SWR was never near 2%

Research on Safe Withdrawal Rates

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Oliver
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SWR was never near 2%

Post by Oliver »

Question: "If you will clearly state (in 100 words or less) what progress you have made in swr analysis"

Answer posted by hocus on: Mon Sep 22, 2003 6:49 am
We have proven beyond any reasonable doubt that the conventional methodology is invalid. We have put forward for the FIRE community's consideration three reasonable analyses indicating that the SWR at the top of the bubble was somewhere near 2 percent, not anything close to the 4 percent number that had been previously claimed. I have set up a board where further research can be safely conducted, and I have begun formulating plans for publicizing the results we have achieved thus far. I have indentified a number of experts who I believe can help us with this effort, and have prepared an outline of a report that I will write that I believe will be helpful in winning their agreement to appear at the SWR board and discuss their thoughts on the SWR matter with that board community (which I hope to grow much larger next year).
Hello Hocus,

Hate to say it, I think you made a mistake. :) (Sorry - I could not help myself given all the recent posts) In all seriousness, at the peak of the bubble TIPS were above 3%, how can the SWR be less? A safe withdrawal rate for a particular mix of asset classes may have been near 2%. However, THE SWR could not have been less than the TIPS ytm.

Oliver

PS I bond yields were less than TIPS.

FIXED REAL RATES
I bond fixed rates are determined each May 1 and November 1. Each fixed rate applies to all I bonds issued in the six months following the rate determination. For example, a fixed rate determined on May 1, 1999 applies to all I bonds issued from May 1999 through October 1999.

DATE FIXED RATES*
MAY 1, 2003 1.10%
NOV 1, 2002 1.60%
MAY 1, 2002 2.00%
NOV 1, 2001 2.00%
MAY 1, 2001 3.00%
NOV 1, 2000 3.40%
MAY 1, 2000 3.60%

NOV 1, 1999 3.40%
MAY 1, 1999 3.30%
NOV 1, 1998 3.30%
SEP 1, 1998 3.40%
*annual rates compounded semiannually
hocus
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Post by hocus »

A safe withdrawal rate for a particular mix of asset classes may have been near 2%. However, THE SWR could not have been less than the TIPS ytm.

It becomes impossible for a community to learn about a subject matter once a discussion board becomes polluted with word game posts. Your comment shows how community members are misled when there are no reasonable restrictons on the trickery that may be employed by debate participants in their attempts to win debating points.

You are of course correct that there are different SWRs for different asset class mixes. In ordinary circumstances, you would know that my position has always been that this is so. I "retired" in August 2000, and my own FIRE plan employs a 4 percent personal withdrawal rate (PWD). I was able to achieve this withdrawal safely by going with an portfolio mix other than the 74 percent S&P stocks allocation recommended by intercst at the Motley Fool's REHP board. So there were SWRs available then that were greater than 2 percent, and there are now as well.

My statement related to the SWR for only one particular asset mix. Was it proper for me to refer to the SWR for this mix as "the" SWR? In speaking to a community in which a good number still cling to the belief that a methodology that always generates wrong answers can somehow remain valid nevertheless, it was proper to employ that shorthand way of talking about things.

The intercst study identifies an "optimal" asset mix. Intercst claims that the optimal mix is 74 percent S&P stocks, and that an aspiring early retiree using any alternate mix will delay his or her retirement by doing so. This is the single most important deception at issue in the debate. Aspiring early retirees using the REHP board to learn what the historical data reveals about what is safe have been told that the data reveals that it will take longer to retire safely with any asset mix other than 74 percent S&P stocks, but what the historical data says in reality is that there are many portfolio allocations that permitted a safe retirement sooner than the one purported to be optimal. This deception has been responsible for losses to the FIRE community in the millions of dollars. I and a good number of others have tried over the years to make the case for alternate portfolio allocations, and effective discussion has been blocked at that board by reference to a study purporting to show that the 74 percent S&P stock mix is "optimal." It is not. It is sub-optimal in many circumstances.

The argument is made that the claims made re the optimal portfolio mix are "rational" because they arebased on data. But the claim that this portfolio mix is optimal is not science, it is science fiction. The historical data says the opposite. Why the false study findings re what the data says? It is the result of use of an invalid methodology.

Intercst did the math right. His analysis led him to false conclusions because he employed a methodology that never provides the correct answer to the question posed, What is safe? It is impossible to say what is safe without looking at the effect of changes in valuation, a factor that William Bernstein says affects long-term returns (and therefore long-term safety) as a matter of "mathematical certitude." Any methodology that ignores this factor is invalid.

I am not saying that you are engaging in word games, Oliver. My sense is that your question is a sincere one, the result of genuine confusion over my views on these matters. It is impossible for anyone who has not followed the debate closely from its first days to make complete sense of many of the issues that have been raised, as a result of the smears that have proliferated both at the REHP board and in more recent months at this site's FIRE board.

I hope that there will come a time when the FIRE community as a whole will come to recognize the great damage that has been done to its efforts to learn about this important subject matter by posters who employ their energies to play games with words rather than to offer constructive help re investment strategies. I remain confident that in time this will happen, although the short-term prospects of fruitful discussions on these questions obviously is not bright.

Thank you for your question. I hope that you will consider posting here again when questions arise as to the realities of SWR analysis and the views that I have put forward during the course of the Great Debate. The purpose of this board is to provide a place for honest and informed posts on the subject matter, and I believe that it is those offering honest and informed posts to the community who will "win" the debate in the long run.
JWR1945
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Post by JWR1945 »

Greetings, Oliver:

hocus's quote was in regards to a portfolio consisting of stocks and commercial paper (along with a particular, optimal stock allocation).

There had been claims that such a portfolio would produce a 4% withdrawal rate at 100% safety unless the future is different from the past. That last qualifier was abused beyond belief. At times, it was described as being equivalent to the earth's being destroyed by a collision with an asteroid. At other times, it kicked in automatically if the 4% withdrawal rate failed.

We now know the mechanisms behind that previous number. It turns out to be only slightly above the dividend yield under worst case conditions. Commercial paper under those conditions yielded about 1% less than stocks. In essence, stock prices had to take quite a tumble for anything else to look attractive. During those worst case conditions, stock dividends yielded 2.9% or 3% or more and grew at least as fast as inflation.

In today's market, stock prices are well above their historical range and dividend yields are much lower. Those older studies, which sought to identify a lower bound under all future conditions, have failed. It is necessary to make adjustments.

Not only can we make adjustments, we can identify cause-and-effect and make improvements. It turns out that long-term TIPS, even at today's rates, can give us 15 to 20 years or longer to coast through an unattractive stock market until prices once again become bargains (or, at least, come closer to intrinsic values). We can focus on the key features of alternative investment classes such as REITS and stock segments grouped differently from the S&P 500. BenSolar has done an excellent job of identifying a sound alternative to the previous mixture of stocks and commercial paper.

Have fun.

John R.
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