No. of Recommendations: 15
StubbleJumper has put up two important posts which I am afraid that many on the board might miss because they come near the end of that poisonous "New Glassman Book" thread. The bottom line is that he knows where to find the data we need to determine the true Safe Withdrawal Rate for stock investments.

Here are links to the two posts:

http://boards.fool.com/Message.asp?mid=17681111

http://boards.fool.com/Message.asp?mid=17683390

One sentence that reveals just how keen an insight StubbleJumper possesses is this one:

In Hocus's unique, unwitting way he stumbled upon a piece of economic theory that has existed for the better part of 40 years.

That is precisely what happened. I didn't discover the limitations of the intercst study by reading it carefully or by subjecting it to analytical tests or by comparing it to other studies in the literature. I don't possess any particular skills to do that sort of thing, and I don't enjoy it, so why would I do it?

What I did was, I decided in the early 1990s that I would like to retire early. The goal had such compelling appeal to me that any sort of work I did in pursuit of that goal became enjoyable to me even if in other circumstances it might be the sort of thing I would not elect to spend my time doing. I spent a good number of my weeknights and a good portion of my weekends for several years researching the question of how to retire early. I had to have bookshelves built into my new home to store the material I gathered, which was collected into about 30 large black binders. I am not an expert on investing, but I do consider myself a bit of an expert on early retirement.

None of the material in those binders addressed the intercst study because I don't believe that the study even existed at the time I was gathering the material. But there was material showing me that it was not possible for most investors to have 100 percent confidence in their ability to take out 4 percent of an investment portfolio with an 80 percent stock allocation to cover each year's living expenses. So I knew that the Safe Withdrawal Study did not work before I ever read it! It may sound strange to put it that way, but it's the truth.

Some years later I began to participate on a message board where the study is frequently cited. As soon as I heard the 4 percent number, I considered putting up a post questioning it. But I sensed that this was a sensitive topic on the board, and I didn't view it as the most important topic for aspiring early retirees to consider at the time, so for a long time I kept my mouth shut. From time to time I put up a post hinting at my reservations re the study, but I did not directly question its methodology until September 2001 (this was prior to the 9-11 attacks and the stock price plunge that followed).

That thread was contentious, so I dropped the issue for a good stretch of time. In early 2002, I rarely posted because I was busy with other work. Stock prices were falling more often than rising and the issue of the true safe withdrawal rate was becoming a larger concern in my mind. You see, in most circumstances identifying the true safe withdrawal rate is not a big deal. The whole concept is to assume that the worst possible scenario plays out. That's not going to happen in the first five years for most investors, and once you get past the first five years it appears to me that even those with 80 percent stock allocations are close to 100 percent safe. So I wasn't all that concerned that the intercst study would do any real harm in my early days of posting here. But I became more conncerned in the early months of 2002.

In May 2002, I put up a post ("Personalized Safe Withdrawal Rates") outlining my concerns. There are lots and lots of angles to the debate, so I didn't put forward all of my concerns in that initial post. I tried to hit the high points. That thread was even more contentious than the earlier one, and it unfortunately turned into a debate of all sorts of questions that I do not even consider relevant to the core issue. It basically became a debate on investing in general, which is far too broad a topic to have a useful debate on on a message board. I decided it was best to drop the issue.

Then JWR1945 put up a real fine post taking some of the stuff I was talking about and converting it into what I think of as "techie babble" (I don't mean that pejoratively, I'm just trying to say that I don't know how to speak that language). I thought it was cool that JWR had tried to do that, and I sent him an e-mail telling him that I was willing to trade thoughts with him on the subject if he was interested, but that I did not intend to post on it anymore on the Retire Early board. JWR said that he thought I was wrong and that I should discuss the issue on the board, but that he was willing to trade e-mails if I wanted.

I sent him an e-mail that was comprised of most of the content of "The Coin Toss" thread. He was in the process of considering it when a post went up on the board making one of my core points, that the amount of assets an investor holds affects his ability to stick with an 80 percent stock allocation. Again, I thought this was cool. My purpose of coming to the board is to discuss things, I really don't care just to post my thoughts and not get any response that might help me extend my own thinking on a subject. Now I had discovered two thoughtful posters who were willing to engage me on the subject. Perhaps there were more.

So I put up the Coin Toss thread. There were those further signs of the possibility of constructive debate that I was hoping for. The post received over 80 recommendations. But, again, support for discussion of the ideas was mixed with intense hostility to my decision to post them. There were a few posts which appeared to me to be genuine questions or comments. Most appeared to me to be mere challenges, questions posed by people with no interest in understanding my views who wanted to see me fail to properly respond to a trick question and thereby "prove" me wrong.

I didn't enjoy responding to those questions. But I believed that by starting the discussion I had put myself in a postion where it was my responsibility to do so. I knew that my view was a minority one when I posted it, and I knew that many visitors to the board have not read the study closely enough to be personally familiar with all its ins and outs. Most of the "prove it" posts possessed at least surface plausibility. I don't think that they were motivated by a desire to learn. But they were not mad ravings, they made points that to a reasonably informed investor would seem to make a good bit of sense. If I was serious about trying to persuade others, I had to respond to each of these "prove it" posts.

It was a bit of an ordeal for me to do so. It took me away from work I really need to be doing for a full week. It annoyed my wife because I was spending time at the computer that I should have been spending taking our boy to the park or giving him a bath. Just about the entire board was mad at me, and a good percentage of my immediate family was not too pleased with me either (the four-month old did not appear to notice). Again, I came to the conclusion that this was a project with more downside than up. Again, I disengaged.

But as I went about my other work, my mind would turn to the good number of posts from people on the board who were not hostile to what I was saying. There were posts from people who said they enjoyed seeing the board for a short time focus on issues relating to early retirement, no matter how contentious the proceedings. There were people making points in support of what I was saying that I hadn't considered before, adding to my storehouse of knowledge on the subject. So I became less than entirely comfortable with my decision to drop the matter.

I tried to figure out why it was that this particular debate had to be so poisonous when the board has had effective discussions on so many other topics in the past. Was it the posts of someone like Gelano, which tend to the inflammatory side?. No, those didn't do much harm, I concluded. Gelano posts that way on many subjects, those that agree with him, agree with him, and those that don't, don't. It's not Galeno that is the problem. What is?

I determined that it is intercst. How is intercst any different than Galeno, given that both are in intense opposition to my views? There are several diffferences, in my view. One is that intercst does not have the reputation that Galeno does for putting up inflammatory posts. Intercst has a reputation around here for putting up informed commentary. To ignore Galeno's posts is a good strategy for a poster trying to advance a new idea. To ignore intercst's is death to his chances of persuading more than a very few.

On top of that, there is great affection for intercst on the board. People may like to think that debates are won or lost solely on the logic of the various arguments, but it doesn't work that way in the real world. People consider arguments, but the emotions they feel about the people making the arguments and about the arguments themselves plays a big role in determining which way they sway on close calls.

On an issue with as many complexities as safe withdrawal rates, most people are not able to research each question themselves, and have no choice but to place trust in what some respected figure says about it. People like intercst and people trust intercst, so when he says in the strongest possible terms that hocus is a complete 100 percent loony on this question, they are inclined to believe that that is at least partly the case. A good number of people on the board like hocus too, which is the only reason I have been able to get this far pressing the point, but there are stronger feelings for intercst than for hocus. That's as it should be. intercst founded the board, and intercst is here every day. hocus visits from time to time when the mood strikes him.

There's also more warm feelings for the viewpoint being expressed by intercst than for the viewpoint being expressed by hocus. Most people on this board, like most investors in general, have large stock allocations at this point in time. There have been developments in the outside world that have caused people to have twinges of uncertainty about whether they were right to adopt those allocations. Intercst is telling them that they were absolutely right to do so, and giving them the message they need to stick with stocks through the bad times, something the historical data shows to be the best strategy. hocus is saying something that undermines the confidence that they are trying to hold up. His message is not a particularly welcome one at this point in time.

On top of all that, there are many more board members starting out in general agreement with the intercst view. My sense is that about one in five on the board is in general sympathy with my ideas on this subject, with far less than that in total agreement. So each time a question is raised, there are five posts making the case against hocus for each one post making the case for him, and many more recommendations for the against case posts. That makes it appear that the case against is stronger. It also makes it necessary for hocus to put up many posts if he hopes to answer even a fraction of the many objections to his ideas that have been raised.

If he doesn't answer the objections, it appears that the objections have merit. If he does, he appears to be a crank who just can't let the subject drop. Either way, he loses the debate.

And yet, not quite. Because if I could just lose this debate once and for all, that would probably be a good thing for everyone involved. Appearances to the contrary, I have a life outside this board that I should be attending to. While my intent in raising the issue was to foster learning, there's precious little learning going on in the way that the debate is being conducted today. So we all would be better off if I would just stop. It's not just 99 percent of the board that sees that. I see it too. I'm not completely clueless.

The biggest problem I have here is that these damn people like StubbleJumper every now and then step in and take the debate in what could be a powerfully constructive direction. In his post he explains that the data needed to answer the question that has been raised here has already been collected and he identifies who possesses it. It's hard for me to ignore the fact that, in the midst of all the "he said, she said" of this debate, there are a few posters like StubbleJumper who are putting their energies into advancing board knowledge on an issue of critical importance to the success of a Retire Early plan.

We face big obstacles in trying to gain access to the data identified by StubbleJumper he notes. So he has not justified hopes that we can settle this thing by next week. But I believe that he has identified a promising avenue of exploration. We are probably not going to be able to get our hands on the actual data set. But is it possible that the researcher identified by StubbleJumper has published a study employing the data set that provides enough clues to what it says to make some progress on solving the question we are trying to address here? I think it is possible. I think it is worth giving it a try.

So after deciding last night for the third time in the course of this debate that the only sane thing is to just let it go, some damn poster puts up a post trying to help people learn rather than to prove one side right and one side stupid, and I'm back this morning to feeling hopeful again. It's an ambiguous sort of hope. My heart feels hope after reading the StubbleJumper posts, but my head tells me, don't trust that feeling, there are others on the board with a fierce determination to sending the debate back into the gutter again. They will do it, and the StubbleJumper insights will be lost in the mix of a hundred "he saids, she saids."

How can it end, I ask myself. Probably it will die from exhaustion at some point. I know I'm exhausted. I pray others are, and I believe they are. It saddens me that exhaustion is the end result of the efforts of people like StubbleJumper and the 20 or 30 others who contributed comments set forth in the post I put up Saturday (second in the thread started by Patnbj) showing how some have against all odds turned this debate into a learning experience for themselves. But the wise Nas90skog would tell me "it's only a message board, afterall," and he would be right. So we can let it die.

Or we could first spend one moment wondering if there is any way that this mess of accusation and legalisms and posturing and outraged outcries could resolve intself into something life enhancing. Is there a way?

The only way I see is if the person with a special personal investment in the issue were to step aside for the course of this one debate. With no malice towards intercst, an indivudal from whom I have learned much and to whom I owe a debt of gratitude for the support he has shown me in earlier times, I hold the view that intercst is not able to engage in a fair debate on the subject of whether a study he prepared answers all the possible questions or not. Again, I think of one of Nas90skog's observation's. It's human nature.

If intercst gave the word, the telegraphs and the prometheusses and the hyperboreas and the rest would return to their ordinary postures of explaining their positions in strong terms but of permitting some reasoned discourse with those of differing opinions at the same time. I believe that's the one possible way that the debate could get to a place where it would generate valuable and practical insights for the benefits of people coming to this board.

But I'm OK with the "let it die" solution too. Just please StubbleJumper and all others (you know who you are) who have overcome all pressures to do otherwise and offered compelling insights in this debate, the next time you see it on its knees and gasping for breath, please, please please let it die! I promise to remember you in my prayers if you kindly will just do that and allow me to return to some more fruitful (I hope!) preoccupations of mine.
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No. of Recommendations: 35
And? All in all, the safest withdrawal rate is zero. It's easy to do, just keep on working. You can continue to save and invest, without withdrawing a penny, and live off your current earnings. As for myself, I much prefer to be out of the rat race. This requires making some financial assumptions. Hey, I know they're assumptions. I think the data is fairly conclusive that 4%, give or take a little, is a reasonably safe assumption. Would a lower rate be safer? Probably, but so would working until I die at my desk. Everybody has to make their own decisions in life. I've made mine.
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No. of Recommendations: 15
The bottom line is that he knows where to find the data we need to determine the true Safe Withdrawal Rate for stock investments.


Unfortunately he neglected to provide any reference to the data (as opposed to research papers about it) in either of the posts you cited. In fact he says it is confidential - meaning, NOT available, he CAN'T find it even though he knows who has it (unless that person breaks faith & contract with his source, which deceitful action would call the data into question). And it is neither comprehensive nor a random sample; how well the customers of any one unidentified brokerage house parallel or typify the market is subject to a great deal of question.

None of the material in those binders addressed the intercst study because I don't believe that the study even existed at the time I was gathering the material. But there was material showing me that it was not possible for most investors to have 100 percent confidence in their ability to take out 4 percent of an investment portfolio with an 80 percent stock allocation to cover each year's living expenses. So I knew that the Safe Withdrawal Study did not work before I ever read it! It may sound strange to put it that way, but it's the truth.


And the first thing we tried to tell you in response is that a human inability to sustain the discipline and follow the math, is NOT the fault of the math. and does NOT cause the math to fail for more-disciplined people. You did not find a limitation of the Safe Withdrawal Study. You found a (presumed) limitation of some humans.

Then you went on to suggest that a HIGHER withdrawal rate would by some unspecified magic be safer. This is incorrect using the investment assumptions of the Study - and lacking the discipline to follow the assumptions of the Study will bring the safe withdrawal rate DOWN, not up.

Of course you could have some other investment strategy with a decent return and a better Sharpe ratio (a comparison of average return versus volatility), which would pull the safe withdrawal rate *up*. However, as far as anyone here or on the MI board is aware there is no historic data allowing us to test the validity of any such scheme back to before the Depression - so (as far as we are aware) a parallel of the Study is not possible.

And the people on the MI board *care* about data. If there existed an interesting and AVAILABLE set of daily, weekly, or monthly data back to 1912, they would probably know about it.
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No. of Recommendations: 21
hocus:

I had to have bookshelves built into my new home to store the material I gathered, which was collected into about 30 large black binders. I am not an expert on investing, but I do consider myself a bit of an expert on early retirement.

None of the material in those binders addressed the intercst study because I don't believe that the study even existed at the time I was gathering the material. But there was material showing me that it was not possible for most investors to have 100 percent confidence in their ability to take out 4 percent of an investment portfolio with an 80 percent stock allocation to cover each year's living expenses. So I knew that the Safe Withdrawal Study did not work before I ever read it! It may sound strange to put it that way, but it's the truth


Huh? YOu've got 30 binders full of information, yet can't provide us any, other than 'not possible for most investors to have 100 percent confidence in their ability to take out 4%"........ what am I missing?


....The whole concept is to assume that the worst possible scenario plays out. That's not going to happen in the first five years for most investors, and once you get past the first five years it appears to me that even those with 80 percent stock allocations are close to 100 percent safe. ......


.....when a post went up on the board making one of my core points, that the amount of assets an investor holds affects his ability to stick with an 80 percent stock allocation.......


So far, the only message I keep hearing is that hocus thinks that most REs and RE wannabees can't stomach a drop in stock price, and are going to panic sell...... Thus the SWR wont work for most, because they can't follow the required discipline (ie, NEVER reverse balance). Huh? Only hocus seems to have this problem on the board. THe rest of us are sitting tight.

And BTW, if you had a five year CD ladder in place, you wouldn't even worry about 90 plus percent of 'bear market' drops, since most of them last less than 18 months. With a CD ladder, you don't have to take ANY money out for five years, if you picked a bad time with five years of depressed stock prices. (but even then, you would survive OK if you didn't panic sell and reverse balance).

I think most REs are going to be unhappy about a drop in stock price, but are not going to sell....their 80/20 portfolio is now probably 60/40....... so why would they want to sell???? Or 50/50?

As Intercst noted, reverse balancing is absolutely the wrong move. (buy high, sell low).

Those who follow the Scott Burns Couch Potato Portfolio, where you don't even look at your balance until the end of the year, then do your 10 minute rebalancing, have no problem.

Yes, people who panic often make exactly the wrong move. Whether driving a car or investing. THey swerve to avoid a dog 100 feet ahead, who isn't likely to stay in the middle of the road anyway, and run into a tree or pole, killing them or their passengers. They panic sell their stocks on a declining stock , since they don't want to lose 'more money', jeopardizing their entire retirement future and savings.

I believe it was Malkiel who noted that if you were not in the market for 10 specific days over the past 30 or 40 years,you lost out on more than 1/3rd the entire gain of the market...just being out of the market for those ten days. So instead of 10.8% annualized increase, you had 1/3rd less. A very very big difference.


There may be many foolish people who sell today, only to see an 800 point rise tomorrow, and then ever increasing stock prices. No one knows when we go back up. Selling today because tomorrow might be worse also means to you lose out if tomorrow is fantastic. Just ten days! think about that.



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No. of Recommendations: 5
hocus:

The whole concept is to assume that the worst possible scenario plays out. That's not going to happen in the first five years for most investors

On the contrary, the only time that Bernstein disucssed difficulties with a portfolio was when you picked the 'worst case', which was retiring the day before the market drop in 1967....or 1929.....

The SWR is based upon the worst case scenario over the 130 years of data, for ANY 30 year period. The worst case IS when you get clobbered in the first five years.

If that doesn't ring a bell, then you haven't been paying attention to your 30 binders full of info.

If that marekt meltdown doesn't happen in the first five years, you are going to be likely sitting on a big pile of money, and be able to increase your annual withdrawals due to the 'annual reset' suggestion of Intercst....over time.

And, if it doesn't happen for most investors, per your claim, then it really is irrelevant, isn't it, since people aren't going to be 'panic selling' when they retire, since it won't be happening to them???? So it won't be a problem for most, right?

Where it is a problem, is for those saving for RE....if they foolishly reverse balance, they aren't going to get to RE.... so again, since they are not at RE, for them, it is also not a problem.

So, in conclusion, if it is not a problem for RE folks (since for most they are OK for 5 years), and it is not a problem for non RE folks, since they aren't retired yet, for who is it a problem? none other than hocus, apparently!

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hocus writes,

StubbleJumper has put up two important posts which I am afraid that many on the board might miss because they come near the end of that poisonous "New Glassman Book" thread. The bottom line is that he knows where to find the data we need to determine the true Safe Withdrawal Rate for stock investments.

I'm well aware of UCBerkeley Prof. Terrance Odean's data on the stock trading behavior and his conclusions. Here's a link to the study in question:

http://faculty.haas.berkeley.edu/odean/papers/returns/returns.html

<snip>

The Common Stock Investment Performance of Individual Investors

Brad Barber and Terrance Odean

Abstract

Using account data for over 60,000 households from a large discount brokerage firm, we analyze the common stock investment performance of individual investors from February 1991 through December 1996. The average household tilts their common stock investment toward high-beta, small, value stocks, and turns over 80 per cent of their portfolio annually. On one hand, the gross returns (before accounting for transaction costs) earned by the average household are unremarkable; the average household earned an annualized geometric mean gross return of 17.7 per cent while the value-weighted market index earned 17.1 per cent. On the other hand, the net returns earned by the average household lag reasonable benchmarks by economically and statistically significant amounts; the average household earned an annualized geometric mean net return of 15.3 per cent. The 20 per cent of households that trade most (which average at least 9.6 per cent turnover per month) earned an annualized geometric mean net return of 10.0 per cent. The poor performance of those households that trade frequently is generally consistent with the implications of recent theoretical models of investor overconfidence. Our central message is that trading is hazardous to your wealth.

</snip>


Odean's conclusion doesn't seem to support the hocus theory of "success through stock switching"

Here's a simplified version of the abstract from the Los Angeles Times for those who don't like math:

<snip>

"Who's Sorry Now? Folks Who Sold, Study Reports" is the title of an article published in the Los Angeles Times on June 3 about Assistant Professor Terrance Odean's study of investor behavior. His study shows that people tend to hang on to their losing stocks too long and to sell their winners too early. Odean was quoted in the article, saying, "The results confirm the conventional wisdom that people should be investors, not traders. They should take a long horizon and not jump in and out of stocks."

</snip>


If you want to read more about Professor Odean and his work, here's a link to his web site at the Haas School of Business at UC Berkeley,

http://faculty.haas.berkeley.edu/odean/

intercst


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No. of Recommendations: 5
That study is fundamentally silly. All it shows, assuming that it shows anything, is that some people - perhaps most people - do not know how to trade.

From this you could take at least one of the following two courses of action:

(1) Stop trading.

(2) Learn how to trade, which means how to pick what to buy and how to know when to sell.

If you have ever been a lifeguard, as I have, you soon discover that the majority of people in the pool at any time are terrible swimmers. They are not likely to drown, since they can generally get from point A to point B safely (particularly when it is a swimming pool, and A is not that far from B). You might conclude from this that it is impossible for people to learn how to swim well. So swimming classes are pointless.

Nevertheless, the people who did attend swimming classes, and who practiced for some time in the pool, did usually get to be better swimmers. In fact, some of them became excellent swimmers, swimming a mile or more in laps every day. All it took was discipline, instruction, and practice.



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Hocus,

Sorry for having raised your hopes on the existence of brokerage account data - the possibility of accessing it is slim to none. For the record, I am not sure that your theory is correct, but it is intriguing and I am unwilling to discard it out of hand (as our friend Telegraph has apparently done). To me it represents one more potential hurdle for the aspiring RE.

While I do not read the majority of the messages posted on this board and I rarely contribute, there have been a few interesting observations over the past few years for a potential RE candidate:

1. Very few people have the discipline to accumulate a sufficiently large "stash" to achieve RE.... even our friend Telegraph is fond of reminding us that most people would rather spend their money on SUVs.

2. Very few people are emotionally prepared to exit the work force at a young age. There have been dozens of posts on this subject and the best quote that has resulted is, "If you have to ask, you wouldn't understand". It is only a small fraternity (er sorry, I mean group) that is able to separate self-worth from professional achievement and have a zest for life that makes work seem like a dull waste of time.



These are important considerations. A potential RE must ask himself whether he can succeed at 1 and 2.


Now you, Hocus, have proposed:

3. Few investors (particularly those with a relatively small "stash") would have the internal fortitude to rebalance religiously. If the stock market declined by 80 percent you have suggested that few people would have the balls to sell their bonds/tips/GICs to purchase stocks to return to 80/20. You suggest that this might be particularly true for those who have a small stash, a four percent withdrawal, and few discretionary expenditures in their budget.



Hocus, I don't know whether you're right or wrong in holding this view (it really doesn't matter). Our friend Telegraph says, "Fiddlesticks, just follow the recipe, rebalance properly and you'll be okay". Effectively Telegraph has stated that he personally can do 1, 2, and 3 (good for him!). Every current and prospective RE must ask himself whether he can succeed at 3. In many respects it's not completely unlike 2. Both 2 and 3 involve assessing your emotional capacities, something with which our engineer friends might not be comfortable.


Anyway Hocus, I'm not holding my breath on testing your theory, but I think it offers another important and interesting consideration for REs. I, for one, am not prepared to discard it out of hand.


StubbleJumper
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Somebody with intelligence and common sense would have gotten out long before the market declined by 80%. Whether after that much of a decline it would be wise to put more money in is another matter. There is no way to know just given that information.
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joelxwil wrtoe:
Somebody with intelligence and common sense would have gotten out long before the market declined by 80%. Whether after that much of a decline it would be wise to put more money in is another matter. There is no way to know just given that information.



Joelxwil, I will not attempt to argue about market timing and common sense --that's a swamp that I don't want to get into! However, if I've understood Intercst's RE study, you must stay in the stock market at all times and rebalance annually for the results of the study to be valid. If you time the market by jumping in and out of stocks in response to major bears and bulls, the SWR identified by the Intercst study no longer applies to you.

Have I understood this properly, Intercst?


StubbleJumper
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Of course you are right, SJ.

The whole concept of such "hibernation investing" where you just wake up one day a year and do something simply makes no sense. You can track the results in the past, of course. It may be successful by some measure or not. It is simply not a good way to manage money.
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StubbleJumper asks,

joelxwil wrtoe:
Somebody with intelligence and common sense would have gotten out long before the market declined by 80%. Whether after that much of a decline it would be wise to put more money in is another matter. There is no way to know just given that information.


Joelxwil, I will not attempt to argue about market timing and common sense --that's a swamp that I don't want to get into! However, if I've understood Intercst's RE study, you must stay in the stock market at all times and rebalance annually for the results of the study to be valid. If you time the market by jumping in and out of stocks in response to major bears and bulls, the SWR identified by the Intercst study no longer applies to you.

Have I understood this properly, Intercst?


Yes!

However, as I showed telegraph last night, if you don't rebalance (and refrain from "Reverse ReBalancing" ,i.e, selling stock to buy bonds after a big market decline) you only reduce your safe withdrawal rate by a small amount, from 4.26% to 4.18% fro a 30-Year pay out period.

intercst
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No. of Recommendations: 3
The whole concept of such "hibernation investing" where you just wake up one day a year and do something simply makes no sense.

Maybe it makes no sense - but as the Safe Withdrawal Study shows, it WORKS.

(Not to say that other things don't work better. Some don't - that's known. Some do - as far as well can tell, but we don't have all that much history on them.)
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No. of Recommendations: 5
SJ's observations:

1. Very few people have the discipline to accumulate a sufficiently large "stash" to achieve RE.... even our friend Telegraph is fond of reminding us that most people would rather spend their money on SUVs.

And that is why so few, percentage wise, are retired early. There are lots of cases where people don't have discipline...more than half of Americans are fat....and more than half of them are OBESE.... so?

It's their choice, and their choice of options...and there are many. Smoke? money down the drain, and health down the drain...but it is an individual choice.

Not invest, but spend for today (or for tomorrow if it is on the credit card)??? well, you just kept yourself working for many many more years, but if that is your thing, fine.

For Telegraph, having all those tens of millions of people consuming is driving the economy! And paying lots of taxes, which keep mine down. I'm not complaining in the least.

All the information about smoking, investing, and healthy eating/living are available. No?

And I did it without benefit of 401Ks for the most part(they only started in big was 1990) or low cost IRAs.

2. Very few people are emotionally prepared to exit the work force at a young age. There have been dozens of posts on this subject and the best quote that has resulted is, "If you have to ask, you wouldn't understand". It is only a small fraternity (er sorry, I mean group) that is able to separate self-worth from professional achievement and have a zest for life that makes work seem like a dull waste of time.

Yes, so? There are very few who can separate themselves from 'herd thinking'...from everything from UFOs to consumption habits, brand awareness, upscale living, keeping up with the Joneses, and a social life that consists of more than "well, what do you do for a living" type events.

And part of the retire early/financial independence awareness, which for most people happens over several years, is determining the priorities in your life. You have so many years to live. You can chose to do with them as you wish.

And a good part of that is the 'societal norms' that the herd creates. It is 'sad' if you are unemployed or not employed (what's wrong with him/her if she/he can't get a job?) for most people. They can't conceive of someone saving enough to retire on, or live a lifestyle that doesn't take 110% of income.

Then again, the country can't afford 100 million early retirees. SOmeone has to pay all the taxes and support S.S., medicare, etc. ALan Greenspan was bemoaning the fact that 'economic output' drops if people leave the work force. Oh, too bad, Alan, but I'd rather live my life, not have you decide that "I have to work to keep your economic model happy".

As you can tell, Telegraph isn't a 'herd follower'. A 'sheep' or a 'consumer' suckered in easily by advertising. PRime Time TV? What is that? (I'd lose on the Millionaire, since I could care less about TV shows and TV stars....). Here today, gone tomorrow,but the talk of office water cooler conversation.

Name brand clothes? If they carry them at Walmart or the Discount Outlet store, I'll buy them. I don't need $120 Nike shoes, nor do most people. But, I agree it is their money, and they are free to earn as much of it, and spend as much of it as they want!

Poor consumption habits make RE an impossibility for most people. So? That is their choice, and the effects of their parents upbringing of the children and setting examples of consumption for their offspring.


These are important considerations. A potential RE must ask himself whether he can succeed at 1 and 2.

MOre than that...he has to succeed at #1. #2 is optional, since he/she can work part time, start a second career, or even go back to work later if she/he wants to. However, with success at #1, you have many choices for #2.

Without success at #1, you don't need to worry about #2 <grin>

Now you, Hocus, have proposed:

3. Few investors (particularly those with a relatively small "stash") would have the internal fortitude to rebalance religiously. If the stock market declined by 80 percent you have suggested that few people would have the balls to sell their bonds/tips/GICs to purchase stocks to return to 80/20. You suggest that this might be particularly true for those who have a small stash, a four percent withdrawal, and few discretionary expenditures in their budget.


Even if you don't rebalance, Intercst has shown you aren't going to fail, unless you had 100% stock, and hit the worse case worse case, and panic sold when 80% down...or held 100% bonds, and took out more than 2% in worst case worst case scenario (1966 retirement).

It matters not on your stash.....Some can live on 20,000/yr, having only a $500,000 stash. Others need $80,000 to survive, having a 2 million nest egg. So? EAch has to cut back if they take out less.

In fact, those with less are going to benefit more from getting SS when they reach SS age. For someone getting $20K from their nest egg, and then collecting $10K or more from SS, they are in hog heaven. For someone needing $80,000K, and getting 10 or 15K SS, that isn't a big help to them, if they are uncomforatable with 4%.

First, the market hasn't declined 80%.....only tech stocks, which you shouldn't have been in in a big way anyway. And that is a drop in equity values. If you were 70/30, and the index dropped 50%, you would now be at still over 50/50%....with a portfolio not down 50%...

ie, you had 1 million..... 700,000 stock, 300,000 bonds
actually your bonds are 'up' this year and last year...

the $700,000 in stock is now worth 350,000

the bonds are worth more than 300,000, but we will use 350K

your current ratio is 350/300, or more than 50/50

you aren't that far out of kilter....

You don't have to sell 'loads' of bonds to get back to 60/40, and you only want to do this once a year......so maybe you only head fo 60/40 this year...and wait till next year to see what happens. No big big rush. Patience.

If you are still investing,you put your contribution dollars into stocks this year. Gets you closer...say $10,000 closer.

Note: your savings is not down 80%, but only 35%. And if your bonds went up (and they did) you are probably only down 30% or 25%, even with a 50% equity market drop!



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"There may be many foolish people who sell today, only to see an 800 point rise tomorrow, and then ever increasing stock prices. No one knows when we go back up. Selling today because tomorrow might be worse also means to you lose out if tomorrow is fantastic. Just ten days! think about that." - Telegraph

I recently read an article that said the stock market makes it upward moves on average on 18 days in a year. I'm not as eloquent as telgraph and hocus but I guess what they mean is that in a years time the most dramatic moves upward in the stock market happen in eighteen days; maybe not necessarily consequtively (<- sp?). If there isn't enough verbage here you can fill in with some more words from the dictionary. - Art



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Hocus: The bottom line is that he knows where to find the data we need to determine the true Safe Withdrawal Rate for stock investments.

warrl: Unfortunately he neglected to provide any reference to the data (as opposed to research papers about it) in either of the posts you cited.

hocus does not need the data to draw conclusions about his personal SWR.

warrl: Then you [hocus] went on to suggest that a HIGHER withdrawal rate would by some unspecified magic be safer.

Yep ... the SWR is both too high at 4% to be safe and too low at 4% to make hocus happy. The evil intercst SWR study must be the reason for this delima. It does not provide happiness so we need a new study that will provide a safer and higher withdrawal rate! What's wrong with that?

Keep in mind that hocus claims that he "stumbled on the truth unwittingly":

"That is precisely what happened. I didn't discover the limitations of the intercst study by reading it carefully or by subjecting it to analytical tests or by comparing it to other studies in the literature. I don't possess any particular skills to do that sort of thing, and I don't enjoy it, so why would I do it?"

He did not bother read the SWR study or figure out its assumptions or figure out how, where & why it worked. He has no particular skills in doing that sort of thing. Instead, he uses his lack of wits and I would argue that the same lack of wits can produce a bigger and safer SWR. <grin>

Prometheuss






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prometheuss writes,

Keep in mind that hocus claims that he "stumbled on the truth unwittingly":

<<<<<hocus: "That is precisely what happened. I didn't discover the limitations of the intercst study by reading it carefully or by subjecting it to analytical tests or by comparing it to other studies in the literature. I don't possess any particular skills to do that sort of thing, and I don't enjoy it, so why would I do it?">>>

He did not bother read the SWR study or figure out its assumptions or figure out how, where & why it worked. He has no particular skills in doing that sort of thing. Instead, he uses his lack of wits and I would argue that the same lack of wits can produce a bigger and safer SWR. <grin>


My approach to hocus's posts is to just read the first and last paragraphs and then respond that. Obviously I have not been aware of each and every inanity that appears in his prodigious, and sometimes disturbing, body of work.

Thanks prometheuss for bringing that particularly humorous one to my attention. <grin>

intercst
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"There may be many foolish people who sell today, only to see an 800 point rise tomorrow, and then ever increasing stock prices. No one knows when we go back up. Selling today because tomorrow might be worse also means to you lose out if tomorrow is fantastic. Just ten days! think about that." - Telegraph

joelxwil,

would you explain to this fellow how missing an 800 point up day (when did that occur) isn't that big a deal when you have already missed out on a 3700 point drop.
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From StubbleJumper's post #74106 :
Our friend Telegraph says, "Fiddlesticks, just follow the recipe, rebalance properly and you'll be okay". Effectively Telegraph has stated that he personally can do 1, 2, and 3 (good for him!). Every current and prospective RE must ask himself whether he can succeed at 3.

Okay, I finally get it. About the gas pains many are having with the SWR not applying because of the lack of discipline to stick to the plan:
If this board were advocating that everyone retire on the 4% with specified asset mix, then there's cause for alarm. Some people won't stick with the plan, and thus may fall short. However, the real question isn't "Can everyone retire on that plan?", but is really "Can *I* retire on that plan?" If you really do stick with the plan, history says you've got the odds on your side. If we have a much worse than historical persiod, then there'll be trouble.

Also, it's been pointed out A LOT that health care expenses grow much more than other expenses and more than "regular" inflation. So, it won't hurt to take a lower than 4% number. Also, a 4% draw-down starting today has a better chance than 4% starting February 2000. It seems that there is more uncertainty on the income-need side than on the worst-case-return side.
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j-w:

<i<joelxwil,

would you explain to this fellow how missing an 800 point up day (when did that occur) isn't that big a deal when you have already missed out on a 3700 point drop.

Because if you accidentally sold before the 3700 drop, and haven't figured out when to buy back in, it could be 4000 points higher in two weeks, and you are still out of the market.......

Or you could be waiting for a lower peak, and it never comes.....

Market timing doesn't work for 99% of people (Malkiel).....

Market timing doesn't work...shifting some winners into others (ie, reducing your holdings in big winners that have become more than 5% of your stock) isn't a bad idea....but few know the future.

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Also, it's been pointed out A LOT that health care expenses grow much more than other expenses and more than "regular" inflation. So, it won't hurt to take a lower than 4% number

Yes...

My health costs are going up 20% a year, and that is in the budget till age 65....

My real estate taxes go up 5-6% /yr..and that is in the budget.....

Having a very good handle on your current living expenses is critical to assessing when you can RE.....

And, always, being more conservative in SWR helps.....

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Market timing doesn't work for 99% of people (Malkiel).....
Market timing doesn't work


"Market timing" is generally used to refer to very short term movements in and out of stocks based on short term predictions of stock movements.

http://www.capitalismmagazine.com/2001/november/tech_timing.htm

Maybe it doesn't work, and maybe it does, but I think joelxwil, nas90skog and I are talking about something entirely different.

For me, at least, it was about recognizing a greatly overvalued market, a bubble likely to deflate with even a mild recession, and the possibility of a cascading recession hammering equities' prices for some time to come.

I note that on my little ValueLine chart which shows "recessions", of the 10 listed since 1940, more than 2/3 showed a marked decline in the DJIA leading into, or within the recession period.* It was perhaps not a stretch to think that equities, whch had reached their highest valuations on P/S, P/E, P/B and nearly every other measure, might come drifting back to earth, particularly if "S" or "E" faltered. I certainly didn't predict all this "corporate malfeasance" paranoia, but it has had some of the same effect.

I kept some of our stocks, but disposed of most of what I thought vulnerable either because of what I perceived as the raw economics of the business or valuation criteria. It was pretty much a "macro" call, so I call it "market timing", although maybe I'm using the words differently than those who rail against it.

I note that I'm still down from the peaky peaky peak we had two years ago, though that is largely because of mutual funds held in 401(k)s which we didn't move out of. In hindsight I'd say "we should have", obviously, but I can live with a 9% decline, rather than the 30%, 40%, 50% and greater that I see and hear some people talking about.

(Incidentally, it is "rental real estate" which has mitigated the decline in our "total net worth", making the overall decline somewhat under 5%.)

You can continue to "pooh pooh" looking at "the market" as well as "your stocks", but I'm tellin' ya, there's a little something there you should keep an open mind about. Maybe I'm gonna be wrong about "getting back in", but I certainly don't think I'll be "worse."
_________________________________________

* I'd prefer to look at the S&P, but DJIA is what VL offers on its handy reference chart, so it is what I have used.
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GF:
For me, at least, it was about recognizing a greatly overvalued market, a bubble likely to deflate with even a mild recession, and the possibility of a cascading recession hammering equities' prices for some time to come.


the problem comes, when do you sell???

In 1997, there were those saying "oh, the market is overvalued...sell! sell! sell"..

and it went up 20%

And in 1998, there were those saying "Oh, sell sell sell..the market is over valued"...

And it went up 20%


And in 1999...."sell sell sell...over valued"......

So when did you decide to sell?

And being down 9% is hardly anything to really get worried about, right? A major downturn, and you are down 9%?????

If you had done some rebalancing, or selling of major winners along the way, you would have been putting money into bonds or CDs along the way..... or putting new money into them....

The problem is, if you sold out in 1997, you lost the opportunity to make money in 1998, and 1999, and 2000...and yes, many value funds weren't even hit...some are 'up' this year.

The problem is, most people can't decide when to get back in. They say they'll wait until 'vaulation' is 'fair'...but if things start to climb, are you going to buy in? or wait.....and before youknow it, we are 10 or 20% higher....

Buying or selling all is a real tough call...and most get it wrong.

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