estiments on faith. It would be asking too much of you to ask that you agree with us. But I don't think it's asking too much to request that you stop referring to us as "irrational."

We are the ones, afterall, who want to look at the evidence and see where it leads. We will accept any safe withdrawal rate that the data points to, whether that turns out to be a pro-stock number or an anti-stock number. We have guesses as to what the answer will turn out to be, like everyone else, but we are saying let's test our guesses before becoming locked into them. Those are not the characteristics of "irrational" investors, in my humble opinion.
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Intercst opines, "mhtyler's proposal is the opposite of this. I guess you'd call it "reverse rebalacing". He suggests that when stocks decline in value, you should sell them and buy bonds. Then later on when stocks have gone through a period of rising prices and you're more at ease with the market, you should sell some of your bonds and buy stocks -- the classic buy high and sell low strategy that has historically met with such great success. <grin>"

That's hyperbole. It is not what I said, nor is it what I suggest.

On the contrary, I have always fully acknowledged that your allocation tables, and safe withdrawal rates are the most efficient over a period of time.

There is an irony though in using an averaging tool to disable individual judgement of a current market when that formula is necessarily inefficient within finite time periods.

It is a religious attitude.

mark
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Eurotrash01 responds to my comment:

The obvious conclusion is that Warren Buffett and golfwaymore are market timers who take enormous risks.

With the excellent reply:

Not so.

Both WEB and GWM buy portions of companies on the basis of price, not time. The financial press for the masses confuses the 2 concepts.

DCA-ing or Value Averaging are strategies which are effective for those who know that they can't value a business/collection of businesses. There is nothing inherently wrong with these strategies.

But if you have the advantage of knowing how to value whole businesses conservatively with a margin of safety, go ahead and buy on the basis of price.

For people who understand how to value a business, this is the only way to fly.

Euro


To which I respond:

I agree. That is why I have just recommended your post.

Any time that anyone takes valuations into account, a whole lot of people jump in and claim that he is engaged in market timing. Remember that hocus has never advocated frequent trading. Yet, he is routinely assaulted for trying to time the market. His rationale has always stressed finding reasonable valuations. He has never insisted on getting low valuations. He has tried to avoid excessively high valuations.

Euro, I encourage you to expand your commentary along these lines. It is quite helpful.

John R.


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hocus said, "I believe that mhtyler has identified one factor with potentially a large effect on the Safe Withdrawal Rate that real people will experience in the real world. Is it true that those with more assets have a higher safe withdrawal rate than those with fewer assets or not? It's a critically important question for anyone using the Safe Withdrawal Rate approach to plan their early retirement.


Its funny to note Intercst deriding business practices...you know...the ones he is invested in, but consider the point you reinfored from that of a business:

If your business has operating expenses of 30 per cent, and you generate 1,000,000 in revenue, and I do the same, we're on an equal footing.

However, lets say that hard times hit both our businesses and we're now only generating 600,000 per year in revenue. In your business however, you can easily reduce your operating expenses to 10 per cent of revenue during that period.

Your profitability zooms ahead of mine, and when business finely turns around for both of us, my position is reduced and yours is much stronger. Here is where the rich get richer doing exactly the same thing, yet the magic formula makes no distinction for the flexability that the rich-er have.

During that period of time I too could have cut expenses by 20 per cent, but only by selling off part of the business, so that when business turns around my ability to generate revenue is further reduced.

Bad idea right? Usually, yes. But if your survivability is in jeopardy...and that is -only- likely at the lower end of retirees using Intercsts method blindly...then you'd better take some action to protect your nest egg.
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You're certainly verbose, hocus :)

I'm not taking offense at your observation. sykeMOL I do indeed employ a lot of words in defense of my position. I'd like to take a moment to explain why I feel a need to do so.

The pro-stock position is easy to explain in today's envronment. All you need do to make you case is refer to various catch phrases. There's the one about "long term buy and hold always works in the log run," and the one about "timing doesn't work" and so on. The problem from the standpoint of someone who wants to know how markets really work is that each of these catch phrases has just enough validity to be persuasive if not examined closely and just enough falsehood to be misleading if you relied on unthinkingly.

I can offer long responses to each of these catch phrases, if put to the challenge. I had to develop answers to each of them before adopting my own Retire Early investment strategy. I have dozens of binders of material I collected that addresses various aspects of these catch phrases, which I used to try to determine in what circumstaces I should have trust in the catch phrases and in which circumstance I should not.

Please don't get the idea that I think I know all there is to know about investing. That's not even close to being true. My primary reason for trying to get a debate started on this board about real-world safe withdrawal rates is that it is something that I was not able to figure out to my satisfaction on my own. I like to be able to teach on this board whenever I think I have something to pass along, but my primary purpose in coming here is to learn.

The problem I've run up against is that there is a hostility on the board to discussing the issues I consider most important at this point inn time to the future viability of my Retire Early plan. I want to see that discussion get going, others want to see it killed dead before it gets on its feet. That's what the debate is about.

If there is someway that Safe Withdrawal Rate proponents could find it in their hearts to allow the few people on this board who seem interested in having the sort of debate I am requesting, without feeling a new to sidetrack any useful threads before they get rolling, I think it might be possible for me to shorten my posts. You see, I can address each of the catch phrases used to support the concept of "all stocks, all of the time." But I can't do it in 50 words or less. I can't answer every possible question about investing on this one thread, and it looks like one thread is all I'm likely to get.

There have been many books and articles put forward stating the pro-stock position and most readers of this board have arguments from those books and articles in their heads when they read my posts. So each time I make a point, they are inclined to jump in and note the conventional wisdom--:"Wait a minute, you're saying that you don't want an 80 percent stock allocation during the period of greatest overvaluation in history, that sounds like timing to me, and I remember reading somewhere that timing is bad."

Well, timing is bad in many circumstances. Not all, though. To figure out whether the sort of timing that I am proposing is a good kind or a bad kind, we need to be able to have a conversation in good faith in which you ask me to kindly explain what it is that I am talking about and I in response try to explain it as carefully and completely as possible.

I can't respond to everything you've ever heard about the stock market in one day on one message board thread. If you really want to know whether all the catch phrases are 100 percent valid or something a little less than that, what I think you should do is express on this board a willingness to allow a debate on the subject. If such a debate goes forward, any questions you have about the strategies that I or any other non-Masterminds follow will be answered.

If the questions are brought up in that context, as a way of mutually learning about how markets work instead of as a way of proving whether the red shirts or the blue shirts won today's debate, I think it is possible for a lot of us to learn some things. If the idea is just to see how many trick questions hocus can respond to in the course of 24 hours, I think we are all using up time here that could be put to more productive use.

That's an impossible number to know. For one, everyone's risk tolerence is different, and secondly how do you know what your pain threshold is until you experience pain you can't stand?

I don't agree. If what you are saying is that we cannot predict precisely how individuals in various circumstances will respond to price drops, then you are obviously right. But if we demand absolute precision in our analysis, then we might as well shut the board down. What we can do is examine the factors that we suspect influence safe withdrawal rates, and then try to estimate based on the historical data how big an influence they play in various sorts of circumstances.

The Safe Withdrawal Rate study itself acknowledges that the same patterns that played out in the past may not play out in the same way in the future. The idea, as I understand it, was to take the best evidence we possess and use it to make the best guess we can as to what the safe withdrawal rate is.

Now, some holes in the logic of the study have been discovered. It doesn't tell us the safe withdrawal rate that applies in the real world, just a theoretical on-paper number. My proposal is that we take the same approach used in putting together the initial study to come up with one that would have more practical value.

We look at the historical data to find out what percentage of middle-class investors move assets out of stocks when prices fall and what effect that action has on their long-term investment results. Then we determine what are the characteristics that puts a particular investor in the class likely to move out of stocks or puts him in the class not as likely to move out of stocks. Then we publish different safe withdrawal rates for investors in different sorts of circumstances. At that point, any investor would be able to come to the site, look up her personal safe withdrawal rate, and have better confidence than she could have today that the number represents true safety.

Peter Lynch did a hypothetical exercise

Since I took on myself the task of showing flaws in the intercst study, I see no reason I shouldn't give equal time to Peter Lynch. ;-) I'm happy to point out flaws in the Peter Lynch analysis if there is interest on the board in the project of putting the effort I put into that to some constructive use. If 99.9 percent of the board already has its mind made up that the Lynch study is perfect regardless of anything I might say about it, there probably are better things I should be doing with my time.

My assessment is that the board is not quite ready for the debate I am proposing. Perhaps it will be in six months or a year. I'll create a file of questions that should be addressed when that debate begins, and I'll put a reference to your question about the Lynch study in it so that I'll remember to address the question when we get around to having the longer debate.

You have to be very nimble to scoot in and out of stocks without missing the gains.

I don't mean to be rude in this response, but my guess is that I will end up scooting in and out of stocks less than you over the course of my lifetime. I have seen research suggesting that one factor that causes people to scoot in and out of stocks a lot is purchasing stocks at high prices. Investors who pay fair value for stocks, or a little more than fair value, don't seem to feel the same pressures to reduce their stock exposure when prices fall. My hope is to be able to purchase stocks at something close to fair value (but possibly 20 percent above or so) and then hold them for long time-periods.

Another factor that seems to play a role in scooting is the percentage of one's assets in stocks. Those with a smaller stock allocation seem to feel less pain during significant price drops. If stocks fall 40 percent, and you have a 50 percent stock allocation, that's a 20 percent drop in your overall investment portfolio. If you have an 80 percent stock allocation, a 40 percent price drop hurts more. If you are sincere in your desire to avoid scooting behavior, you might want to consider a lower allocation to stocks at times of extreme overvaluation.
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Wow... them theres a lot of words...

there is a hostility on the board to discussing the issues I consider most important at this point inn time to the future viability of my Retire Early plan. I want to see that discussion get going, others want to see it killed dead before it gets on its feet.

Anyway...

If we'd spent half the energy discussing the issues you purport you want to discuss that's been wasted on why we supposedly can't discuss it in the first place, we'd all be mini-Buffett's by now.

you might want to consider a lower allocation to stocks at times of extreme overvaluation.

And this is the crystal ball we'd all love to have... ;)

I understand your goal here, but my question is; do you have any techniques that work to determine when stocks are extremely overvalued? I'm interpreting your message as referring to stocks in the general sense, as in the market being extremely overvalued; rather than referring to individual company's stocks.

Is this the discussion you want to have? How to determine when the market is "extremely overvalued"? I'm still a little vague on the desired direction of your desired discussion that we can't have on this board.

Draggon
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Draggon wrote:
I understand your goal here, but my question is; do you have any techniques that work to determine when stocks are extremely overvalued? I'm interpreting your message as referring to stocks in the general sense, as in the market being extremely overvalued; rather than referring to individual company's stocks.

Is this the discussion you want to have? How to determine when the market is "extremely overvalued"? I'm still a little vague on the desired direction of your desired discussion that we can't have on this board.


I wish I understood hocus' goal(s). The truth is, I'm baffled about it or them. I guess I'm not a true Mastermind--only a M&M wannabe.

It seems to me that hocus is "trying to make a dollar out of 99 cents." But hey, if he solves it, I'd like to know about how <grin>.

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If we'd spent half the energy discussing the issues you purport you want to discuss that's been wasted on why we supposedly can't discuss it in the first place, we'd all be mini-Buffett's by now.

Draggon:

That's so. I'm going to put you down as in favor of a debate about effective Retire Early investment strategies, but not too crazy about debates about having debates on effective Retire Early investment strategies. That's where I put myself too.

This is the crystal ball we'd all love to have...

Why is it that when I see the word "crystal ball" in a post, I always get the sense that the person writing it is skeptical about whatever claim is being made? Do we all have something against crystal balls?

The Safe Withdrawal Rate study is a crystal ball. I don't fault it for being a crystal ball. If you are planning to retire early, you need some sort of crystal ball to anticipate what may happen in times to come, don't you? I like the way that tthe Safe Withdrawal Rate uses historical data to come up with predictions for the future. I'd like more certainty, but I know it's not possible. My suggestion is that we build a better, more accurate, crystal ball than the one available to us today.

I'm interpreting your message as referring to stocks in the general sense, as in the market being extremely overvalued; rather than referring to individual company's stocks.

When I say "stocks" I usually am referring to "stocks" as used in the Safe Withdrawal Rate study, a broad index of stocks. It's quite true that it is possible to select individual stocks that are not as overvalued as the indexes, and that that might be a good Retire Early investment strategy. I've considered it from time to time, and I keep a list of suitable candidates, but I hesitate because I don't think I'm a smart enough investor yet to pull this off effectively. I hope to change that in years to come.

As far as the board discussion goes, I personally don't see this as an appropriate place to spend lots of time recommending individual stocks. I would think that the better approach would be to use this board to come up with investment strategies that work for Retire Early investors. Some of those strategies might involve investing in indexes, but I don't see any reason why some couldn't also involve investment in individual stocks. I guess I'd like to see whether the historical data suggests that investing in indivudual stocks is better for Retire Early investors than investing in indexes or not, and what sort of circumstances tend to make that true or not.

Do you have any techniques that work to determine when stocks are extremely overvalued?

Sure. The one I refer to most frequently is the Price/Earnings ratio. That's only one of many that have been used by lots of informed investors for a long time. Some people have found fault with the PE ratio in recent years, and I'm not wedded to it at all. I refer to it because it's the one that most people are familiar with it and it's easy to describe.

There are lots of other indicators. There's price to book value, there's the dividend rate, there's the percentage of middle-class investors invested in stocks at a given time, there's the comparison of stock values to GDP, and on and on. If it were only the PE number that showed stocks to be extremely overvalued today, I would be less confident that they really are. But the other indicators all say the same thing. There might be a few that indicate that the overvaluation is not the highest ever in history, but I don't think I've seen any that don't put current prices in the two or three most extreme overrvaluations periods in history.

The funny thing about valuation criteria is that different ones come into fashion as prices move higher and lower. It wasn't too long a time ago that the conventional wisdom was that you had to be nuts to buy a stock with a dividend that paid less annual income than what you could get on a long-term bond,. The theory--an idea defended as fiercely then as the idea that stocks can never possibly reach prices at which they are not a good buy is defended today--was that stocks were obviously riskier than bonds and thus should always provide more annual income to compensate the investor for the added risk she was taking on.

How many stocks in the big indexes today pay annual dividends that exceed the annnual income on a long-term bond? The thing about investing truths that everybody knows are so is that they change from year to year, from investing cycle to investing cycle. That's because most of them contain both some truth and soem falsehod, so the level of confidence they inspire at any given time depends on what sorts of experiences most investors have had with stocks in recent times.

There will be safe withdrawal rate studies published when stock prices go down showing with absolute certainty that Retire Early investors should never consider devoting even a dime to stocks. I hope that, when that happens, I'm making the case for stock purchases by Retire Early investors because that viewpoint is just as extreme as the one that says that investors obtain a 4 percent safe withdrawal rate regardless of the circumstances in which they purchase stocks and make withdrawals from their portfolios.

Is this the discussion you want to have? How to determine when the market is "extremely overvalued"? I'm still a little vague on the desired direction of your desired discussion that we can't have on this board.

No. I don't have any particular interest in determining when stocks are overvalued. I would think that it's a question that would be likely to come up somewhere during the debate that I would like to have. But it wouldn't bother me if for some reason it didn't.

The debate that I would like to have is on the question, what is true Safe Withdrawal Rate for stock investments? My estimate is that it is almost certainly less than 3 percent for investors in my circumstances. But it is not clear to me whether "less than" means 2.8 percent, 1.8 percent, .8 percent, or something else.

The difference between a safe withdrawal rate of 2,8 percent and one of .8 percent is a difference of only 2 points. But that's a big deal for me. I am able to get a 2 percent inflation-adjusted return today from ibonds. I view a 2 percent inflation-adjusted return as roughly equal to a 2 percent withdrawal rate. If I can get a better safe withdrawal rate from stocks, it would seem to me that I would be better off in stocks because the long-term growth prospects are probably better in stocks. But I can't afford a safe withdrawal rate of much less than 2 percent.

That's my dilemma, and that's the reason I proposed the debate. Of course, there's no reason the board should allow a debate aimed at helping only one person. My sense is that it's more than just me that would like to have the debate, but that the number that desires it is pretty small. I expect that I will check on the board from time to time for signs that there are a few more people interested in such a debate.

When we get to the point where there are at least 10 or 12 people interested, I think there will probably be a good chance that the number trying to have the debate will be large enough that those trying to prevent the debate will no longer have much luck in trying to stop it. Ultimately, the board as a collective entity decides what debates are held here. I can't on my own insist that the debate be held, and no one else on his or her own can stop it from being held if there are more than just a few who want to hear it or participate in it.
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hocus draws our attention to historical data in post 68387.

“We look at the historical data to find out what percentage of middle-class investors move assets out of stocks when prices fall and what effect that action has on their long-term investment results. Then we determine what are the characteristics that puts a particular investor in the class likely to move out of stocks or puts him in the class not as likely to move out of stocks. Then we publish different safe withdrawal rates for investors in different sorts of circumstances. At that point, any investor would be able to come to the site, look up her personal safe withdrawal rate, and have better confidence than she could have today that the number represents true safety.”

The New York Stock Exchange discusses some of this information at www.nyse.com/marketinfo/marketinfo.html. It draws primarily from the Federal Reserve's “1998 Survey of Consumer Finances.” You can also go to the Federal Reserve itself at www.federalreserve.gov. Look under Economic Research and Data. Then look at the Survey and Reports and Statistics: Release of Historical Data. Unfortunately, the Federal Reserve updates its Survey of Consumer Finances only once in every three years. The University of Michigan actually collects the data. We only have snapshots. Middle-class investors tend to buy stocks when prices are rising and to sell when prices are falling. We can also see this kind of behavior by many people on this board. Many are now looking at REITs...in spite of intercst's personal testimony.

Have fun.

John R.
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In post 68400 hocus tells Draggon:

“That's so. I'm going to put you down as in favor of a debate about effective Retire Early investment strategies, but not too crazy about debates about having debates on effective Retire Early investment strategies. That's where I put myself too.”

Count me in. I am very interested in studies, investigations and discussions along these lines. It is unfortunate that we have to debate about having debates. But there are many who insist on doing so without increasing knowledge and understanding.

I am very interested in the method of withdrawal. If one has an 80% stocks versus 20% other in the first year, that 20% portion corresponds to five years of withdrawals at 4%/year. If one rebalances every year...similar to dollar cost averaging but in reverse...it tends to reduce the average price per share that is sold. If there were even the slightest ability to favor selling stocks and rebalancing during times of higher prices, a real world investor would be better off. We keep getting hit over the head by those who confuse making valuations over a five year time period with market timing. eurotrash01 knows better. See post 68379. So does golfwaymore. He had to say that he was timing the market to one group and that he was not timing the market to another.

I am still having fun.

John R.
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If there were even the slightest ability to favor selling stocks and rebalancing during times of higher prices, a real world investor would be better off.

JWR1945:

The historical data provides important clues as to how to go about developing this "ability."

Robert Shiller in the book Irrational Exuberance provides a scatter diagram of annualized ten-year returns against price-earnings ratios. I'll provide some quotes from his discussion of the scatter diagram.

"The swarm of points in the scatter shows a definite tilt, sloping down from the upper left to the lower right. The scatter shows that in some years near the left of the scatter (such as January 1920, January 1949, or January 1982) subsequent long-term returns have been very high. In some years near the right of the scatter (such as January 1929, January 1937, or January 1966) subsequent returns have been very low. There are also some important exceptions, such as Janaury 1899, which still managed to have subsequent 10-year returns as high as 5. 5 percent a year despite a high price-earnings ratio of 22.9, and January 1922, which managed to have subsequent 10-year returns of only 8.7 percent despite a low price-earnings ratio of 7.4. But the point of the scatter diagram is that, as a rule and on average, years with low price-earnings ratios have been followed by high returns, and years with high price-earnings ratios have been followed by low or negative returns."

"The spiking of prices in the years 1992 through 2000 has been most remarkable: the price index looks like a rocket taking off from the top of the chart....Yet this dramatic increase in prices since 1982 is not matched in real earnings growth....Earnings in fact seem to be oscillating around a slow, steady growth path that has persisted for over a century. No price action like this has ever happened before in U.S. stock market history."

"There is an enormous spike after 1997, when the [price-earnings] ratio rises until it hits 44.3 by Janaury 2000....The closest parallel is September 1929, when the ratio hit 32.6....As we all know, the market tumbled from this high, with a real drop in the S&P index of 80.6 percent by June 1932....The real S&P composite Index did not return to its September 1929 value until December 1958. The average real return in the stock market (including dividends) was -13.1 percent a year for the five years following September 1929, -1.4 percent a year for the next ten years, -0.5 percent for the next 15 years, and 0.4 percent for the next 20 years."

"The recent values of the price-earnings ratio [Shiller uses a ten-year average of earnings for the denominator], well over 40, are far outside the historical range of price-earnings ratios. If one were to locate such a price-earnings ratio on the horizontal axis [of the scatter diagram], it would be off the chart altogether. It is a matter of judgment to say, from the data shown in Figure 1.3, what predicted return the relationship suggests over the succeeding 10 years; the answer depends on whether one fits a straight line or a curve to the scatter, and since the 2000 price-earnings ratio is outside of the historical range, the shape of the curve can matter a lot. Suffice it to say that the diagram suggests substantially negative returns, on average, for the next 10 years."

"Dividends historically represent the dominant part of the average return on stocks. The reliable return attributable to dividends, not the less predictable one attributable to capital gains, is the main reason why stocks have on average been such good investments historically....Times of low dividends relative to stock price in the stock market as a whole tend to be followed by price decreases (or smaller than usual increases) over long horizons, and so returns tend to take a double hit at such times, from both low dividend yields and price decreases."

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The obvious conclusion is that Warren Buffett and golfwaymore are market timers who take enormous risks.

The conclusion is not obvious and is not even correct. Warren Buffett buys when the stock is trading at a substantial discount to intrinsic value. This isn't even close to timing the market, because Buffett makes no attempt to determine if the discount will increase or decrease in the near future.
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Intercst:
<The problem is that hocus wants a spreadsheet that shows he can avoid stocks and still get a 4% withdrawal rate with 100% safety. That hasn't been possible in the past.>


Hocus:
<<I'll stick with the default option, which is to wait to buy stocks until they are available at more reasonable prices.>>


I think these two comments are at the core of the differences in the debate. I think that most of us who accept the 4% study buy into the concept without being strict adherents to all of it's details. Many of us have portfolios of individual stocks rather than the S&P 500 index. That would mean that we are in violation of the guidelines. So be it.

Most of us are not focused on 100% absolute certainty. There are other real life concerns that go into the equation. The simplist is that the more certainty you require, the longer you have to be part of the rat race. There are also potential health issues that each person has to consider. Equally important is getting a firm handle on what your living expenses are going to be. If your expenses are going to be so low that you can affordably live on a 2.3% withdrawal rate, then I can find no fault at all for never being in the market. My only question would be how hard have you nailed down your expense end?

I think your particular case is outside the norm. I believe you have said you had your second child after you RE'd. Two very young kids is not typical for a new RE if they are on the borderline. I think that makes it much harder to clearly define what your expenses will be. It may also explain some of your obvious aversion to risk.

Where I would take issue with you is your waiting for reasonable prices. You have clarified that your statement is a generalized one. I certainly would agree that is was generally true in 2000 and may or may not be true today. However, I feel that your reluctance to dig beneath the surface has cost you over the last few years. There are several strategies that would have provided some juice to your returns without exposing you to excess risk.

The S&P 500 has a beta of 1.0. If you bothered to look in any detail, you could have found many stocks in the utility and REIT area that had betas of 0.1-0.5. A 0.1 beta is 10 times LESS volatile than the S&P. They are not immune from price declines, but they all pay healthy dividends without large swings in prices.

Starting in 2000, I made my first REIT buy and added to my utility positions. I bought all of them for income and stability, with the hope of some appreciation along the way. I was very selective about my choices. I did not chase high yields, but preferred a demonstration of LT performance. These holdings have helped to enhance the income side of my portfolio while offsetting the sour performance of some of my other holdings.

BTW, my REIT investing came about from some discussions on this board. I like to remain open to new ideas and will act on them if I feel that they can be a benefit. Everyone does not adhere to the party line as Intercst has made his dislike of real estate investments well known. Like most people here, we listen to other views and decide for ourselves what to ignore and what to incorportate into our strategies.

I actually agree somewhat with the idea that investment real estate is not for most people. It takes a set of skills that I either do not have or do not want to make the effort to develop. The compromise for me was finding REITs. There were other choices you could have made. If you were so certain that stocks were overvalued you could have shorted the indexes or individual stocks. A lot of money was made that way, although I have to say that it is not in my style of investing. My main point is that there are a number of ways that you could have enhanced your holdings without staying on the sidelines.


BRG

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Seems to me the essence of a big part of this thread is simply that those who feel that they haven't got a big margin of safety in their retirements can't afford much volatility, and them with big safety margins can.

Which means that if you have 10 million, and your stock portfolio declines by 40%, you are still doing OK. But, if you retired on a portfolio of 500K, and your portfolio declines by the same 40% you are SOL and back to work.

Makes sense to me.

Hocus' portfolio probably is closer to 500K and intercsts is probably closer to 10 mill.
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Warren Buffett, regarding volatility:
“In fact, the true investor welcomes volatility. Ben Graham explained why in Chapter 8 of The Intelligent Investor. There he introduced "Mr. Market," an obliging fellow who shows up every day to either buy from you or sell to you, whichever you wish. The more manic-depressive this chap is, the greater the opportunities available to the investor. That's true because a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly.”
- 1993 Letter to Berkshire Hathaway shareholders

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nnn12345 said, "Seems to me the essence of a big part of this thread is simply that those who feel that they haven't got a big margin of safety in their retirements can't afford much volatility, and them with big safety margins can."

Its a point worth discussing many if not most people retire when they have _enough_, not because they've reached the 2.5 million mark.
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Seems to me the essence of a big part of this thread is simply that those who feel that they haven't got a big margin of safety in their retirements can't afford much volatility, and them with big safety margins can.

nnn12345:

You have tapped into not merely the essence of the thread. Your few words above communicate pretty much the whole damn thing, a point that took the rest of us about 5 million words to convey.

If I can put what you said above in my own words, every aspiring early retiree needs to look at his or her own circumstances to determine what stock allocation makes sense for him or her.

If we could agree on that simple and to me painfully obvious point, those of us who do not have a big margin of safety could then proceed to the little discussion we would like to have amongst ourselves as to what stock allocations do make sense in our circumstances, and those with bigger margins of safety (and thereby bigger safe withdrawal rates) would feel no need to jump in every ten seconds and remind us that it is "irrational" to ever consider anything other than an 80 percent stock allocation because there is this darned study that few follow and that few have bothered to read very carefully that "proves" it.

We have gotten to a strange place where it becomes controversial to say something that any investor with a lick of sense knows--that there is nothing irrational about limiting your exposure to stocks at times of life when you cannot afford to be invested in them, given what the historical data says about how they are likely to perform over the following 20 years or so.

I may have "retired" with less in the way of assets than some on this board would have approved of. Reasonable arguments can be made both ways. But I sure as heck wasn't irrational to get out of stocks when I went about the business of doing it. And there's no study that can ever "prove" different because to believe that I was requires that you completely abandon your common sense.
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Hocus wrote:

If I lost 40 percent of my assets, I would have to go back to a corporate job, where the paycheck would be more steady and bigger than with the work I am doing now.

YIKES!!! Hold on there. The 4% number was based on minimizing the risk that your portfolio would go to zero before 30 years. The assumption was not that your portfolio wouldn't go to less than 40% of its value.
There are many times in the past when your portfolio would have dropped by a large amount in the time of a year (25 or 30%!!)

Looking at PE ratios would not have saved you, unless you only invest in times when the PE ratio is so low that it would exclude you from investing in the market most of the time.

It seems to me that the non-Mastermind investor doesn't deal well with the fluctuations that their portfolio will go through?? Perhaps this is why having someone else manage their port was suggested.

Out of curiousity, it seems like you might have never gone through a down year during the accumulate phase of life. 1991-2000? Do you think this plays into your fears now that you are seeing down times in the market?

I haven't seen down times either, but am still in the accumulate phase. I expect that when I do retire, I will have much fewer worries about my portfolio going up or down 10 or 20%....because of my experiences in the last year or two.

I also agree that PEs are high right now, but that doesn't mean that all stocks are a bad purchase.

justpatrick
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I think your particular case is outside the norm.

It is outside the norm. But what is the norm exactly? This is a Retire Early board. The entire concept is outside the norm. Intercst's position is outside the norm. He has more assets at this point than many aspiring early retirees. I think that it should be OK for people with circumstances outside the norm to come to the board and trade thoughts without being characterized as "irrational" for not following strategies that make no sense in their circumstances.

Two very young kids is not typical for a new RE if they are on the borderline. I think that makes it much harder to clearly define what your expenses will be. It may also explain some of your obvious aversion to risk.

I'm glad you understand this. If there is any way you can think of to get the point across to others that these children are not pieces of paper that can be fed and clothed with the results of paper studies, but need the sort of incomes that come from real-world investment results, I'd appreciate your suggestions.

My REIT investing came about from some discussions on this board.

Gurdison, I believe that you brought up the REIT issue on an earlier thread. My response was that I had looked at REITS but not invested in them. I believe that you interpreted that comment as a suggestion that I had found REITS wanting. I did not mean it that way. What I meant was that REITS appeared promising enough to me as an investment class that I put them on a short list of possibilities to consider. I ended up not finding the time to do further research, so I never acted on the possibility. I have not looked at REITS recently, so I can't offer any opinion as to whether they are a good investment for me or not.

I don't consider myself any sort of investment expert. It's sort of embarassing to get into these threads where people are asking me to respond to an array of questions as if I were. I'm just a person with an IQ somewhere near average who decided one day in the 90s that he would like to Retire Early. I accumulated the assets needed, and then took a look at the historical data on stocks to see whether they made sense for me. I came to a conclusion a little different than the one intercst came to. And, a few years later, here I am. That's the extent of my investment "expertise," trying to put together a personal Retire Early plan that I thought might have some reasonable chance of not going bust.

My main point is that there are a number of ways that you could have enhanced your holdings without staying on the sidelines.

I don't consider myself on the sidelines. I am invested in TIPS, ibonds, and CDs. Each has provided great returns thus far. I wish I had been in a position to have picked up a lot more TIPS at the time when they were going for a real rate of 4 percent. I wanted to purchase more when they were available at that return, but much of my money was tied up in an employer plan at the time.











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hocus writes:

What I really want is for each person on this board to be able to determine with confidence what investment allocation will give him or her the best shot at a safe early retirement in the shortest possible amount of time.

I like this statement. I like it because it focuses on the accumulation stage of preparing for early retirement. It doesn't deal in absolutes and allows that there may be many suitable paths for achieving early retirement.


intercst responds:

If by "best shot at a safe early retirement" you mean no risk, then you have to invest in low-return Gov't guaranteed fixed income assets. The only way to shorten the amount of time required to amass the required portfolio amount (assuming you're saving the same amount each year from your salary) is to invest in asset classes with greater returns and greater risk, like equities.

I don't like this statement. You say the only way to shorten the amount of time required to retire early is to invest in high risk assets. Not necessarily so. Depending on actual market performance, attempting to carry out such a strategy may in fact result in your retirement being significantly delayed and your original plans lying in tatters. This is not a plan. It is a gamble. It is ultimately irrational, since over the shorter periods involved in accumulating the funds for early retirement; the results are far from predictable. The safe withdrawal study puts great stock in insuring portfolio survival over all historically encountered market conditions. How about addressing the survivability of an early retirement plan based substantially on investing in these same volatile assets over a much shorter time period? Gillette Edmunds explores this approach on page 212 of “How to Retire Early and Live Well” and reaches the same conclusion. We continue to inappropriately and myopically focus on the “safe withdrawal” study as the be-all and end-all of achieving early retirement, when in fact it sheds little if any light on what, for many people may be more appropriate options for creating an achievable plan to retire early. Why can't we explore creative ways live below your means, to save more, create more income and design a more predictable portfolio which will increase our chances for success? Instead of concentrating on strategies which involve areas of preparation where we can individually exert some influence, the apparent philosophy of this board is “put it all in equities and pray”. Some plan.

The REHP study balances these two opposing forces at the efficient frontier to get the maximum safe withdrawal rate for the given pay out period. If you decide you want to have more fixed income assets than the optimal stock/cash ratio you also need to reduce your withdrawal rate to remain 100% safe. A lower withdrawal rate means you'll have to work longer to amass the required amount.

I really don't have any problem with the safe withdrawal study, even given its many limitations, chief of which (as hocus has aptly pointed out) is the fact that most people aren't psychologically able to implement it. If it wasn't for the REHP safe withdrawal study, I doubt this board would exist since it seems to be all this forum is capable of offering. The REHP “safe withdrawal” study speaks not at all to the issues involved in the accumulation stage and doesn't help a single soul to accelerate the process of achieving early retirement. All it does is prescribe a method which some individuals could use to help insure that they don't outlive their assets, once they are accumulated. This is not unimportant, but receives entirely too much focus here.



Regards,
FMO
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The assumption was not that your portfolio wouldn't go to less than 40% of its value. There are many times in the past when your portfolio would have dropped by a large amount in the time of a year (25 or 30%!!)

I understand that. That's why I'm not in stocks.

The reason I am not in stocks is that I looked at the data that was used to prepare the Safe Withdrawal Rate study. The data tells the story better than I can. People should look at it.

My problem is that, while the data I looked at is in the study, people who promote the study seem to forget this fact regularly on these boards. They come onto threads in which people are trying to discuss alternatives to stock investing as a way of avoiding the sorts of returns that the study data says are possible, and make crazy claims that it is "irrational" to do that.

Either it is rational to take account of the historical data in planning your investment strategy, or it is not. I believe it is. I believe that those who are ignoring the historical data are the ones who are being irrational.

Looking at PE ratios would not have saved you, unless you only invest in times when the PE ratio is so low that it would exclude you from investing in the market most of the time.

If you look at the historical data, you will see that there is a connection between high PE years and years which cause early retirements to get off to a bad start (and ultimately to go bust). If you avoid those years, your odds of achieving a successful early retirement go up.

I'd like to refine that statement to tell you exactly how much they go up. It would be nice to know. There are about three or four people on the board at this point who seem to agree with me.

It seems to me that the non-Mastermind investor doesn't deal well with the fluctuations that their portfolio will go through.

I guess we'll see who deals well with flutuations when fluctuations come. I hope I do OK. But I don't have nearly the level of confidence that I will that some others exhibit.

Out of curiousity, it seems like you might have never gone through a down year during the accumulate phase of life. 1991-2000? Do you think this plays into your fears now that you are seeing down times in the market?

It doesn't play into my fears. I had my money in stocks at one time, before I started accumlating assets for early retirement. But it wasn't much money. So I had no significant stock gains in the 90s.

I also agree that PEs are high right now, but that doesn't mean that all stocks are a bad purchase.

I don't say that all stocks are a bad purchase. I say that all stocks are a bad purchase for me. There's an important difference in the two statements.
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hocus just wrote in post 68453:

“I don't consider myself any sort of investment expert. It's sort of embarrassing to get into these threads where people are asking me to respond to an array of questions as if I were. I'm just a person with an IQ somewhere near average who decided one day in the 90s that he would like to Retire Early. I accumulated the assets needed, and then took a look at the historical data on stocks to see whether they made sense for me. I came to a conclusion a little different than the one intercst came to. And, a few years later, here I am. That's the extent of my investment "expertise," trying to put together a personal Retire Early plan that I thought might have some reasonable chance of not going bust.”

I guess that we will have to call hocus an early retiree expert. I will point out, however, that hocus has outstanding skills in critical thinking and those skills are of great value to all of us.

John R.
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