CTVR80 versus Earnings Yield
Moderator: hocus2004
CTVR80 versus Earnings Yield
hocus2004 has requested data of this nature.
This data could have been collected using the original Retire Early Safe Withdrawal Calculator, Version 1.61, 7 November 1972.
CTVR80 refers to a portfolio consisting of 80% stocks and 20% commercial paper. It is rebalanced annually. Its expenses are 0.20%. The initial balance was set to $100000. Withdrawals were adjusted to match inflation in accordance with the CPI. I have determined the maximum withdrawal rates (in increments of 0.1%) that would have ended with a final balance of $100000 (in real dollars) or higher after 30 years.
This is similar to the conventional Safe Withdrawal Rate strategy that is investigated most frequently. The difference is that I have required the portfolio's final balance to equal (or exceed) its original value instead of falling to zero. I refer to these withdrawal rates as Constant Terminal Value Rates (CTVR). These are similar to Historical Surviving Withdrawal Rates and Half Failure Withdrawal Rates. The constraint is different.
The Retire Early Safe Withdrawal Calculator presents 10, 20, 30, 40, 50 and 60 year nominal and real terminal values in columns S through AK and rows 10 through 144. For this investigation, I made use of column S, which lists the start year, and column AB, which has the 30-year terminal amount in real dollars. By using $100000 as my initial amount, it was easy to spot when a final balance fell below the initial amount. It would have five or fewer digits or it would have parentheses to indicate a negative number.
I have tabulated the 30-year Constant Terminal Value Rates along with the percentage earnings yield (100E10/P) for 1871-1980. [E10/P is 1/[P/E10]. P/E10 is Yale Professor Robert Shiller's measure of valuation. He and Dr. Campbell have shown that it has a reasonable amount of capability for predicting long-term stock market returns. P/E10 is the current price of the S&P500 divided by the average of earnings over the previous decade.
I have made a (straight line) linear curve fit to the 1923-1972 Constant Terminal Value Rates versus the Percentage Earnings Yield 100E10/P. The equation that it produces is y = 0.7014x + 0.2313%, where y is the Constant Terminal Value Rate and x is the Percentage Earnings Yield. R squared was 0.8499, which is outstanding. I have not calculated confidence limits yet. Using an eyeball estimate, they are likely to be about plus and minus 1%.
These graphs have slopes similar to those using Historical Surviving Withdrawal Rates (HDBR80) and Half Failure Withdrawal Rates (HFWR80). The intercepts are different.
It was necessary for me to limit the upper end of the data to 1972 because the dummy data in the calculator from 2003-2010 reduced the Constant Terminal Value Rates of later sequences sharply. The dummy data assumes that stock prices and dividends both decrease 20% per year starting in 2003.
Have fun.
John R.
[Edited to correct CVTR to CTVR in several places.]
This data could have been collected using the original Retire Early Safe Withdrawal Calculator, Version 1.61, 7 November 1972.
CTVR80 refers to a portfolio consisting of 80% stocks and 20% commercial paper. It is rebalanced annually. Its expenses are 0.20%. The initial balance was set to $100000. Withdrawals were adjusted to match inflation in accordance with the CPI. I have determined the maximum withdrawal rates (in increments of 0.1%) that would have ended with a final balance of $100000 (in real dollars) or higher after 30 years.
This is similar to the conventional Safe Withdrawal Rate strategy that is investigated most frequently. The difference is that I have required the portfolio's final balance to equal (or exceed) its original value instead of falling to zero. I refer to these withdrawal rates as Constant Terminal Value Rates (CTVR). These are similar to Historical Surviving Withdrawal Rates and Half Failure Withdrawal Rates. The constraint is different.
The Retire Early Safe Withdrawal Calculator presents 10, 20, 30, 40, 50 and 60 year nominal and real terminal values in columns S through AK and rows 10 through 144. For this investigation, I made use of column S, which lists the start year, and column AB, which has the 30-year terminal amount in real dollars. By using $100000 as my initial amount, it was easy to spot when a final balance fell below the initial amount. It would have five or fewer digits or it would have parentheses to indicate a negative number.
I have tabulated the 30-year Constant Terminal Value Rates along with the percentage earnings yield (100E10/P) for 1871-1980. [E10/P is 1/[P/E10]. P/E10 is Yale Professor Robert Shiller's measure of valuation. He and Dr. Campbell have shown that it has a reasonable amount of capability for predicting long-term stock market returns. P/E10 is the current price of the S&P500 divided by the average of earnings over the previous decade.
I have made a (straight line) linear curve fit to the 1923-1972 Constant Terminal Value Rates versus the Percentage Earnings Yield 100E10/P. The equation that it produces is y = 0.7014x + 0.2313%, where y is the Constant Terminal Value Rate and x is the Percentage Earnings Yield. R squared was 0.8499, which is outstanding. I have not calculated confidence limits yet. Using an eyeball estimate, they are likely to be about plus and minus 1%.
These graphs have slopes similar to those using Historical Surviving Withdrawal Rates (HDBR80) and Half Failure Withdrawal Rates (HFWR80). The intercepts are different.
It was necessary for me to limit the upper end of the data to 1972 because the dummy data in the calculator from 2003-2010 reduced the Constant Terminal Value Rates of later sequences sharply. The dummy data assumes that stock prices and dividends both decrease 20% per year starting in 2003.
Have fun.
John R.
[Edited to correct CVTR to CTVR in several places.]
Last edited by JWR1945 on Sun Aug 08, 2004 6:37 am, edited 1 time in total.
Here are the Year, P/E10, Percentage Earnings Yield 100E10/P and 30-Year Constant Terminal Value Rates with 80% stocks. All values later than 1972 have been influenced greatly (i.e., reduced sharply) by dummy data in the calculator for the years 2003-2010.
1871-1920
1920-1980
Have fun.
John R.
1871-1920
Code: Select all
1871 13.3 7.5 8.5
1872 14.5 6.9 8.4
1873 15.3 6.5 7.8
1874 13.9 7.2 7.8
1875 13.6 7.4 7.7
1876 13.3 7.5 8.0
1877 10.6 9.4 8.2
1878 9.7 10.3 7.8
1879 10.7 9.3 9.0
1880 15.3 6.5 6.5
1881 18.5 5.4 6.0
1882 15.7 6.4 6.3
1883 15.3 6.5 5.9
1884 14.4 6.9 5.5
1885 13.1 7.6 6.1
1886 16.7 6.0 5.2
1887 17.5 5.7 5.0
1888 15.4 6.5 4.5
1889 15.8 6.3 4.1
1890 17.2 5.8 3.8
1891 15.4 6.5 3.8
1892 19.0 5.3 3.7
1893 17.7 5.6 3.6
1894 15.7 6.4 4.1
1895 16.5 6.1 4.5
1896 16.6 6.0 4.5
1897 17.0 5.9 4.9
1898 19.2 5.2 4.6
1899 22.9 4.4 4.8
1900 18.7 5.3 4.8
1901 21.0 4.8 4.1
1902 22.3 4.5 3.5
1903 20.3 4.9 3.3
1904 15.9 6.3 4.6
1905 18.5 5.4 3.5
1906 20.1 5.0 3.4
1907 17.2 5.8 3.6
1908 11.9 8.4 4.6
1909 14.8 6.8 4.0
1910 14.5 6.9 3.4
1911 14.0 7.1 3.4
1912 13.8 7.2 3.3
1913 13.1 7.6 3.4
1914 11.6 8.6 3.9
1915 10.4 9.6 4.6
1916 12.5 8.0 4.4
1917 11.0 9.1 4.8
1918 6.6 15.2 7.3
1919 6.1 16.4 8.2
1920 6.0 16.7 7.8
Code: Select all
1921 5.1 19.6 8.6
1922 6.3 15.9 8.5
1923 8.2 12.2 7.6
1924 8.1 12.3 7.8
1925 9.7 10.3 7.4
1926 11.3 8.8 6.5
1927 13.2 7.6 6.2
1928 18.8 5.3 4.7
1929 27.1 3.7 3.5
1930 22.3 4.5 3.7
1931 16.7 6.0 4.2
1932 9.3 10.8 6.2
1933 8.7 11.5 7.1
1934 13.0 7.7 5.3
1935 11.5 8.7 6.3
1936 17.1 5.8 4.6
1937 21.6 4.6 3.6
1938 13.5 7.4 5.2
1939 15.6 6.4 4.8
1940 16.4 6.1 4.8
1941 13.9 7.2 6.2
1942 10.1 9.9 7.9
1943 10.2 9.8 7.7
1944 11.1 9.0 6.8
1945 12.0 8.3 5.9
1946 15.6 6.4 5.6
1947 11.5 8.7 7.8
1948 10.4 9.6 8.2
1949 10.2 9.8 8.1
1950 10.7 9.3 8.0
1951 11.9 8.4 7.0
1952 12.5 8.0 6.0
1953 13.0 7.7 5.9
1954 12.0 8.3 6.4
1955 16.0 6.3 4.5
1956 18.3 5.5 3.8
1957 16.7 6.0 4.2
1958 13.8 7.2 4.7
1959 18.0 5.6 3.5
1960 18.3 5.5 3.6
1961 18.5 5.4 3.4
1962 21.2 4.7 3.4
1963 19.3 5.2 3.5
1964 21.6 4.6 3.0
1965 23.3 4.3 2.6
1966 24.1 4.1 2.7
1967 20.4 4.9 3.3
1968 21.5 4.7 3.3
1969 21.2 4.7 3.4
1970 17.1 5.8 4.1
1971 16.5 6.1 4.0
1972 17.3 5.8 3.7
1973 18.7 5.3 3.4
1974 13.5 7.4 4.4
1975 8.9 11.2 5.9
1976 11.2 8.9 4.2
1977 11.4 8.8 3.7
1978 9.2 10.9 4.1
1979 9.3 10.8 3.2
1980 8.9 11.2 2.1
John R.
Here are Constant Terminal Value Rates with 80% stocks in a form suitable for downloading into a spreadsheet or document.
1871-1900
1901-1920
1921-1950
1951-1980
Have fun.
John R.
1871-1900
Code: Select all
8.5
8.4
7.8
7.8
7.7
8.0
8.2
7.8
9.0
6.5
6.0
6.3
5.9
5.5
6.1
5.2
5.0
4.5
4.1
3.8
3.8
3.7
3.6
4.1
4.5
4.5
4.9
4.6
4.8
4.8
Code: Select all
4.1
3.5
3.3
4.6
3.5
3.4
3.6
4.6
4.0
3.4
3.4
3.3
3.4
3.9
4.6
4.4
4.8
7.3
8.2
7.8
Code: Select all
8.6
8.5
7.6
7.8
7.4
6.5
6.2
4.7
3.5
3.7
4.2
6.2
7.1
5.3
6.3
4.6
3.6
5.2
4.8
4.8
6.2
7.9
7.7
6.8
5.9
5.6
7.8
8.2
8.1
8.0
Code: Select all
7.0
6.0
5.9
6.4
4.5
3.8
4.2
4.7
3.5
3.6
3.4
3.4
3.5
3.0
2.6
2.7
3.3
3.3
3.4
4.1
4.0
3.7
3.4
4.4
5.9
4.2
3.7
4.1
3.2
2.1
John R.
JWR1945:
Thanks for putting this together. I think that having this information available will prove helpful.
I think you may have calculated something a little different than what I was asking for. My sense is that what you have calculated here is the withdrawal rate that in actual fact would have permitted an investor to retain portfolio value for 30 years. That's a concept similar to the historical surviving withdrawal rate (HSWR) concept, one that involves looking back from the present in doing the calculations.
I was looking for a number more comparable to a safe withdrawal rate (SWR), one in which you are looking forward in doing the calculation rather than backward. I'm trying to get numbers comparable to the ones set forth in the "Calculated Rates of the Past Decade" thread.
We know that at today's valuation level, an investor with an 80 percent stock allocation needs to limit his annual takeout percentage to 2.5 percent to be sure that his portfolio will survive 30 years (presuming that stocks perform in the future as they have in the past). What is the take-out percentage that insures him that he will retain the full value of his starting-point portfolio at the end of 30 years?
Thanks for putting this together. I think that having this information available will prove helpful.
I think you may have calculated something a little different than what I was asking for. My sense is that what you have calculated here is the withdrawal rate that in actual fact would have permitted an investor to retain portfolio value for 30 years. That's a concept similar to the historical surviving withdrawal rate (HSWR) concept, one that involves looking back from the present in doing the calculations.
I was looking for a number more comparable to a safe withdrawal rate (SWR), one in which you are looking forward in doing the calculation rather than backward. I'm trying to get numbers comparable to the ones set forth in the "Calculated Rates of the Past Decade" thread.
We know that at today's valuation level, an investor with an 80 percent stock allocation needs to limit his annual takeout percentage to 2.5 percent to be sure that his portfolio will survive 30 years (presuming that stocks perform in the future as they have in the past). What is the take-out percentage that insures him that he will retain the full value of his starting-point portfolio at the end of 30 years?
Hmmmmm - Looks like a little something for everyone to me. Look at the last number - add thirty years from 1980 to get 2010. My prejudice shows his number close to my div/interest yield,( Norwegian widow with hand grenade), albiet I'm closer to 60/40 not 80/20. The take out number is much lower than past studies giving creedance to people worried about valuations and being above the historical (1871) trend channel for stocks combined with low interest rates - the warning flags are flying. I would make the case for look back variable take -out keyed off SEC yield with some sensible upper and lower bounds based on JWR's other work - say 2- 5% ballpark(without looking at the numbers). I would also uncouple from inflation and let 'Mr. Market' tell me what I could have. Others might look and want to shift 80/20 to other mixes along a thirty year period based on numbers/valuation change. Some might look further back in the data string and deduce an RTM cycle and expect it to reoccur in a manner they can take advantage of. Hmmmm - good stuff to chew on.
Expanded CVTR80 Tables
I have collected additional CTVR80 data. I have identified the minimum balance of each sequence and the number of years after the beginning of a retirement sequence.
I took this data with my Deluxe Calculator V1.1A02 modified version of the Retire Early Safe Withdrawal Calculator, Version 1.61, 7 November 1972.
CTVR80 refers to a portfolio consisting of 80% stocks and 20% commercial paper. It is rebalanced annually. Its expenses are 0.20%. The initial balance was set to $100000. Withdrawals were adjusted to match inflation in accordance with the CPI. I have determined the maximum withdrawal rates (in increments of 0.1%) that would have ended with a final balance of $100000 (in real dollars) or higher after 30 years.
This is similar to the conventional Safe Withdrawal Rate strategy that is investigated most frequently. The difference is that I have required the portfolio's final balance to equal (or exceed) its original value instead of falling to zero. I refer to these withdrawal rates as Constant Terminal Value Rates (CTVR). These are similar to Historical Surviving Withdrawal Rates and Half Failure Withdrawal Rates. The constraint is different.
I had already tabulated the 30-year Constant Terminal Value Rates along with the percentage earnings yield (100E10/P) for 1871-1980. [E10/P is 1/[P/E10]. P/E10 is Yale Professor Robert Shiller's measure of valuation. He and Dr. Campbell have shown that it has a reasonable amount of capability for predicting long-term stock market returns. P/E10 is the current price of the S&P500 divided by the average of earnings over the previous decade.
I have added columns that show the portfolio's minimum amount and the number of years into the sequence at which it occurred.
I have made use of the list of Portfolio Balances in Real Dollars starting around row 3200. After entering an Initial Withdrawal Rate into cell B9, I pressed function key F5, typed a3200 and then clicked OK. That brought me to a list of all portfolio balances for all sequences from 1871-2000. The list displays all balances from N = 0 (i.e., the initial balance) to N = 60 years after the start of each sequence.
When interpreting these new tables, remember that the final balance at year 30 can be more than $100000. The final balance at year 30 falls below $100000 when the withdrawal rate is increased by 0.1%. In addition, comparisons are made based upon years 1 through 30. The initial balance is not included. It occurs in year zero.
It was necessary for me to limit the upper end of the data to 1972 because the dummy data in the calculator from 2003-2010 reduced the Constant Terminal Value Rates of later sequences sharply. The dummy data assumes that stock prices and dividends both decrease 20% per year starting in 2003.
I had already made a (straight line) linear curve fit to the 1923-1972 Constant Terminal Value Rates versus the Percentage Earnings Yield 100E10/P. The equation that it produces is y = 0.7014x + 0.2313%, where y is the Constant Terminal Value Rate and x is the Percentage Earnings Yield. R squared was 0.8499, which is exceedingly high. I have not calculated confidence limits yet. Using an eyeball estimate, they are likely to be about plus and minus 1%.
I have made a (straight line) linear curve fit of the 1923-1972 CTVR80 Minimum Balances versus the Percentage Earnings Yield 100E10/P. The equation is y = 5518.2x + 27808 based upon an initial balance of $100000. The CTVR80 minimum balance in (real) dollars is y. The percentage earnings yield is x. R squared is 0.5185. My eyeball estimate of the confidence limits is plus and minus $25000.
I have made a (straight line) linear curve fit of the 1923-1972 CTVR80 Minimum Balances versus the value of CTVR80. The equation is y = 7977.3x + 25446 based upon an initial balance of $100000. The CTVR80 minimum balance in (real) dollars is y. The value of CTVR80 in percent is x. R squared is 0.6306. My eyeball estimate of the confidence limits is plus and minus $20000.
When you look at the number of years N into a sequence at which the minimum balance occurs, you will notice that N is usually part of a countdown from N = 30 to N = 1. This means that there is a single defining year among a collection of sequences that caused a bottom (with the smallest minimum balances).
It is reasonable to expect Minimum Balances to increase with Constant Terminal Value Rates. Stated differently, if specify a Minimum Balance and its corresponding CTVR and apply that withdrawal rate to other years, balances for those years with smaller values of CTVR would dip even deeper and they would fail to return to the initial balance. Balances for the other years (with higher values of CTVR) would dip less and end up with final balances in excess of the initial balances.
Have fun.
John R.
P.S. To convert a CTVR to something similar to a Safe Withdrawal Rate, subtract the confidence limit (of 1%, $25000 or $20000, as appropriate). To get something similar to a High Risk Withdrawal Rate, add the appropriate confidence limit.
I have collected additional CTVR80 data. I have identified the minimum balance of each sequence and the number of years after the beginning of a retirement sequence.
I took this data with my Deluxe Calculator V1.1A02 modified version of the Retire Early Safe Withdrawal Calculator, Version 1.61, 7 November 1972.
CTVR80 refers to a portfolio consisting of 80% stocks and 20% commercial paper. It is rebalanced annually. Its expenses are 0.20%. The initial balance was set to $100000. Withdrawals were adjusted to match inflation in accordance with the CPI. I have determined the maximum withdrawal rates (in increments of 0.1%) that would have ended with a final balance of $100000 (in real dollars) or higher after 30 years.
This is similar to the conventional Safe Withdrawal Rate strategy that is investigated most frequently. The difference is that I have required the portfolio's final balance to equal (or exceed) its original value instead of falling to zero. I refer to these withdrawal rates as Constant Terminal Value Rates (CTVR). These are similar to Historical Surviving Withdrawal Rates and Half Failure Withdrawal Rates. The constraint is different.
I had already tabulated the 30-year Constant Terminal Value Rates along with the percentage earnings yield (100E10/P) for 1871-1980. [E10/P is 1/[P/E10]. P/E10 is Yale Professor Robert Shiller's measure of valuation. He and Dr. Campbell have shown that it has a reasonable amount of capability for predicting long-term stock market returns. P/E10 is the current price of the S&P500 divided by the average of earnings over the previous decade.
I have added columns that show the portfolio's minimum amount and the number of years into the sequence at which it occurred.
I have made use of the list of Portfolio Balances in Real Dollars starting around row 3200. After entering an Initial Withdrawal Rate into cell B9, I pressed function key F5, typed a3200 and then clicked OK. That brought me to a list of all portfolio balances for all sequences from 1871-2000. The list displays all balances from N = 0 (i.e., the initial balance) to N = 60 years after the start of each sequence.
When interpreting these new tables, remember that the final balance at year 30 can be more than $100000. The final balance at year 30 falls below $100000 when the withdrawal rate is increased by 0.1%. In addition, comparisons are made based upon years 1 through 30. The initial balance is not included. It occurs in year zero.
It was necessary for me to limit the upper end of the data to 1972 because the dummy data in the calculator from 2003-2010 reduced the Constant Terminal Value Rates of later sequences sharply. The dummy data assumes that stock prices and dividends both decrease 20% per year starting in 2003.
I had already made a (straight line) linear curve fit to the 1923-1972 Constant Terminal Value Rates versus the Percentage Earnings Yield 100E10/P. The equation that it produces is y = 0.7014x + 0.2313%, where y is the Constant Terminal Value Rate and x is the Percentage Earnings Yield. R squared was 0.8499, which is exceedingly high. I have not calculated confidence limits yet. Using an eyeball estimate, they are likely to be about plus and minus 1%.
I have made a (straight line) linear curve fit of the 1923-1972 CTVR80 Minimum Balances versus the Percentage Earnings Yield 100E10/P. The equation is y = 5518.2x + 27808 based upon an initial balance of $100000. The CTVR80 minimum balance in (real) dollars is y. The percentage earnings yield is x. R squared is 0.5185. My eyeball estimate of the confidence limits is plus and minus $25000.
I have made a (straight line) linear curve fit of the 1923-1972 CTVR80 Minimum Balances versus the value of CTVR80. The equation is y = 7977.3x + 25446 based upon an initial balance of $100000. The CTVR80 minimum balance in (real) dollars is y. The value of CTVR80 in percent is x. R squared is 0.6306. My eyeball estimate of the confidence limits is plus and minus $20000.
When you look at the number of years N into a sequence at which the minimum balance occurs, you will notice that N is usually part of a countdown from N = 30 to N = 1. This means that there is a single defining year among a collection of sequences that caused a bottom (with the smallest minimum balances).
It is reasonable to expect Minimum Balances to increase with Constant Terminal Value Rates. Stated differently, if specify a Minimum Balance and its corresponding CTVR and apply that withdrawal rate to other years, balances for those years with smaller values of CTVR would dip even deeper and they would fail to return to the initial balance. Balances for the other years (with higher values of CTVR) would dip less and end up with final balances in excess of the initial balances.
Have fun.
John R.
P.S. To convert a CTVR to something similar to a Safe Withdrawal Rate, subtract the confidence limit (of 1%, $25000 or $20000, as appropriate). To get something similar to a High Risk Withdrawal Rate, add the appropriate confidence limit.
Here are the Year, P/E10, Percentage Earnings Yield 100E10/P, 30-Year Constant Terminal Value Rates with 80% stocks, the Lowest Balance (after starting from $100000) and the Year N into the Sequence when the Lowest Balance occurred. All values later than 1972 have been influenced greatly (i.e., reduced sharply) by dummy data in the calculator for the years 2003-2010.
1871-1920
More Follows.
John R.
1871-1920
Code: Select all
1871 13.3 7.5 8.5 86124 6
1872 14.5 6.9 8.4 83649 5
1873 15.3 6.5 7.8 84782 4
1874 13.9 7.2 7.8 88378 3
1875 13.6 7.4 7.7 85060 2
1876 13.3 7.5 8.0 82683 1
1877 10.6 9.4 8.2 100280 27
1878 9.7 10.3 7.8 103444 30
1879 10.7 9.3 9.0 89241 29
1880 15.3 6.5 6.5 95006 28
1881 18.5 5.4 6.0 83957 4
1882 15.7 6.4 6.3 91391 26
1883 15.3 6.5 5.9 95344 2
1884 14.4 6.9 5.5 96557 1
1885 13.1 7.6 6.1 105780 30
1886 16.7 6.0 5.2 92576 5
1887 17.5 5.7 5.0 89359 4
1888 15.4 6.5 4.5 99421 3
1889 15.8 6.3 4.1 96755 2
1890 17.2 5.8 3.8 90605 1
1891 15.4 6.5 3.8 101492 30
1892 19.0 5.3 3.7 85982 29
1893 17.7 5.6 3.6 73802 28
1894 15.7 6.4 4.1 78098 27
1895 16.5 6.1 4.5 67959 26
1896 16.6 6.0 4.5 65190 25
1897 17.0 5.9 4.9 60042 24
1898 19.2 5.2 4.6 53522 23
1899 22.9 4.4 4.8 42224 22
1900 18.7 5.3 4.8 48630 21
1901 21.0 4.8 4.1 47808 20
1902 22.3 4.5 3.5 52017 19
1903 20.3 4.9 3.3 53787 18
1904 15.9 6.3 4.6 51932 17
1905 18.5 5.4 3.5 49158 16
1906 20.1 5.0 3.4 41277 15
1907 17.2 5.8 3.6 41232 14
1908 11.9 8.4 4.6 50899 13
1909 14.8 6.8 4.0 42958 12
1910 14.5 6.9 3.4 43766 11
1911 14.0 7.1 3.4 44231 10
1912 13.8 7.2 3.3 46135 9
1913 13.1 7.6 3.4 47063 8
1914 11.6 8.6 3.9 49705 7
1915 10.4 9.6 4.6 52812 6
1916 12.5 8.0 4.4 45553 5
1917 11.0 9.1 4.8 50805 4
1918 6.6 15.2 7.3 70641 3
1919 6.1 16.4 8.2 78341 2
1920 6.0 16.7 7.8 85270 1
John R.
Here are the Year, P/E10, Percentage Earnings Yield 100E10/P, 30-Year Constant Terminal Value Rates with 80% stocks, the Lowest Balance (after starting from $100000) and the Year N into the Sequence when the Lowest Balance occurred. All values later than 1972 have been influenced greatly (i.e., reduced sharply) by dummy data in the calculator for the years 2003-2010.
1921-1980
Have fun.
John R.
1921-1980
Code: Select all
1921 5.1 19.6 8.6 95016 28
1922 6.3 15.9 8.5 91935 27
1923 8.2 12.2 7.6 85533 26
1924 8.1 12.3 7.8 91931 25
1925 9.7 10.3 7.4 75546 24
1926 11.3 8.8 6.5 68557 23
1927 13.2 7.6 6.2 66906 22
1928 18.8 5.3 4.7 63505 21
1929 27.1 3.7 3.5 49563 20
1930 22.3 4.5 3.7 51756 19
1931 16.7 6.0 4.2 57831 18
1932 9.3 10.8 6.2 67628 17
1933 8.7 11.5 7.1 71330 16
1934 13.0 7.7 5.3 57570 15
1935 11.5 8.7 6.3 62705 14
1936 17.1 5.8 4.6 50390 13
1937 21.6 4.6 3.6 46067 12
1938 13.5 7.4 5.2 57927 11
1939 15.6 6.4 4.8 54571 10
1940 16.4 6.1 4.8 57132 9
1941 13.9 7.2 6.2 63582 8
1942 10.1 9.9 7.9 78334 7
1943 10.2 9.8 7.7 78820 6
1944 11.1 9.0 6.8 75928 5
1945 12.0 8.3 5.9 74448 4
1946 15.6 6.4 5.6 62100 3
1947 11.5 8.7 7.8 84178 2
1948 10.4 9.6 8.2 98120 1
1949 10.2 9.8 8.1 101518 30
1950 10.7 9.3 8.0 102997 30
1951 11.9 8.4 7.0 99771 29
1952 12.5 8.0 6.0 99844 2
1953 13.0 7.7 5.9 92687 29
1954 12.0 8.3 6.4 85642 28
1955 16.0 6.3 4.5 82762 27
1956 18.3 5.5 3.8 74599 26
1957 16.7 6.0 4.2 66299 25
1958 13.8 7.2 4.7 72737 24
1959 18.0 5.6 3.5 65125 23
1960 18.3 5.5 3.6 60628 22
1961 18.5 5.4 3.4 64162 21
1962 21.2 4.7 3.2 55623 20
1963 19.3 5.2 3.5 57549 19
1964 21.6 4.6 3.0 53779 18
1965 23.3 4.3 2.6 52317 17
1966 24.1 4.1 2.7 46912 16
1967 20.4 4.9 3.3 47711 15
1968 21.5 4.7 3.3 42779 14
1969 21.2 4.7 3.4 40842 13
1970 17.1 5.8 4.1 44838 12
1971 16.5 6.1 4.0 47724 11
1972 17.3 5.8 3.7 47567 10
1973 18.7 5.3 3.4 46365 9
1974 13.5 7.4 4.4 58522 8
1975 8.9 11.2 5.9 79216 7
1976 11.2 8.9 4.2 72962 6
1977 11.4 8.8 3.7 75601 5
1978 9.2 10.9 4.1 89494 4
1979 9.3 10.8 3.2 91688 3
1980 8.9 11.2 2.1 95481 2
John R.
You are correct.hocus2004 wrote:I think you may have calculated something a little different than what I was asking for. My sense is that what you have calculated here is the withdrawal rate that in actual fact would have permitted an investor to retain portfolio value for 30 years. That's a concept similar to the historical surviving withdrawal rate (HSWR) concept, one that involves looking back from the present in doing the calculations.
I was looking for a number more comparable to a safe withdrawal rate (SWR), one in which you are looking forward in doing the calculation rather than backward. I'm trying to get numbers comparable to the ones set forth in the "Calculated Rates of the Past Decade" thread.
Here is what you are after.
With the 80% stock portfolio, the Constant Terminal Value Rate (CTVR80) equation is y = 0.7014x + 0.2313%, where y is the Constant Terminal Value Rate and x is the Percentage Earnings Yield 100E10/P. R squared is 0.8499, which is exceedingly high. My eyeball estimate of the confidence limits is that they are (close to) plus and minus 1%.
I have listed below the last decade's January values of P/E10 taken from Professor Robert Shiller's website.
http://www.econ.yale.edu/~shiller/
http://www.econ.yale.edu/~shiller/data/ie_data.htm
Here are the values of P/E10 in January.
Code: Select all
1995 20.219819
1996 24.763281
1997 28.333753
1998 32.860928
1999 40.578255
2000 43.774387
2001 36.98056
2002 30.277409
2003 22.894158
Nov 03 25.898702
Here are the Constant Terminal Value Rates (CTVR80) for an 80% stock portfolio. These correspond to Calculated Rates.
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1995 3.70
1996 3.06
1997 2.71
1998 2.37
1999 1.96
2000 1.83
2001 2.13
2002 2.55
2003 3.29
Nov 03 2.94
Today 2.92
Code: Select all
Year Safe Calculated High Risk
1995 2.7 3.70 4.7
1996 2.1 3.06 4.1
1997 1.7 2.71 3.7
1998 1.4 2.37 3.4
1999 1.0 1.96 3.0
2000 0.8 1.83 2.8
2001 1.1 2.13 3.1
2002 1.6 2.55 3.6
2003 2.3 3.29 4.3
Nov 03 1.9 2.94 3.9
Today 1.9 2.92 3.9
Have fun.
John R.
My initial response was to step aside until valuations become more favorable. That is why I have investigated switching portfolio allocations. That is why I have looked into how long someone can stay with a TIPS-only portfolio, waiting on the sidelines, until the outlook for stocks gets better.unclemick wrote:I would make the case for look back variable take -out keyed off SEC yield with some sensible upper and lower bounds based on JWR's other work - say 2- 5% ballpark(without looking at the numbers). I would also uncouple from inflation and let 'Mr. Market' tell me what I could have. Others might look and want to shift 80/20 to other mixes along a thirty year period based on numbers/valuation change.
These numbers show why I am interested in dividend and dividend growth strategies as well. Look at these numbers and compare them to dividend yields. My impression is that dividend and dividend growth strategies are safer than the conventional approach, lasting far into the future, and they allow you to withdraw more than the conventional approach (at least, at today's valuations if you demand a reasonably high level of safety).
Have fun.
John R.
"Today 1.9 2.92 3.9"
Thanks, JWR1945.
So you only give up six-tenths of a percentage point of withdrawal rate to increase your minimum portfolio value at the end of 30 years from $1 to the inflation-adjusted value of your portfolio at your retirement start date. That's a helpful thing to know, in my view.
Thanks, JWR1945.
So you only give up six-tenths of a percentage point of withdrawal rate to increase your minimum portfolio value at the end of 30 years from $1 to the inflation-adjusted value of your portfolio at your retirement start date. That's a helpful thing to know, in my view.
Here is what happens to Minimum Balances if you withdraw at the CTVR80 rates. This is of value when monitoring progress.
Here are the minimum balances associated with Constant Terminal Value Rates (CTVR80) for an 80% stock portfolio assuming that the initial balance is $100000. These are the most likely minimum balances when withdrawals are at the CTVR80 rates.
Minimum Balances to Maintain Constant Terminal Values for 80% Stocks. The Initial Balance is $100000. The Calculated Minimum Balances occur for withdrawals equal to CTVR80.
I have assumed used plus and minus $25000 for the confidence limits.
Have fun.
John R.
I have made a (straight line) linear curve fit of the 1923-1972 CTVR80 Minimum Balances versus the Percentage Earnings Yield 100E10/P. The equation is y = 5518.2x + 27808 based upon an initial balance of $100000. The CTVR80 minimum balance in (real) dollars is y. The percentage earnings yield is x. R squared is 0.5185. My eyeball estimate of the confidence limits is plus and minus $25000.
Here are the minimum balances associated with Constant Terminal Value Rates (CTVR80) for an 80% stock portfolio assuming that the initial balance is $100000. These are the most likely minimum balances when withdrawals are at the CTVR80 rates.
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1995 $55099
1996 $50092
1997 $47284
1998 $44601
1999 $41407
2000 $40414
2001 $42730
2002 $46033
2003 $51911
Nov 03 $49115
Today $48933
Code: Select all
Year Lower-Bound Calculated Upper-Bound
1995 $30099 $55099 $80099
1996 $25092 $50092 $75092
1997 $22284 $47284 $72284
1998 $19601 $44601 $69601
1999 $16407 $41407 $66407
2000 $15414 $40414 $65414
2001 $17730 $42730 $67730
2002 $21033 $46033 $71033
2003 $26911 $51911 $76911
Nov 03 $24115 $49115 $74115
Today $23933 $48933 $73933
Have fun.
John R.
Here is the other equation.
Using the formula, if a rate that is calculated to be Safe is actually needed to Maintain a Constant Terminal Value with 80% stocks, these are the Minimum Balances during the 30-year period (assuming an Initial Balance of $100000).
Lower Bound: $20603.
Safe Rate: $40603.
Upper Bound: $60603.
Using the formula, if the Calculated CTVR80 rate is what is actually needed to Maintain a Constant Terminal Value with 80% stocks, these are the Minimum Balances during the 30-year period (assuming an Initial Balance of $100000).
Lower Bound: $28740.
Calculated (CTVR80) Rate: $48740.
Upper Bound: $68740.
Using the formula, if a rate that is calculated to be at High Risk actually does Maintain the Constant Terminal Value with 80% stocks, these are the Minimum Balances during the 30-year period (assuming an Initial Balance of $100000).
Lower Bound: $36557.
High Risk Rate: $56557.
Upper Bound: $76557.
I have assumed used plus and minus $20000 for the confidence limits.
These numbers help you prepare for what actually happens during the 30-year period. If you are withdrawing at the Calculated CTVR80 Rate and if it is appropriate, you should expect your portfolio balance to drop down to 48.74% of its initial value sometime during the 30 years. It could fall to 28.74%. It might only fall to 68.74%.
If you have prepared for the worst and chosen to withdraw at the Safe Rate, you have prepared for the possibility that your portfolio's balance would drop between 20.603% and 60.603% of its initial value (with 40.603% being most likely). If the balance remains above 60.603% as you monitor your progress and if it seems as if it will stay above that amount, you will know that you have been overly conservative and you can safely withdraw more.
Have fun.
John R.
Here are today's Safe, Calculated and High Risk Levels to Maintain Constant Terminal Values for 80% Stocks. The Calculated Rates correspond to CTVR80.I have made a (straight line) linear curve fit of the 1923-1972 CTVR80 Minimum Balances versus the value of CTVR80. The equation is y = 7977.3x + 25446 based upon an initial balance of $100000. The CTVR80 minimum balance in (real) dollars is y. The value of CTVR80 in percent is x. R squared is 0.6306. My eyeball estimate of the confidence limits is plus and minus $20000.
Code: Select all
For today:
Safe 1.9%
Calculated (CTVR80) 2.92%
High Risk 3.9%
Lower Bound: $20603.
Safe Rate: $40603.
Upper Bound: $60603.
Using the formula, if the Calculated CTVR80 rate is what is actually needed to Maintain a Constant Terminal Value with 80% stocks, these are the Minimum Balances during the 30-year period (assuming an Initial Balance of $100000).
Lower Bound: $28740.
Calculated (CTVR80) Rate: $48740.
Upper Bound: $68740.
Using the formula, if a rate that is calculated to be at High Risk actually does Maintain the Constant Terminal Value with 80% stocks, these are the Minimum Balances during the 30-year period (assuming an Initial Balance of $100000).
Lower Bound: $36557.
High Risk Rate: $56557.
Upper Bound: $76557.
I have assumed used plus and minus $20000 for the confidence limits.
These numbers help you prepare for what actually happens during the 30-year period. If you are withdrawing at the Calculated CTVR80 Rate and if it is appropriate, you should expect your portfolio balance to drop down to 48.74% of its initial value sometime during the 30 years. It could fall to 28.74%. It might only fall to 68.74%.
If you have prepared for the worst and chosen to withdraw at the Safe Rate, you have prepared for the possibility that your portfolio's balance would drop between 20.603% and 60.603% of its initial value (with 40.603% being most likely). If the balance remains above 60.603% as you monitor your progress and if it seems as if it will stay above that amount, you will know that you have been overly conservative and you can safely withdraw more.
Have fun.
John R.
We can do quite a bit along these lines. Except for the conventional type of withdrawals, everything is in terms of nominal dollars. We can withdraw a portion of the current balance and/or break it into components of dividends and/or interest. A major plus is that we can analyze data easier and better than before. In many cases what used to be extremely difficult is easy.unclemick wrote:I would make the case for look back variable take -out keyed off SEC yield with some sensible upper and lower bounds based on JWR's other work - say 2- 5% ballpark(without looking at the numbers). I would also uncouple from inflation and let 'Mr. Market' tell me what I could have.
Should we be satisfied with 1.9%?Mike wrote:1.9% This is the dividend yield plus a little bit, the same as previous calculations. It seems to be a fairly consistent number.
I doubt that you will be surprised that Verizon VZ is yielding 4.02% this morning. But Merck MRK has been beaten down enough that it now yields 3.49%. IIRC, these are both Dividend Achievers according to a recent tabulation by Mergent. This means that they provide consistent dividends that grow.
It seems to me that we can do better than 1.9% even now. We should be able to match the 2.5% (real) yield-to-maturity recently available from TIPS (but not this morning) through stock dividends. IMHO, we can do a lot better.
Have fun.
John R.
CTVR80 versus Earnings Yield
I have reported 30-year Constant Terminal Value Rate data for sequences extending through 1980, using dummy data (for 2003-2010) when needed. I have extended the calculations through 2003.
Here are tables.
1923-1980 with 80% stocks: Year, P/E10, 100E10/P, CTVR80, Calculated Withdrawal Rate for a Constant Terminal Value
1981-2003 with 80% stocks: Year, P/E10, 100E10/P, Calculated Withdrawal Rate for a Constant Terminal Value
1923-1980 with 80% stocks:Year, CTVR80, Safe Withdrawal Rate for a Constant Terminal Value, Calculated Withdrawal Rate for a Constant Terminal Value, High Risk Rate for a Constant Terminal Value
1981-2003 with 80% stocks:Year, Safe Withdrawal Rate for a Constant Terminal Value, Calculated Withdrawal Rate for a Constant Terminal Value, High Risk Rate for a Constant Terminal Value
The current value of P/E10 is close to 28. This is similar, but slightly less than, the P/E10 value in 1997. In 1997, the Safe, Calculated and High Risk Rates for a Constant Terminal Value were 1.53%, 2.62% and 3.72% respectively. A person who retires today with a high stock (80%) portfolio and who withdraws 2.7% to 2.8% of his initial balance (plus inflation) has about a 50-50 chance of maintaining the full buying power of his portfolio at year 30. If he withdraws 3.8%, he is almost certain to have lost buying power at year 30. If he limits his withdrawals to 1.5%, he is almost certain to have increased his buying power at year 30.
Have fun.
John R.
I have calculated the confidence limits. They are plus and minus 1.10%. [This is 1.64 times the standard deviation of 0.669% using 48 degrees of freedom.]CTVR80 refers to a portfolio consisting of 80% stocks and 20% commercial paper. It is rebalanced annually. Its expenses are 0.20%. The initial balance was set to $100000. Withdrawals were adjusted to match inflation in accordance with the CPI. I have determined the maximum withdrawal rates (in increments of 0.1%) that would have ended with a final balance of $100000 (in real dollars) or higher after 30 years.
This is similar to the conventional Safe Withdrawal Rate strategy that is investigated most frequently. The difference is that I have required the portfolio's final balance to equal (or exceed) its original value instead of falling to zero. I refer to these withdrawal rates as Constant Terminal Value Rates (CTVR). These are similar to Historical Surviving Withdrawal Rates and Half Failure Withdrawal Rates. The constraint is different.
..
I have made a (straight line) linear curve fit to the 1923-1972 Constant Terminal Value Rates versus the Percentage Earnings Yield 100E10/P. The equation that it produces is y = 0.7033x + 0.2133%, where y is the Constant Terminal Value Rate and x is the Percentage Earnings Yield. R squared was 0.8501%, which is exceedingly high. I have not calculated confidence limits yet. Using an eyeball estimate, they are likely to be about plus and minus 1%.[I have corrected the equation and R-squared.]
..
It was necessary for me to limit the upper end of the data [for making curve fits] to 1972 because the dummy data in the calculator from 2003-2010 reduces the Constant Terminal Value Rates of later sequences sharply. The dummy data assumes that stock prices and dividends both decrease 20% per year starting in 2003.
I have reported 30-year Constant Terminal Value Rate data for sequences extending through 1980, using dummy data (for 2003-2010) when needed. I have extended the calculations through 2003.
Here are tables.
1923-1980 with 80% stocks: Year, P/E10, 100E10/P, CTVR80, Calculated Withdrawal Rate for a Constant Terminal Value
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1923 8.2 12.2 7.6 8.79
1924 8.1 12.3 7.8 8.90
1925 9.7 10.3 7.4 7.46
1926 11.3 8.8 6.5 6.44
1927 13.2 7.6 6.2 5.54
1928 18.8 5.3 4.7 3.95
1929 27.1 3.7 3.5 2.81
1930 22.3 4.5 3.7 3.37
1931 16.7 6.0 4.2 4.42
1932 9.3 10.8 6.2 7.78
1933 8.7 11.5 7.1 8.30
1934 13.0 7.7 5.3 5.62
1935 11.5 8.7 6.3 6.33
1936 17.1 5.8 4.6 4.33
1937 21.6 4.6 3.6 3.47
1938 13.5 7.4 5.2 5.42
1939 15.6 6.4 4.8 4.72
1940 16.4 6.1 4.8 4.50
1941 13.9 7.2 6.2 5.27
1942 10.1 9.9 7.9 7.18
1943 10.2 9.8 7.7 7.11
1944 11.1 9.0 6.8 6.55
1945 12.0 8.3 5.9 6.07
1946 15.6 6.4 5.6 4.72
1947 11.5 8.7 7.8 6.33
1948 10.4 9.6 8.2 6.98
1949 10.2 9.8 8.1 7.11
1950 10.7 9.3 8.0 6.79
1951 11.9 8.4 7.0 6.12
1952 12.5 8.0 6.0 5.84
1953 13.0 7.7 5.9 5.62
1954 12.0 8.3 6.4 6.07
1955 16.0 6.3 4.5 4.61
1956 18.3 5.5 3.8 4.06
1957 16.7 6.0 4.2 4.42
1958 13.8 7.2 4.7 5.31
1959 18.0 5.6 3.5 4.12
1960 18.3 5.5 3.6 4.06
1961 18.5 5.4 3.4 4.01
1962 21.2 4.7 3.2 3.53
1963 19.3 5.2 3.5 3.86
1964 21.6 4.6 3.0 3.47
1965 23.3 4.3 2.6 3.23
1966 24.1 4.1 2.7 3.13
1967 20.4 4.9 3.3 3.66
1968 21.5 4.7 3.3 3.48
1969 21.2 4.7 3.4 3.53
1970 17.1 5.8 4.1 4.33
1971 16.5 6.1 4.0 4.48
1972 17.3 5.8 3.7 4.28
1973 18.7 5.3 3.4 3.97
1974 13.5 7.4 4.4 5.42
1975 8.9 11.2 5.9 8.12
1976 11.2 8.9 4.2 6.49
1977 11.4 8.8 3.7 6.38
1978 9.2 10.9 4.1 7.86
1979 9.3 10.8 3.2 7.78
1980 8.9 11.2 2.1 8.12
Code: Select all
1981 9.3 10.71 7.75
1982 7.4 13.48 9.70
1983 8.7 11.51 8.31
1984 9.8 10.25 7.42
1985 9.9 10.07 7.30
1986 11.7 8.57 6.24
1987 14.7 6.78 4.98
1988 13.7 7.28 5.33
1989 15.2 6.60 4.85
1990 17.0 5.88 4.35
1991 15.6 6.42 4.73
1992 19.6 5.11 3.81
1993 20.4 4.90 3.66
1994 21.5 4.65 3.48
1995 20.5 4.89 3.65
1996 25.4 3.93 2.98
1997 29.2 3.43 2.62
1998 33.8 2.96 2.30
1999 40.9 2.44 1.93
2000 44.7 2.24 1.79
2001 37.0 2.70 2.12
2002 30.3 3.30 2.54
2003 22.9 4.37 3.29
Code: Select all
1923 7.6 7.69 8.79 9.89
1924 7.8 7.80 8.90 9.99
1925 7.4 6.37 7.46 8.56
1926 6.5 5.34 6.44 7.54
1927 6.2 4.44 5.54 6.64
1928 4.7 2.86 3.95 5.05
1929 3.5 1.71 2.81 3.91
1930 3.7 2.27 3.37 4.47
1931 4.2 3.33 4.42 5.52
1932 6.2 6.68 7.78 8.87
1933 7.1 7.20 8.30 9.40
1934 5.3 4.53 5.62 6.72
1935 6.3 5.23 6.33 7.43
1936 4.6 3.23 4.33 5.42
1937 3.6 2.37 3.47 4.57
1938 5.2 4.32 5.42 6.52
1939 4.8 3.62 4.72 5.82
1940 4.8 3.40 4.50 5.60
1941 6.2 4.18 5.27 6.37
1942 7.9 6.08 7.18 8.27
1943 7.7 6.01 7.11 8.21
1944 6.8 5.45 6.55 7.65
1945 5.9 4.98 6.07 7.17
1946 5.6 3.62 4.72 5.82
1947 7.8 5.23 6.33 7.43
1948 8.2 5.88 6.98 8.07
1949 8.1 6.01 7.11 8.21
1950 8.0 5.69 6.79 7.88
1951 7.0 5.03 6.12 7.22
1952 6.0 4.74 5.84 6.94
1953 5.9 4.53 5.62 6.72
1954 6.4 4.98 6.07 7.17
1955 4.5 3.51 4.61 5.71
1956 3.8 2.96 4.06 5.15
1957 4.2 3.33 4.42 5.52
1958 4.7 4.21 5.31 6.41
1959 3.5 3.02 4.12 5.22
1960 3.6 2.96 4.06 5.15
1961 3.4 2.92 4.01 5.11
1962 3.2 2.43 3.53 4.63
1963 3.5 2.76 3.86 4.96
1964 3.0 2.37 3.47 4.57
1965 2.6 2.13 3.23 4.33
1966 2.7 2.03 3.13 4.23
1967 3.3 2.56 3.66 4.76
1968 3.3 2.39 3.48 4.58
1969 3.4 2.43 3.53 4.63
1970 4.1 3.23 4.33 5.42
1971 4.0 3.38 4.48 5.57
1972 3.7 3.18 4.28 5.38
1973 3.4 2.88 3.97 5.07
1974 4.4 4.32 5.42 6.52
1975 5.9 7.02 8.12 9.21
1976 4.2 5.39 6.49 7.59
1977 3.7 5.28 6.38 7.48
1978 4.1 6.76 7.86 8.96
1979 3.2 6.68 7.78 8.87
1980 2.1 7.02 8.12 9.21
Code: Select all
1981 6.65 7.75 8.84
1982 8.60 9.70 10.79
1983 7.21 8.31 9.41
1984 6.32 7.42 8.52
1985 6.20 7.30 8.40
1986 5.14 6.24 7.34
1987 3.89 4.98 6.08
1988 4.23 5.33 6.43
1989 3.76 4.85 5.95
1990 3.25 4.35 5.45
1991 3.63 4.73 5.83
1992 2.71 3.81 4.91
1993 2.56 3.66 4.76
1994 2.38 3.48 4.58
1995 2.55 3.65 4.75
1996 1.88 2.98 4.08
1997 1.53 2.62 3.72
1998 1.20 2.30 3.39
1999 0.83 1.93 3.03
2000 0.69 1.79 2.88
2001 1.02 2.12 3.21
2002 1.44 2.54 3.63
2003 2.19 3.29 4.38
Have fun.
John R.
"If he limits his withdrawals to 1.5%, he is almost certain to have increased his buying power at year 30. "
JWR1945:
I find these recent numbers most helpful. Can you say what the equivalent number is using the conventional methodology assumptions?
Under the conventional methodology, the number would be the same at all valuation levels, of course. I'm interested in knowing how far it takes you below 4 percent to be sure not of having $1 in your portfolio at the end of 30 years, but of retaining the real value of your starting-point portfolio for 30 years.
JWR1945:
I find these recent numbers most helpful. Can you say what the equivalent number is using the conventional methodology assumptions?
Under the conventional methodology, the number would be the same at all valuation levels, of course. I'm interested in knowing how far it takes you below 4 percent to be sure not of having $1 in your portfolio at the end of 30 years, but of retaining the real value of your starting-point portfolio for 30 years.
Users of the conventional methodology would select the smallest of the CTVR80 numbers and claim that it was 100% safe.
The smallest value of CTVR80 occurred in the 1966 sequence. It was 2.6%.
[The 1980 sequence is still in progress. The latest complete sequence started in 1972 (since dummy data are used in 2003-2010).]
[Before 1923, the lowest value of CTVR80 was 3.3%.]
Those using the conventional methodology would claim that they are certain [place slippery disclaimer here] of maintaining the entire buying power of their portfolios when they withdraw 2.6%. In reality, their odds would be very close to 50-50.
Have fun.
John R.
The smallest value of CTVR80 occurred in the 1966 sequence. It was 2.6%.
[The 1980 sequence is still in progress. The latest complete sequence started in 1972 (since dummy data are used in 2003-2010).]
[Before 1923, the lowest value of CTVR80 was 3.3%.]
Those using the conventional methodology would claim that they are certain [place slippery disclaimer here] of maintaining the entire buying power of their portfolios when they withdraw 2.6%. In reality, their odds would be very close to 50-50.
Have fun.
John R.
Here is a summary of how well the conventional methodology would have predicted safety at today's valuations. The conventional answer is taken as the minimum value between 1923 and 1980 (or 1972, when appropriate). Today's Safe, Calculated and High Risk Rates are roughly equal to those of 1997. [Today's P/E10 is close to 28, which is slightly less than that of 1997.]
HFWR50: Conventional answer: 2.8% from 1937
1997 rates: 2.37%, 3.25% and 4.13%
Confidence limits: plus and minus 0.88%
Standard deviation: 0.54%
Conventional answer (2.8%) is close to 1997 calculated rate (3.25%) minus one standard deviation. (The standard deviation is 0.54%.)
HFWR80: Conventional answer: 2.4% from 1966
1997 rates: 1.00%, 2.87% and 4.73%
Confidence limits: plus and minus 1.87%
Standard deviation: 1.10%
Conventional answer (2.4%) is close to 1997 calculated rate (2.87%) minus one-half standard deviation. (The standard deviation is 1.10%.)
CTVR50: Conventional answer: 2.4% from 1937
1997 rates: 1.83%, 2.55% and 3.27%
Confidence limits: plus and minus 0.72%
Standard deviation: 0.44%
Conventional answer (2.4%) is close to 1997 calculated rate (2.55%) minus one-third standard deviation. (The standard deviation is 0.44%.)
CTVR80: Conventional answer: 2.6% from 1965
1997 rates: 1.53%, 2.62% and 3.72%
Confidence limits: plus and minus 1.10%
Standard deviation: 0.67%
Conventional answer (2.6%) is close to 1997 calculated rate (2.62%) minus zero standard deviations. (The standard deviation is 1.10%.)
Roughly speaking, the conventional answer is close to, but less than, the calculated rate at today's valuations. If it were equal to the calculated rate, the conventional answer would have a 50% chance of predicting the correct outcome. That is, the conventional answer is claimed to provide perfect safety but it actually provides only a 50% chance of being safe. When it differs by minus one standard deviation, the conventional answer has an 84% chance of predicting the correct outcome. That is, the conventional answer is claimed to provide perfect safety but it actually provides only an 84% chance of being safe.
The conventional answer is claimed to provide perfect safety. It actually provides a chance of being safe between 50% and 84%.
It is surprising that the smallest value of HFWR80 (2.4%) is lower than the smallest value of CTVR80 (2.6%). HFWR80 is established when a portfolio's balance falls to one-half of its initial value (in real dollars), which can occur at any time within the first 30 years. CTVR80 is established when the balance at year 30 equals the initial balance (in real dollars). Portfolios typically fall at first and then rise to their balances at year 30. When one withdraws 2.6% from an 80% stock portfolio, it falls to less than one-half of its initial balance (plus inflation) before rising all the way back to its initial balance (plus inflation) at year 30.
Have fun.
John R.
HFWR50: Conventional answer: 2.8% from 1937
1997 rates: 2.37%, 3.25% and 4.13%
Confidence limits: plus and minus 0.88%
Standard deviation: 0.54%
Conventional answer (2.8%) is close to 1997 calculated rate (3.25%) minus one standard deviation. (The standard deviation is 0.54%.)
HFWR80: Conventional answer: 2.4% from 1966
1997 rates: 1.00%, 2.87% and 4.73%
Confidence limits: plus and minus 1.87%
Standard deviation: 1.10%
Conventional answer (2.4%) is close to 1997 calculated rate (2.87%) minus one-half standard deviation. (The standard deviation is 1.10%.)
CTVR50: Conventional answer: 2.4% from 1937
1997 rates: 1.83%, 2.55% and 3.27%
Confidence limits: plus and minus 0.72%
Standard deviation: 0.44%
Conventional answer (2.4%) is close to 1997 calculated rate (2.55%) minus one-third standard deviation. (The standard deviation is 0.44%.)
CTVR80: Conventional answer: 2.6% from 1965
1997 rates: 1.53%, 2.62% and 3.72%
Confidence limits: plus and minus 1.10%
Standard deviation: 0.67%
Conventional answer (2.6%) is close to 1997 calculated rate (2.62%) minus zero standard deviations. (The standard deviation is 1.10%.)
Roughly speaking, the conventional answer is close to, but less than, the calculated rate at today's valuations. If it were equal to the calculated rate, the conventional answer would have a 50% chance of predicting the correct outcome. That is, the conventional answer is claimed to provide perfect safety but it actually provides only a 50% chance of being safe. When it differs by minus one standard deviation, the conventional answer has an 84% chance of predicting the correct outcome. That is, the conventional answer is claimed to provide perfect safety but it actually provides only an 84% chance of being safe.
The conventional answer is claimed to provide perfect safety. It actually provides a chance of being safe between 50% and 84%.
It is surprising that the smallest value of HFWR80 (2.4%) is lower than the smallest value of CTVR80 (2.6%). HFWR80 is established when a portfolio's balance falls to one-half of its initial value (in real dollars), which can occur at any time within the first 30 years. CTVR80 is established when the balance at year 30 equals the initial balance (in real dollars). Portfolios typically fall at first and then rise to their balances at year 30. When one withdraws 2.6% from an 80% stock portfolio, it falls to less than one-half of its initial balance (plus inflation) before rising all the way back to its initial balance (plus inflation) at year 30.
Have fun.
John R.