Switching: Help a New Member

Research on Safe Withdrawal Rates

Moderator: hocus2004

Lena
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Post by Lena »

Wow, thanks to everyone who has responded. John and Hocus, your posts were very helpful, and, Petey, I especially appreciate your tutorial. I've already read it a couple of times, and I will certainly be doing so many more times.

I do understand so much more now, and I'm in the process of digesting all this and determining how to apply it to our particular situation. I've already gotten answers to several of my followup questions just by reading all of this thread.

My husband and I are working on our asset allocations right now in preparation for his probable retirement later this year. We want to get it as right as we can, and the information I'm getting here has been a huge step in the right direction, even if the only result is that we start asking questions that make us really think about what we're doing.
JWR1945
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Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Delawaredave wrote:I thought the average historical PE was closer to 16 ?

Also I read somewhere (Jeremy Siegel ?) that an average PE these days should be expected to be a little higher than PE's 20-40 years ago -- because there's more liquidity, more public information, and tighter accounting -- so one should pay a slightly higher multiple today.

Question is how much higher ? I think our current PE of 20 is high by anyone's standards...
Different people use different definitions these days. Some bullish commentators compare today's P/E based on projected, future earnings with historically recorded P/E levels based upon trailing earnings. [It used to be that all calculations were based on trailing earnings.] Even then, some definitions exclude some earnings (such as nonrecurring revenue) and/or some charges to earnings (such as nonrecurring write downs). Another side issue: how do you handle companies with losses? With some calculations, such losses are subtracted from the earnings from the other companies in the index. With others, those losses are ignored.

The typical, historical level of P/E10 in Professor Robert Shiller's database is around 14 or 15. Since earnings generally increase over time, the typical P/E for a single year should be a little bit higher. IIRC, the comparable single-year P/E that goes along with P/E10 is close to 16.

Yes, P/E = 20 is high.

I am aware of the assertion that multiples should remain higher. I am not convinced that they must remain higher. For the immediate future, however, I expect multiples to remain higher than average because of demographics: more people need to own stocks because they need retirement income.

I could be wrong. If the market continues to underperform for the next few years, many people will abandon it just as many people came in during the bubble in the late 1990s. Because of the bubble, many new investors have entirely unrealistic expectations, such as getting compounded annual returns of 20%+. Will they stick around for real returns of 3% or 4%? IMHO, many would shun a real return of 7% (and quickly lose money by following the wonderful sounding dreams crafted by salesmen).

Have fun.

John R.

P.S. I like Louis Rukeyser's Christmas wish for his viewers: may you receive everything that you deserve plus 20%.
JWR1945
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Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Delawaredave wrote:Hey - while we're talking about "definitions" what is "accumulation stage" ?

I though that was accumulating savings while you worked. But I've seen several posts by people that seem already retired who talk that they are in "accumulation stage" ?
I view my investments as custodial holdings for my daughters. I do not need them for myself.

OTOH, I am not adding to my investments. Rather, the new money is going directly to my daughters for them to put into their Roth IRAs.

I have found that it is a very bad idea for me to just dump large amounts of money on them. It disappears. [Christmas and birthdays are OK. I expect those dollars to disappear.]

I don't mind their spending some of their inheritance on their immediate desires, but I want a significant fraction to last longer.

Hocus2004 was accurate in what he said:
JWR1945 is retired, so your initial thought would be to say that he is in the withdrawal stage with his stock investments. That is not really so. JWR1945 has enough money coming in from his pension to cover his costs of living. So there is no circumstance in which he would be required to sell stocks to cover his costs of living. I think that a good argument can be made that the circumstances that apply for JWR1945 are the circumstances that generally apply for an investor in the accumulation stage.
My only refinement is that I am in a maintenance stage. I am not putting new money into my own investment accounts.

BTW, what you do during accumulation differs from what is best during retirement. We have only scratched the surface for accumulation. There is also an important transition period, just before and after the beginning of retirement, that we have not examined adequately.

Recognize that dollar cost averaging is a powerful plus until you get close to the transition stage. As you get closer to the magic date, the volatility of stocks becomes more and more important. One can tolerate a downward price fluctuation of 40% or 50% when he is young. He cannot tolerate it when he is within one or two years of his magic retirement date.

Have fun.

John R.
peteyperson
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Post by peteyperson »

Lena wrote:Wow, thanks to everyone who has responded. John and Hocus, your posts were very helpful, and, Petey, I especially appreciate your tutorial. I've already read it a couple of times, and I will certainly be doing so many more times.

I do understand so much more now, and I'm in the process of digesting all this and determining how to apply it to our particular situation. I've already gotten answers to several of my followup questions just by reading all of this thread.

My husband and I are working on our asset allocations right now in preparation for his probable retirement later this year. We want to get it as right as we can, and the information I'm getting here has been a huge step in the right direction, even if the only result is that we start asking questions that make us really think about what we're doing.
Thank you, Lena. I did put a great deal of time in on your behalf.

Investing is not all that complicated. You just need to get a few basic concepts that very few people ever learn and then you are streaks ahead of 99% of the rest of investors out there.

I am going to recommend some books for you:

I would suggest that you read Gillette Edmunds How to Retire and Live Well. This is a book from a guy who has lived off his investments for over 20 years and talks honestly about what he discovered through trial and error worked and didn't work. He could not find any good advice at the time and so worked his way through his options. It has no difficult math or anything to trip over. He runs thru the different types of investments and how they work. As with all books, he has his own opinions on what works and what doesn't. You will likely find that if you read a selection of books, you will come to form your own independent opinions of what works for you.

http://www.amazon.com/exec/obidos/ASIN/1580622011/

A book, Irrational Exuberance by Robert Shiller is a great follow up. He details the different eras that markets have gone thru. He shows with press articles from that time how the markets repeat themselves with the euphoria in 1901 with electricity & automobiles and later in 1920s with radio and 1950s with TV and 1995 with the internet. Investors believing returns will be amazing, bidding up prices to incredible levels and few people valuing the market in traditional ways. Playing a game of musicial chairs, hoping they can sell before the music stops (few ever do as they have no way to judge the timing!) Shiller also alludes to prices of markets, what is expensive, what is not and why this makes a difference to the future returns one can expect. From this book, one can begin to understand why investors did poorly in the internet boom (it has happened before) and why investor typically buy what has gone up and not what is likely to go up because it is cheap relative to the price that asset usually commands.

http://www.amazon.com/exec/obidos/ASIN/0767907183/

I would then recommend reading Common Sense on Mutual Funds by John Bogle. The information I provided to you comes from what I learned from Mr Bogle. John Bogle breaks down returns like I showed you and make it clear how things really work. This is a great practical follow-on to Shiller as it gives a little more information to chew over. He is also very pro-indexing, but hopefully you can see past that. This is more detail oriented, providing dividend yields and earnings for different times, the message is incredibly clear. Bogle is very good at writing books for the small investor. He thrives on communicating the benefits and pitfalls of the markets. Bogle is the founder of the Vanguard Index funds.

http://www.amazon.com/exec/obidos/ASIN/0471392286/

William Bernstein's Four Pillars of Investing is a more complex read and the earlier books will help you be able to understand it. His is the kind of book where if you tried to read it first, you'd completely give up. Can't recommend his highly enough but his 2nd chapter is a ***** to read. He should have put it later in the book as getting through it is tough and I think many readers never make it to shore!

http://www.amazon.com/exec/obidos/ASIN/0071385290/

Lastly, I would read David Swensen's book, Pioneering Portfolio Management. Easy book! This details the original perspective the Yale Endowment Fund use in investing for the long-term. Whilst some of the techniques are beyond private investors, most are not and his take on a variety of subjects are original, thoughtful and important. He also gives a far more balanced view to the subject of active vs index investing, with a nod to indexing but hiring managers to actively manage the equity portfolio to considerable success. This same outlook is detailed in shorter space in the Yale Endowment Annual Reports each year which explain their thinking on what they own and why. Each year they focus on different aspects and these reports are gems. You can also get a good flavor of what his book would be like. I would recommend a sneak peak. Start with 2000 and work thru. Easy read. BTW, Yale are in the top 1% of investment returns for the past decade which speaks volumes for the value of their investment message.

www.yale.edu/investments/

http://www.amazon.com/exec/obidos/ASIN/0684864436/

I would strongly suggest that any plans be put on hold and you & your partner work through these books one at a time, taking your time. Any plans you make now are likely to be far inferior to any new plans you make once you have done your homework. The difference in your understanding and ability to both manage & plan for your future will be night & day. Most of the people here have at least read several of the books and benefited. I would stress reading them in this order even if you have to buy them to do so and cannot rent them from your local library. I found that I could only get so much benefit from the boards here because there was so much to appreciate. These books helped me take this information in a bit at a time and then I was up to speed. I thought of it like my own private investing course. I hope you have not found all the recommendations too much, I am just trying to be as helpful as I can. :lol: Take your time and soak it in slowly. Allow several months and treat it like night school. It is an investment in your future prosperity and security, and so I feel is well worth the personal investment. :lol:

Petey
JWR1945
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Post by JWR1945 »

peteyperson wrote:William Bernstein's Four Pillars of Investing is a more complex read and the earlier books will help you be able to understand it. His is the kind of book where if you tried to read it first, you'd completely give up. Can't recommend his highly enough but his 2nd chapter is a ***** to read. He should have put it later in the book as getting through it is tough and I think many readers never make it to shore!
Let me caution you about William Bernstein.

One of the reasons that his book is difficult to read is that he is careless in his use of numbers. In one place he will predict a 3.5% real growth rate. In another location, the same number becomes 3.0%.

William Bernstein is usually in the right ballpark. Just remember, it is not always your fault if you are confused.

You can trust all of John Bogle's numbers in this sense: a person can always figure out what they mean with great precision. You do not have to agree with his interpretation. But if you don't understand exactly what something means, you can always find someone who can and who can help you.

My own recommendation is David Dreman's book Contrarian Investment Strategies: The Next Generation dated 1998. I consider it to be a real blockbuster. He presents his thoughts well. You can trust all of his numbers. They hold up under intense scrutiny.

The best part, in my opinion, is his dedication:
For Holly, Ditto, and Meredith,
without whose love, support--and pleasant diversions--this book might have been completed many months earlier.
He has a good sense of balance.

Have fun.

John R.
JWR1945
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Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

I would strongly suggest that any plans be put on hold and you & your partner work through these books one at a time, taking your time. Any plans you make now are likely to be far inferior to any new plans you make once you have done your homework. The difference in your understanding and ability to both manage & plan for your future will be night & day. Most of the people here have at least read several of the books and benefited.
John Bogle is known for offering this advice (paraphrased):

Always be prepared to react quickly and DO NOTHING.

Never allow yourself to be rushed on financial matters. OTOH, you can comfortably ease yourself toward a strategy. You do not have to wait to know all of the final details before starting.

Have fun.

John R.
peteyperson
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Post by peteyperson »

Hi John,

I have yet to read Dreman, but he is high on my list.

The books I have recommended and the order in which I have recommended them was designed to be done on an easy learning curve. Dreman is probably on a par with the complexity of Bernstein. When I say complexity what I mean is that one has to have the sort of knowledge and understanding acquired from reading the other authors I have listed in order to be able to understand a Bernstein or a Dreman comfortably. I would not want to scare Lena off learning. Often people on this board and elsewhere jump right into recommending Bernstein as the first person to read, but I think it has far too much in it to be an easy start. I like Edmunds for that because he talks in broad concepts, gives a good outline to wide diversification between asset classes, how oil & gas behaves differently than stocks is one good example, and he really lays some excellent groundwork to build up.

I think we all have our personal favorites! :lol:

It is also one of the other things the board needs. A sticky post just of recommended reading, with links and a note as to the benefit of the book and the level of understanding needed to take the information in. This will possibly be more helpful than anything else. I have found intercst's reviews of FIRE reading on his website useful in the early days. I think once people clue into an interest in investing, they struggle to find good sources of information. The topics discussed on this board are advanced in the sense that one needs the grounding in order to understand them, even if the concepts are simple. They build on what Bogle and Shiller and othes have written about. So catering to someone new who has an interest but will very much be confused by the more advanced stuff needs an easier way to how to pick things up. I think Lena (if I can speak about her in her absence) is a good example of this.

Best,
Petey
JWR1945 wrote:
peteyperson wrote:William Bernstein's Four Pillars of Investing is a more complex read and the earlier books will help you be able to understand it. His is the kind of book where if you tried to read it first, you'd completely give up. Can't recommend his highly enough but his 2nd chapter is a ***** to read. He should have put it later in the book as getting through it is tough and I think many readers never make it to shore!
Let me caution you about William Bernstein.

One of the reasons that his book is difficult to read is that he is careless in his use of numbers. In one place he will predict a 3.5% real growth rate. In another location, the same number becomes 3.0%.

William Bernstein is usually in the right ballpark. Just remember, it is not always your fault if you are confused.

You can trust all of John Bogle's numbers in this sense: a person can always figure out what they mean with great precision. You do not have to agree with his interpretation. But if you don't understand exactly what something means, you can always find someone who can and who can help you.

My own recommendation is David Dreman's book Contrarian Investment Strategies: The Next Generation dated 1998. I consider it to be a real blockbuster. He presents his thoughts well. You can trust all of his numbers. They hold up under intense scrutiny.

The best part, in my opinion, is his dedication:
For Holly, Ditto, and Meredith,
without whose love, support--and pleasant diversions--this book might have been completed many months earlier.
He has a good sense of balance.

Have fun.

John R.
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