Search found 1697 matches

by JWR1945
Mon Dec 09, 2002 11:07 am
Forum: FIRE Board
Topic: Datamining in Intercst SWR Study
Replies: 20
Views: 18017

hocus suggests and I heartily endorse: What if we were to work together to develop a "Frequently Asked Questions (FAQs) on the Proper Application of the Intercst SWR Study?" We could come up with a clear statement both of what the study does indeed show, and what it does not, with short e...
by JWR1945
Mon Dec 09, 2002 6:57 am
Forum: FIRE Board
Topic: Datamining in Intercst SWR Study
Replies: 20
Views: 18017

I intend to look into this issue further. However, when hocus says: I don't want to be argumentative on this. I asked for your opinion, and I need to hear it out regardless of whether it is what I expected to hear or not. But I personally do not see how the second statement could be a case of poor s...
by JWR1945
Sun Dec 08, 2002 4:14 pm
Forum: FIRE Board
Topic: Datamining in Intercst SWR Study
Replies: 20
Views: 18017

hocus asks: Let's forget for a moment whether what intercst says is statistically valid or not. Just leave that to the side. What I am trying to nail down here is whether, given the two links I provided in my earlier post, is there any possible way to read this in which intercst is not engaging in ...
by JWR1945
Sat Dec 07, 2002 9:55 am
Forum: FIRE Board
Topic: Importance of the sequence of returns for calculating SWR
Replies: 34
Views: 28723

Oops! ...in this manner... should be ...in this matter...

Have fun.

John R.
by JWR1945
Sat Dec 07, 2002 8:33 am
Forum: FIRE Board
Topic: Importance of the sequence of returns for calculating SWR
Replies: 34
Views: 28723

Should there be any doubt, I am on record and still assert that all of hocus's comments in this manner are accurate and true. Any objective review of the record...although time consuming...will verify this.

Have fun.

John R.
by JWR1945
Fri Dec 06, 2002 2:19 pm
Forum: FIRE Board
Topic: FIRE Thresholds and Time (Overview)
Replies: 13
Views: 12367

raddr states Unfortunately, it is the "early" failures that are the real retirement wreckers. I was hoping for a better showing early on by sparing the stock portion of the portfolio from withdrawals but it appears that can't be helped by the dual method. Don't give up yet. Now we know wh...
by JWR1945
Fri Dec 06, 2002 12:36 pm
Forum: FIRE Board
Topic: Importance of the sequence of returns for calculating SWR
Replies: 34
Views: 28723

Dagrims asks for civility and then says Please feel free to tell me to stuff it if I'm out of line here.... You are far from being out of line. I think that there are some frustrations that will still take a little bit more time to work out. But civility is always in style and it is always apprecia...
by JWR1945
Fri Dec 06, 2002 8:43 am
Forum: FIRE Board
Topic: FIRE Thresholds and Time (Overview)
Replies: 13
Views: 12367

FIRE Thresholds and Time (Long) A. The portfolios. 1. I examined two series of portfolios on the dory36 calculator. 2. The Lx series consisted of a conventional mixture of stocks and commercial paper. I examined portfolios with 50%, 60%, 70%, 80% and 90% stocks. 3. The Kx series consisted of a cash...
by JWR1945
Fri Dec 06, 2002 8:29 am
Forum: FIRE Board
Topic: FIRE Thresholds and Time (Overview)
Replies: 13
Views: 12367

FIRE Thresholds and Time (Overview)

FIRE Thresholds and Time A. Conditions. 1. I looked at two series of portfolios. In all cases the withdrawal rate was 4.444% and the duration was 50 years. 2. The Lx series consisted of a conventional mixture of stocks and commercial paper. It was re-balanced annually. The percentage of stocks was ...
by JWR1945
Wed Dec 04, 2002 2:46 am
Forum: FIRE Board
Topic: Repeated post: FIRE The Dual Portfolio Approach
Replies: 5
Views: 6296

Rec feature

ataloss

I don't know about a rec feature. I recced just about every post back at the MSN boards. There are just a whole lot of great posts and great posters on this board.

Have fun.

John R.
by JWR1945
Wed Dec 04, 2002 1:06 am
Forum: FIRE Board
Topic: Repeated post: FIRE The Dual Portfolio Approach
Replies: 5
Views: 6296

Repeated post: FIRE More on Dual Portfolios

This is out of sequence. It should be between the other two. Pay special attention to the summary and summary items 3 and 4 in particular. FIRE: More on Dual Portfolios A. Background I just checked out a couple of more cases using the Dual Portfolio approach. (Someone, please, verify that my calcula...
by JWR1945
Wed Dec 04, 2002 12:58 am
Forum: FIRE Board
Topic: Repeated post: FIRE The Dual Portfolio Approach
Replies: 5
Views: 6296

Repeated post: FIRE 50 Year Dual Portfolios

A. Background 1. The dual portfolio approach breaks a stock and cash mixture into two distinct components: one has a traditional stock and cash mixture, which is re-balanced annually, and the other is cash only. 2. This opens up a variety of options for managing cash during withdrawals. 3. In earlie...
by JWR1945
Wed Dec 04, 2002 12:55 am
Forum: FIRE Board
Topic: Repeated post: FIRE The Dual Portfolio Approach
Replies: 5
Views: 6296

Repeated post: FIRE The Dual Portfolio Approach

I am reposting my three Dual Portfolio Approach articles from the MSN board. It is best to visit that board to see the complete threads.

The Dual Portfolio Approach

A. Background
1. This started out as a study about monitoring portfolio safety. In an earlier post on the Retire Early Home Page discussion board, I had examined how to spot problems with a portfolio with an 80% stock allocation. (See post 67551 dated 6-1-02: Monitoring Portfolio Safety.) This time I was looking at a 50% stock allocation. In the previous study I had been able to provide a very simple way of thinking about the portfolio. If the portfolio grows so that withdrawals are only 4% of its current value, it will succeed. If the portfolio falls so that withdrawals are 10% of its current value, the portfolio will fail. If the portfolio falls so that withdrawals are 6.67% of its value, the portfolio is in danger but it will not necessarily fail.
2. Notice that these rules correspond very closely to safe withdrawal rate (SWR) calculations that would normally be associated with the very beginning of a retirement. My study showed that you do not have to restrict yourself to that time. If withdrawals pass either the 4% or the 10% threshold during the first ten years, you can make a good prediction.
3. For that study I assumed an initial withdrawal rate of 5%. That choice allows for two possibilities. In one case a person retires young enough that he can go back to work if his investments do poorly. He needs to learn as soon as possible whether his portfolio will succeed or fail. The other case covers the possibility that the calculated 100% safe withdrawal rate (SWR) is wrong. If you reflect upon the logic behind such calculations, a 100% threshold number corresponds to an extreme of a statistical distribution. As such, its reliability as a true answer is low. In contrast, numbers corresponding to a 95% or a 90% probability of success are much more reliable. They correspond to more data points (i.e., historical sequences).
4. I have examined several ways to characterize a portfolio with a 50% stock allocation. I was trying to come up with some simple rules of thumb. Instead, I found out something much more profound.
B. The Dual Portfolio Concept
1. A 50% stock portfolio can be broken into two components. One has an 80% stock allocation. The other is entirely in cash. We now treat each component separately for safe withdrawal rate (SWR) estimates.
2. This approach is not exactly the same as using a true 50% stock allocation. In a true 50% stock allocation, you re-balance the entire portfolio annually. Using the dual portfolio approximation, you re-balance only the component with stocks. You leave the cash only component unchanged.
3. The next step is to withdraw funds from the two components separately...but in such a manner that the total withdrawal amount remains constant. I withdrew disproportionate amounts from the cash only portfolio. In my examples, I exhausted my cash only portfolio in 10, 15 and 20 years. After the cash only portfolio balance fell to zero, I increased my withdrawals from the remaining component (with 80% stocks).
4. I used a withdrawal rate of 5% of the initial balance of the combined portfolio. That guarantees having some failures but not many. I also used a 30-year period for the withdrawals. I did this to simplify analysis. The stock market has had several good periods for starting one's retirement and several (three) bad periods for starting a retirement. By using 30 years in our calculations, we encounter one bad period (in each historical sequence) but not two.
5. A stock allocation of 80% is nearly optimal for a 4% withdrawal rate. This combination is also very close to the best mixture that provides 100% safety. As used here, the term "100% safety"￾ is only an estimate. It is a projection based on historical sequences. It is not necessarily accurate.
6. Re-balancing an entire portfolio is not necessarily the best thing to do...especially with a 50% stock portfolio.
C. The Portfolios
1. Portfolio A starts out with $800 in stocks and $200 in cash. You re-balance it annually to maintain an 80% stock allocation.
2. Portfolio B starts out with $600 in cash. You keep it in cash always.
3. Portfolio C is the combination of Portfolios A and B. It starts out with $800 in stocks and $800 in cash. It totals $1600 initially. You only use the cash that corresponds to Portfolio A for re-balancing.
4. Portfolio D starts out with $1280 in stocks and $320 in cash. It totals $1600 initially. You re-balance it annually to maintain an 80% stock allocation.
5. Portfolio E starts out with $800 in stocks and $800 in cash. It totals $1600 initially. You re-balance it annually to maintain a 50% stock allocation.
D. Withdrawals and Thresholds
1. The overall withdrawal rate is 5% of the initial amount. For portfolios C, D and E, this totals $80 per year.
2. With Portfolio C, we withdraw three different amounts from the cash only component (Portfolio B). With Mix 1, we withdraw $30 per year for 20 years ($600 total). With Mix 2, we withdraw $40 per year for 15 years ($600 total). With Mix 3, we withdraw $60 per year for 10 years ($600 total). In each instance we deplete Portfolio B.
3. We adjust the amounts withdrawn from the Portfolio A component (of Portfolio C) so that we maintain a constant combined withdrawal amount of $80 per year for 30 years. With Mix 1, we withdraw $50 per year from Portfolio A for 20 years and then $80 per year for years 21 through 30. With Mix 2, we withdraw $40 per year from Portfolio A for 15 years and then $80 per year for years 16 through 30. With Mix 3, we withdraw $20 per year from Portfolio A for 10 years and then $80 per year for years 11 through 30.
4. We establish three thresholds. At year 10, if the amount in Portfolio C is 1600 or more, we declare success...for we could convert the portfolio to cash only and continue to withdraw $80 per year for the remaining 20 years. At year 15, if the amount in Portfolio C is 1200 or more, we declare success...for we could convert the portfolio to cash only and still withdraw $80 per year for the remaining 15 years. At year 20, if the amount in Portfolio C is $800 or more, we declare success...for we could convert the portfolio to cash only and still withdraw $80 per year for the remaining 10 years.
5. We declare success if Portfolio C meets one of its thresholds ($1600 at year 10, $1200 at year 15 or $800 at year 20) or, if it does not, if it lasts a full 30 years with a positive balance.
6. With Mix 1, Portfolio B (as part of Portfolio C) contributes $300 at year 10 and $150 at year 15 and nothing at year 20. With Mix 2, Portfolio B contributes $200 at year 10 and nothing at years 15 and 20. With Mix 3, Portfolio B does not contribute anything at years 10, 15 and 20.
E. Dory36 Calculator Inputs
1. For all Portfolio C calculations, I adjusted the inputs entirely on the basis of its Portfolio A component. The portfolio amount was $1000. The stock percentage was 80%. The expenses were 0.20%. The period was 30 years. I selected the CPI for inflation adjustments. I selected Commercial Paper (CP) for my cash equivalent component of Portfolio A. I unchecked the box for a withdrawal at the beginning of the first year.
2. For Mix 1, I withdrew $50 per year and I increased it by $30 per year beginning in year 21. For Mix 2, I withdrew $40 per year and I increased it by $40 per year beginning in year 16. For Mix 3, I withdrew $20 per year and I increased it by $60 per year beginning in year 11.
3. For Portfolio D calculations, I used a portfolio amount of $1600, a stock allocation of 80% and a withdrawal rate of $80 per year. I used 0.20% expenses. The period was 30 years. I selected the CPI for inflation adjustments. I selected Commercial Paper (CP) as my cash equivalent. I unchecked the box for a withdrawal at the beginning of the first year.
4. I used the same inputs for Portfolio E as I had used for Portfolio D except that I changed the stock allocation to 50%. (For Portfolio E calculations, I used a portfolio amount of $1600, a stock allocation a 50% and a withdrawal rate of $80 per year. I used 0.20% expenses. The period was 30 years. I selected the CPI for inflation adjustments. I selected Commercial Paper (CP) as my cash equivalent. I unchecked the box for a withdrawal at the beginning of the first year.)
F. Results
1. With Portfolio C, Mix 1 had 22 failures out of the 110 sequences from 1871 to 1980. (Sequences in the 1970s are incomplete. They are included because several failures occurred with sequences starting in the early 1970s.) This mix exhausted the cash only component at 20 years.
2. With Portfolio C, Mix 2 had 13 failures out of the 110 sequences from 1871 to 1980. This mix exhausted the cash only component at 15 years.
3. With Portfolio C, Mix 3 had 12 failures out of the 110 sequences from 1871 to 1980. This mix exhausted the cash only component at 10 years.
4. Portfolio D (80% stocks) had 9 failures out of the 110 sequences from 1871 to 1980. However, if there had been no thresholds at 10, 15 and 20 years, there would have been 20 failures.
5. Portfolio E (50% stocks) had 12 failures out of the 110 sequences from 1871 to 1980. However, if there had been no thresholds at 10, 15 and 20 years, there would have been 30 failures.
6. The normal way of assessing success for Portfolios D and E excludes thresholds at 10, 15 and 20 years.
G. Conclusions
1. By examining the dual portfolio concept, we have dramatically increased the chances of success versus the normal approach. We have introduced additional methods to gain success. In particular, when we added thresholds for converting from a volatile portfolio to an all cash portfolio, we also reduced the number of failures from 20 to 30 down to 9 to 12.
2. Adding thresholds is inherent in the dual portfolio approach. It makes immediate sense to check whether we have succeeded whenever Portfolio B (cash only) is exhausted. Because we looked at three Mixes, it made sense to look at those three thresholds across the board.
3. We would have expected Portfolios D and E with 80% and 50% stock allocations to behave in the manner that they did for a withdrawal rate of 5%. Portfolio D (80% stocks) is very close to optimal when there is annual re-balancing (the conventional approach).
4. For portfolios with 50% stock allocations, a dual portfolio with a 10-year cash component (Portfolio C Mix 3) is as good as a conventional single component (Portfolio E). Both had 12 failures. A 15-year cash component (Portfolio C Mix 2) is almost as good (13 failures).
5. Introducing thresholds for success eliminates almost all of the advantage of an 80% stock allocation over a 50% stock allocation.
6. The dual portfolio concept is consistent with gradually increasing the stock allocation from 50% to 80%. The time to make that change is the same as the lifetime of Portfolio B. Hence, the dual portfolio concept provides a productive way of thinking when one wishes to increase his stock exposure gradually.
H. Reflections
1. This study fits in nicely with the idea of having several portfolios with different goals. We can extend the dual portfolio approach easily along those lines. What we have found is that such thinking actually improves everything...including the original single portfolio approach.
2. The dual portfolio approach allows you to handle the non-stock portion of your portfolio much better than the traditional approach. For this study I treated the cash component as matching inflation and nothing more. Since today's choices include TIPS and ibonds, an actual portfolio should do better. Including them would also have further reduced any advantage of an 80% stock allocation over a 50% allocation.
3. Traditional safe withdrawal rate (SWR) studies have over-emphasized the need for high stock allocations. A more realistic handling of the cash portion of a portfolio can change results dramatically.

Have fun.

John R.

Some helpful resources:
1. For a wealth of information about safe withdrawal rates, go to www.retireearlyhomepage.com. It includes a free version the Retire Early Safe Withdrawal Rate study. The full report only costs $5.00.
2. The dory36 calculator is available at http://capn-bill.com/fire/.
by JWR1945
Tue Nov 26, 2002 12:41 pm
Forum: FIRE Board
Topic: Diversified portfolio book recommendations?
Replies: 7
Views: 7710

Good references

Peteyperson, ElSupremo has archived a whole lot of good information. I don't know exactly where it is at the moment. It was via the FAQs and something else at the old msn site. IIRC you ended up at ElSupremo's backup location. I was just beginning to read the material...there is a lot of it...and it...
by JWR1945
Tue Nov 26, 2002 8:21 am
Forum: FIRE Board
Topic: Dory36 Calculator Workaround
Replies: 3
Views: 4999

Dory36 Calculator Workaround

raddr, here is my latest email (with attachments) from Captain Bill. I hope that it has enough detail (from the emails that I wrote). When I first used the calculator, I got the "old" numbers with the inflation adjustment (check mark present) for Withdrawal Change 2. Have fun. John R. .......
by JWR1945
Tue Nov 26, 2002 8:05 am
Forum: FIRE Board
Topic: What does "FIRE" stand for?
Replies: 7
Views: 8235

Definition of FIRE

Financial Independence/Retire Early The source was an influential book Your Money or Your Life. The FI part occurs in two stages. The first is Financial Integrity(?)...which involves knowing your financial condition, tracking your net worth and several steps to enhance your financial condition. One ...
by JWR1945
Tue Nov 26, 2002 4:23 am
Forum: FIRE Board
Topic: Dory36 Calculator Workaround
Replies: 3
Views: 4999

Dory36 Calculator Workaround

The dory36 calculator has been updated to make things easier. Both the new and old versions are available at this time. The dory36 calculator has a bug when making Withdrawal Change 2 (and also Withdrawal Change 3). I can duplicate my earlier results by removing the check mark for using inflation ad...