Financial Independence/Retire Early -- Learn How!
JWR1945
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These are a series of posts that summarize our definition of the term Safe Withdrawal Rate along with their links and supporting rationale.

Number 1

http://nofeeboards.com/boards/viewtopic.php?t=943
http://nofeeboards.com/boards/viewtopic ... 6859#p6859

From JWR 1945:

Alternative Definition A. This is a brand new definition.

The Safe Withdrawal Rate is the best estimate of the maximum withdrawal amount for a retirement portfolio based on both a well-defined procedure and a set of well-defined constraints. It is stated as a percentage of the initial portfolio balance. It must be a mathematical calculation that is based primarily on existing, historical information. The sense in which it is the best estimate must be identified. The algorithm or procedure must be stated clearly. The constraints must be stated clearly. There must be an assessment of the degree of safety. This may be stated in terms of probabilities.

The phrase Safe Withdrawal Rate should always be placed in context. It should be defined in terms of those factors that are covered by the calculation, those factors that are not covered and those that are only partially covered. The context of a Safe Withdrawal Rate calculation must always address the reliability of the estimate. This should include known sensitivities to the assumptions that are inherent in making any projection. It is desirable to include general comments about the applicability of the estimate.

The Safe Withdrawal Rate must be described in terms independent of any methodology. The Safe Withdrawal Rate must be based on calculations that are independent of the actual occurrence of future events. The Safe Withdrawal Rate must be described in terms that acknowledge our inability to conduct carefully controlled experiments.

An example of a Safe Withdrawal Rate that does not depend on existing, historical information involves the use of mathematical formulas and theorems. If you started out with \$1.0 million, you could withdraw \$50K annually for 20 years. You would simply keep the money in cash at zero interest (such as stuffing dollars into a mattress). Another example is the introduction of a new asset class on a theoretical basis instead of a historical basis such as including Treasury Inflation Protected Securities (TIPS). Even though they have existed only recently, it is possible to define a meaningful Safe Withdrawal Rate calculation that includes TIPS. Another example would be to include the effects of a new law.

Several example of well-defined procedures include:
1) Withdrawing a fixed dollar amount every year of the portfolio's lifetime.
2) Withdrawing an initial amount and then increasing (or decreasing) that amount to adjust for inflation (or deflation).
3) Withdrawing a fixed percentage of the current balance of the retirement portfolio every year.
4) Withdrawing a minimal amount every year and taking out an additional amount that depends upon how much the portfolio size has increased. If the balance has decreased, the additional amount is zero. If the balance has increased greater than a specified amount (or percentage), take a specified percentage of the increase up to a maximum (amount or percentage).
5) Withdrawing an initial amount based on a specified percentage of the initial balance of the retirement portfolio. At the end of each year two amounts are calculated. One is to increase (or decrease) that amount to adjust for inflation (or deflation). The other is to use the originally specified percentage, but this time to apply it to the current portfolio balance. Withdraw whichever amount is larger.

Several examples of well-defined constraints include:
1) The portfolio balance must remain above zero for a specified number of years.
2) The portfolio balance must be greater than or equal to the original balance after a specified number of years.
3) The portfolio balance must be greater than or equal to the original balance as adjusted for inflation after a specified number of years.
4) The portfolio balance must remain between a minimum amount and a maximum amount for a specified number of years. All amounts are adjusted for inflation.

Have fun.

John R.

JWR1945
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Number 2

http://nofeeboards.com/boards/viewtopic ... c&start=20

http://nofeeboards.com/boards/viewtopic ... 6763#p6763

From JWR1945:

Desirable features for the Safe Withdrawal Rate definition.

I want to avoid some semantics traps that have been used against hocus. They were laid to create confusion and they have succeeded. We see honorable people of good will falling into these traps and adopting definitions that they should not.

These are some features that I would like to see in any definition of Safe Withdrawal Rates.

1. I want the definition to be independent of the methodology.

It is OK for the term to be used in a restricted sense internal to a study. That makes it easier to read. But the term is widely used and there are many methodologies.

hocus states it well when he says that he wants to know the Safe Withdrawal Rate, not the Safe Withdrew Rate. I reject categorically any notion that raddr, Gummy and Bernstein as well as others have no right to the term. Should any qualifier be used, it should be identified as a limitation of some particular study or investigation. When we see words such as historical Safe Withdrawal Rates, it should imply something inferior to the unhindered term Safe Withdrawal Rates.

2. I want any definition to use calculations that are independent of future events. It is OK to provide updates.

I want a calculation that was made in 2000 to stay put. I want it to be independent of events that follow. As we discover more factors that should be included in a calculation, it is OK to improve our estimates by including those factors. But a calculation appropriate for 2000 should include information up to the year 2000 and not any later information.

We seek to find a best estimate of the Safe Withdrawal Rate. I want to exclude the following kind of nonsense: The best estimate of the Safe Withdrawal Rate is the one that, when we look at stock market returns thirty years from now, we discover to have matched the actual returns over the previous thirty years. I do not want trivial arguments that you cannot make a calculation today without receiving a direct revelation from God.

3. I want any definition to acknowledge our inability to conduct carefully controlled experiments. That is why we end up with more than one answer. Each investigation looks at possible futures. Each determines probable future returns. There will only be one actual future.

I definitely want things such as raddr's sensitivity studies to be part of a Safe Withdrawal Rate calculation. When he discovers that the actual historical sequences were lucky, I want that discovery to be part of an improved Safe Withdrawal Rate calculation. We cannot live through the twentieth century a thousand times and measure portfolio safety directly. We can do the kind of thing that raddr and Gummy and others have done. We extract information from the historical record and look at it from many points of view. Then we assess the reliability of our projections.

I hope that this helps clarify our thinking. None of this is trivial.

Have fun.

John R.

JWR1945
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Number 3

http://nofeeboards.com/boards/viewtopic.php?t=957
http://nofeeboards.com/boards/viewtopic ... 7205#p7205

From JWR1945:

I (JWR1945) have just voted in favor of my own definition (Alternative A). However, I do expect to make some minor changes and add some clarifications.

One clarification relates to questions as to whether we are talking about mathematical calculations or rules of thumb. I view the Safe Withdrawal Rate itself as being a mathematical calculation. I view the application of several such calculations in light of the detailed context of each as forming a rule of thumb. We act on the basis of the rule of thumb.

This establishes a very fine line between what hocus is saying about valuations and what I am saying. This distinction would allow us to refer to previous studies and calculations as providing Safe Withdrawal Rates in spite of the fact that many of them have not considered valuations. This allows us to introduce the much needed corrections after the fact without rejecting the older studies outright.

I definitely want to avoid semantics traps. Even today there are those who would choose to define a Safe Withdrawal Rate strictly in terms of a particular study. To those people, as soon as you have hit the 100% safety level, valuations and future returns are all irrelevant.

To KenM: I haven't forgotten you. I still plan to answer your questions. It may take a week or so.

Have fun.

John R.

JWR1945
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Number 4

http://nofeeboards.com/boards/viewtopic.php?t=978
http://nofeeboards.com/boards/viewtopic ... 7412#p7412

From BenSolar:

Proposition:

The conventional historical SWR studies like the Trinity study and the REHP study achieve their results by studying financial market returns over periods with start dates ranging from 1871 to the 1970s. During that time the maximum Price/Rolling Ten Year Average Earnings of the S&P large cap index was 33, and the PE-10 only rarely reached the mid 20s.

There is a strong foundation of logic and statistics that valuation directly affects long term stock market returns, and thus directly affects the long term withdrawal rate achievable from a stock heavy portfolio.

In light of these facts, when preparing to retire and take withdrawals, it is essential to consider the valuation of the stock market. If you plan on a stock heavy portfolio like 75% S&P 500 / 25% FI, and if valuations are near the top, or over the top :shock:, of the range covered in the historical record, then you must adjust your withdrawal rate down, or at minimum take note of increased risk of failure and have a fall-back plan.

BenSolar :)

JWR1945
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Number 5

http://nofeeboards.com/boards/viewtopic ... &start=100
http://nofeeboards.com/boards/viewtopic ... 7080#p7080

From BenSolar:
bpp wrote: Along the lines that Ben has asked about, has anybody made a scatter-plot using historical data with PE/10 along the horizontal axis and subsequent maximum withdrawal rate along the vertical axis?
Yes, and it is pretty interesting I think. See the graph at the bottom of this page: http://rehphome.tripod.com/pestudy1.html

That chart, which uses PE-10, has pretty tight clustering of the data around the regression line, and a sharp slope. Seems to be a relationship there to me, which is backed up by the logic that receiving greater cash dividends supports a higher SWR. The other graphs on that page of PE vs. SWR are pretty useless: they use some kind of odd calculation for "the P/E ratio for the year prior to the start of the 30-year pay out period" which uses year old price data.

I like a crude approach to using the PE-10 chart: look at the center of the chart where most of the data points are. Note the scatter of SWR: it extends to roughly 3% above and below the regression line. I see the 3% below the regression line as a rough SWR. This assumes a linearity which can't exist, since a rate below zero is nonsense. I assume that the actual line that the scatter would approach would be an asymptote approaching zero as the PE-10 approaches very high numbers. And also which gets extremely large as PE-10 approaches 0.

Of course as PE-10 gets closer to 0 then that means that people are betting the odds of an black swan event are rising: an event that will make their shares of SPY paying 100% dividends completely worthless.

In short, I think that very low valuations (single digit) combined with a clear eyed assessment that the nation isn't in danger of destruction would make me grab lots of SPY or US-TSM and be comfortable planning for a 5 or 5.5% withdrawal rate over 30 years. On the other hand, I think that PE-10 over 20 means you are in the danger zone for a 4% withdrawal.

Peak PE-10 in 2000: 44 :shock:I personally think there are good odds (it's probable) that a 4% WR will fail from PE-10 in the upper 30s or higher. If the you linearly extend the regression line to 40 and up, it's zero at about PE-10 of 38.

BenChartin

PS I can claim a small amount of credit for the above chart, as I pestered the unnamed one about it for quite a while. 8)

JWR1945
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Number 6

http://nofeeboards.com/boards/viewtopic ... c&start=20
http://nofeeboards.com/boards/viewtopic ... 6770#p6770

From JWR1945:

It is very common in science and mathematics to have many different answers to what is meant by the word best. The key is that each answer truly is best in its own limited, very narrowly defined way.

We want the term Safe Withdrawal Rate to be defined as a unique mathematical calculation. We also want it to be the best calculation. This means that we should always associate with the term Safe Withdrawal Rate the manner in which it is the best calculation possible. It should never be used in isolation. We should always talk in terms of "the Safe Withdrawal Rate in the sense that [fill in the blank]."

I hope that this helps.

Have fun.

John R.

JWR1945
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Number 7

http://nofeeboards.com/boards/viewtopic ... c&start=80
http://nofeeboards.com/boards/viewtopic ... 7000#p7000

From JWR1945:
I still don't understand. If the "tool" is an objective function then you must have some specific calculations that spit out a number or numbers. Please share them with us. Inquiring minds want to know. If you don't have a numerical model that you can describe to us then I don't see how your "tool" is any more objective than all of the other (subjective) opinions out there.
Please continue on to the Part 2 thread. I have put up Revision 2 and Alternative A versions of a definition. (I am favoring Alternative A.)

Both definitions require that the SWR be the numerical result of a mathematical calculation. I think that we have a general agreement on that point. (That point was one that hocus advocated strongly.)

The next issue is the matter of which calculation to select. I ended up permitting several different answers in the context of what you consider to be a best estimate. You have to be very specific and explain what you mean by the term best estimate. I have introduced some other restrictions. One of them is that the Safe Withdrawal Rate cannot be defined as being the result of any specific method or model.

(You have been spared seeing posts...[paraphrased here for dramatic effect]...that hocus is wrong because the SWR is defined to be the result of [a particular] historical sequence calculation. Since hocus thinks that the SWR might be some other number, he is stupid and should shut up.)

The reason that I allow for multiple answers is a matter of context. Some methods are very well understood and their strengths and limitations can be identified in a fair amount of detail. Some other methods are also well understood but their strengths and weaknesses are different. Other methods might include factors that make them seem to be superior, but we really don't know enough to know for sure.

Which answer is best depends upon the needs of the individual. I expect most individuals to benefit from using several answers, each for a different purpose.

Have fun.

John R.

JWR1945
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Number 8

http://nofeeboards.com/boards/viewtopic.php?t=954
http://nofeeboards.com/boards/viewtopic ... 7059#p7059

From JWR1945:

I just cast the first vote to assert that there is a right answer.

It is just that there are a lot of questions and each one has its own right answer. There are lots of Safe Withdrawal Rates. Each one is unique. Each one applies to a slightly different circumstance.

That puts me pretty much into agreement with therealchips in this sense: I would prefer to have said both.

I think that the phrase Safe Withdrawal Rate should be expressed only in terms of its own context. The reason is simple. If I am going to make a calculation, I need to limit the scope of the problem so that there is such a thing as a right answer. Later, I can look at a lot of similar calculations along with the context behind each. From that, I can decide what to do.

Have fun.

John R.

JWR1945
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Number 9

http://nofeeboards.com/boards/viewtopic.php?t=974
http://nofeeboards.com/boards/viewtopic ... 7332#p7332

From JWR1945:

I am hoping that my "official" definition will resolve this issue. I ended up demanding that Safe Withdrawal Rates be the results of mathematical calculations and that any such SWR calculation has a unique right answer. I just demand that you include a full explanation of its context. You act after considering several such numbers in light of your own situation and your own understanding of what those numbers mean to you.

hocus's concern is that people want to start at the end of this process and force-fit a single answer for all. If you start with a single number and work backwards, you can always find some special circumstance that justifies the number. If you do it that way, you really don't need a mathematical calculation. You are just figuring out where to introduce your fudge factor.

When done right, a Safe Withdrawal Rate calculation provides objective information that you understand. It has no hidden fudge factors. (It can include honest mistakes. That is a different matter. Such mistakes get corrected when they are identified.)

Have fun.

John R.

JWR1945
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Summary

I have gathered together our working definition of the term Safe Withdrawal Rate along with selected comments and explanations. Where there are differences, it tends to be in terms of applications. I had started down that path originally, but I think that the rationale for abandoning it was far better. Many would prefer to think of a Safe Withdrawal Rate strictly as a rule of thumb.

My approach is different. My approach is to restrict the term Safe Withdrawal Rate to being as objective as possible. My approach is to define it as a mathematical calculation which, at least in theory, has a right answer. To do so required me to allow for the single phrase Safe Withdrawal Rate to apply to a multitude of different questions. As such, the term must always be placed in its context: What question does the mathematical calculation attempt to answer? How well does it do that? To what extent can the calculation be applied to similar, but different, questions?

Each individual then constructs his own rules of thumb, based upon a variety of such calculations and according to his own personal applications.

I have defined Safe Withdrawal Rate in such a manner that all valid mathematical computations are retained even when there are known, significant shortcomings. It is in this context that I have retained all of the studies that fail to include valuations as a key factor. Through extensive research, we have firmly established that valuations always matter and that valuations have been highly significant in recent years. I have approached this issue in terms of accepting the older results as is and then making adjustments for today. It must be understood that recognizing the true importance of valuations is a new finding. Earlier studies are not to be faulted for excluding valuations. They were assumed to be of secondary importance and that assumption proved false. The correct action at this point is to build upon and correct the previous studies, not to toss them aside.

This definition accepts a wide variety of strategies during retirement. When we speak of a Safe Withdrawal Rate, we include the investment strategy as well. There is usually one number that can be identified that establishes the sequence of withdrawal amounts.

There is a nit worth mentioning. In order to define a rate, we must have a denominator. I have chosen the initial portfolio balance as that denominator. It is always a positive number, not zero, which satisfies the minimal requirement for division. Actual withdrawal strategies can vary widely from that point. They can even start with an initial withdrawal amount of zero lasting for several years. In that sense my choice of a denominator is not necessarily ideal. At some point there have to be withdrawals and something has to be chosen as a default option.

This series of posts satisfy an important need when examining Safe Withdrawal Rates. Even though there is not 100% agreement on some of the details, there is a lot of agreement in general. The finer points can be directed toward this definition along with its background. We can exclude semantics from the main thrust of our normal discussions.

Have fun.

John R.

hocus
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These are a series of posts that summarize our definition of the term Safe Withdrawal Rate along with their links and supporting rationale.

Thanks for puting up the summary thread, JWR1945. I will be having further discussions with Easterling on SWRs when some time opens up for him, and the comments that you have gathered here will help me organize my thoughts and identify the key points that he needs to think over in preparation for the "A Night with..." event.

I'll offer comments on a few of the points put forward in your summary thread to clarify where I stand on some of these issues.

This distinction would allow us to refer to previous studies and calculations as providing Safe Withdrawal Rates in spite of the fact that many of them have not considered valuations. This allows us to introduce the much needed corrections after the fact without rejecting the older studies outright.

I am OK with people referring to studies using the conventional methodology so long as they do not put forward any suggestion that such studies report the SWR accurately.

There were probably maps of small geographic areas that were drawn up in the days when people thought the earth was flat and that remianed perfectly accurate after it was discovered that the earth was in fact round. Claims that "the earth is flat" became invalid with the discovery that it is round. But that didn't make it necessary to throw out all old maps. The right thing to do was to use the old maps for what they did that was accurate and not to use them for what they did that was not accurate.

It's the same with SWR studies using the conventional methodology. When those studies look at things like historical returns and volatillity, they offer valuable insights. So there is no reason why the studies themselves should be discarded. However, their bottom-line results ("the SWR is x) should no longer be considered valid findings. Since the methodology used in those studies did not account for at least one critical factor, the studies do not report accurate findings on the question they examine (what is safe).

Let's continue to make use of the old studies, but let's use them for valid purposes, not to mislead people as to what the SWR is. This is what Bernstein did. He made use of studies using the old methodology in coming up with his assessment of a valid SWR for the year 2000. He took the old number and adjusted it to produce a number accurate for the circumstances applicable in the year 2000. I think that middle-ground approach makes more sense than either of the two extreme reactions of: (1) pretending that studies not accounting for all the factors could somehow be valid regardless; (2) throwing out all of the old work just because the old methodology ignored one critical factor.

The old studies are invalid for the purpose of reporting the SWR, that's all. That doesn't mean that we should not continue to make use of the valuable insights that they do indeed offer to those making responsible use of them.

I think that very low valuations (single digit) combined with a clear eyed assessment that the nation isn't in danger of destruction would make me grab lots of SPY or US-TSM and be comfortable planning for a 5 or 5.5% withdrawal rate over 30 years. On the other hand, I think that PE-10 over 20 means you are in the danger zone for a 4% withdrawal.

A lot of statistical support for this BenSolar statement is offered in a book that I started reading this past weekend, "Yes! You Can Time the Market!" by Ben Stein and Phil DeMuth. The authors state that: "Our research tells us that, if an investor buys stocks when their valuation levels are two or three standard deviations above average, there is no history of consistently making money from that starting point....The lesson is stark: Your likelihood of making monery is an inverse function of he height of the price/earnings ratio in the year you started buying; of the price to book in the year you started buying; the price to dividend ratio in the year you started buying; the relative level of the price to the 15-year moving average of any of the measures we have used in this book. If you buy cheap by historic standards, your likelihood of making money is simply astronomically better than if you buy when stocks are dear by historic measurements."

Many would prefer to think of a Safe Withdrawal Rate strictly as a rule of thumb....My (it is JWR1945 speaking here) approach is different. My approach is to restrict the term Safe Withdrawal Rate to being as objective as possible. My approach is to define it as a mathematical calculation which, at least in theory, has a right answer.... Each individual then constructs his own rules of thumb, based upon a variety of such calculations and according to his own personal applications.

I strongly endorse this statement. I think it is perfectly reasonable for an optimist to say "I am going to use SWR plus one percent for my personal withdrawal rate because I do not believe that the worse case scenario will turn up in my retirement" or for a pessimist to say "I am going to use SWR minus one percent because I think that there is a good chance that the future will be worse than the past." How one employs SWR analysis is subjective. There is nothing wrong with the idea of an aspiring early retiree viewing the results of an SWR analysis as a mere rule of thumb for purposes of his personal application of those results to his particular circumstances.

There is a great deal wrong, however, with throwing out all standards of scientific accountability in the calculation of the SWR just because it is "only a rule of thumb." SWR studies purport to make use of historical data. When you include some data points and exclude other data points solely because you prefer the result produced when only the former group of data points is incorporated into the analysis, you are engaging in an analytically invalid exercise.

I have no problem with someone saying "I like the number 4 a whole lot better than the number 2 so I urge all people to use the number 4." That's fine so long as it is clear that you are just reporting a feeling you have. Those hearing the recommendation know what is is based on, and it is their choice whether to make their investing decisions according to what you your subjective feelings reveal to them or not to do so.

I become alarmed, however, when people put forward studies purporting to be based on data but which actually do not incorporate all the data bearing on the question they are purporting to examine. I think there is a big risk in those circumstances that people will be led to believe that the numbers recommended would work if the future were like the past, and, in those circumstances, that would not be so. Aspriing early retirees could suffer serious life setbacks as a result. I think we all have a responsibility to protect members of the entire community of people interested in FIRE from studies that purport to be based on data but in fact rely on methodologies now know to be invalid.

Through extensive research, we have firmly established that valuations always matter and that valuations have been highly significant in recent years.

This is a point of great significance. Most of our discussions to date have been focused on the recent bubble years in which valuation levels exceeded those seen in the time-periods examined in the studies. The results of the failure to account for changes in valuation levels are far more dramatic in those years than in earlier time-periods. But changes in valuation levels always affect SWRs. So the pre-bubble-years SWRs reported by old-methodology studies are off too.

This reality opens up a lot of exciting possibilities for the use of SWR analysis in the future. Our focus to date has been on how considering valuation pulls the SWR down. But there are other circumstances in which incorporating this factor into the analysis pulls the SWR up. Calculating SWRS by a valid methodology may present aspiring early retirees with some exciting opportunities in years to come to achieve their goals sooner than would have been possible if only the results of studies using the invalid methodology were available to them.

It must be understood that recognizing the true importance of valuations is a new finding. Earlier studies are not to be faulted for excluding valuations.

I agree. Researchers who used the old methodology were making a sincere effort to help people understand what the historical data reveals. What is there to find fault with in that?

The failure to account for valuation becomes problemmatic only if researchers continue to claim that the old methodology is a reasonable way of calculating SWRs after the time at which the old methodology has been revealed to be invalid.

JWR1945
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A lot of statistical support for this BenSolar statement is offered in a book that I started reading this past weekend, "Yes! You Can Time the Market!" by Ben Stein and Phil DeMuth.

When I read the book review in Barron's, I couldn't help thinking that the writers had been lurking on these boards and reading what BenSolar had written. I finally concluded that they did not because of the amount of time that it takes to write a book under normal circumstances.

Still, I have noticed that Warren Buffett's numbers are matching ours these days. It makes you wonder....

Have fun.

John R.

ataloss
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I guess I am with raddr (per the quote) until I see this objective swr I am withholding judgment. "As objective as possible" sounds subjective to me.

I haven't read the Ben Stein book but I think that it is common knowledge that one could do better (and by better I mean having higher returns)
buying stocks when they are cheap. Market timing (like other investment approaches) looks easy in retrospect but may be diffi9cult to implement prospectively.
Have fun.

Ataloss

peteyperson
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Killer hocus post!

Hocus, do you feel that this book is highlighting that the current market is overvalued and buying at this point even over 20 years via dollar cost averaging might not be the best plan? It gets into the distinction between what is market timing and what isn't, and when is moving or investing in asset classes that are currently performing better good allocation vs. timing.

Added the book to my reading list. Looking at a P/E in the low to mid 20s gives a 30-50% overvalued large cap market on both sides of the coast. We just dropped our rates a 0.25% to 3.5% base rate to further stimulate the economy. Its at the point where savings account can throw off inflation matching results post-tax, any lower and only bond investments which most consumers are unaware/unknowledge on will deliver close to inflation until rates return and you can sell down back to cash. Following Bogle reading, I can understand where Americans are having problems on fixed income investing in money market accounts and CDs. We're never had 1% base rates here, we're now at 48 year lows on the base rate as it is.

It sounds from your book reading that a plan to invest in my business growth and paying down a mortgage may be smart places to put cash rather than the market until it's P/E is more reasonable.

P.S. What do you make of the whole Efficient Market Theory and Revert to the mean over time vs. Warren Buffett, Peter Lynch and others stock picking companies that didn't conform to EMT?

Petey

hocus wrote: A lot of statistical support for this BenSolar statement is offered in a book that I started reading this past weekend, "Yes! You Can Time the Market!" by Ben Stein and Phil DeMuth. The authors state that: "Our research tells us that, if an investor buys stocks when their valuation levels are two or three standard deviations above average, there is no history of consistently making money from that starting point....The lesson is stark: Your likelihood of making monery is an inverse function of he height of the price/earnings ratio in the year you started buying; of the price to book in the year you started buying; the price to dividend ratio in the year you started buying; the relative level of the price to the 15-year moving average of any of the measures we have used in this book. If you buy cheap by historic standards, your likelihood of making money is simply astronomically better than if you buy when stocks are dear by historic measurements."
Last edited by peteyperson on Mon Jul 14, 2003 11:53 am, edited 1 time in total.

peteyperson
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Could you clarify what you mean here, John?

Thanks mate.

Petey

JWR1945 wrote: Still, I have noticed that Warren Buffett's numbers are matching ours these days. It makes you wonder....

Have fun.

John R.

therealchips
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4) The portfolio balance must remain between a minimum amount and a maximum amount for a specified number of years. All amounts are adjusted for inflation.
Maybe you won't mind me repeating a question since another reader may share my confusion. You have said something similar to that quotation before. I asked about it then, you clarified it, and (sad to say) I have forgotten your explanation. The question is "How can a retired person keep the portfolio balance above a minimum amount if the assets are volatile at all?"

Does your quotation mean "Whenever the portfolio falls below a specified minimum, all withdrawals cease until the portfolio value is above that minimum again"? If this is your intent, may I suggest saying so?

Alternatively, does it mean "Whenever the portfolio falls below a specified minimum, the retired person must make an addition of capital to the account to bring it back up to the required minimum -- a negative withdrawal, if you will"? If this is your intent, then there is some unmentioned stash of capital somewhere that comes into play only when someone needs it to restore the value of the mentioned stash. If I had such a get-well stash, I would have included it in my planning in the first place.

Another possible interpretation (or misinterpretation) is "Whenever the portfolio falls to a value just above a specifed minimum, sell all volatile assets." (Then I need a rule for getting back into the market.)

Somehow, I don't think you meant any of these interpretations, but all are possible from what you said.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips

JWR1945
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therealchips
Maybe you won't mind me repeating a question since another reader may share my confusion. You have said something similar to that quotation before. I asked about it then, you clarified it, and (sad to say) I have forgotten your explanation. The question is "How can a retired person keep the portfolio balance above a minimum amount if the assets are volatile at all?"

The answer is simpler than you expect: The intent of a strategy is to satisfy this (or some other) requirement. You estimate your likelihood of success...as in traditional studies.

For example, the traditional 4% withdrawal rate (with increases to match inflation) was based on specified portfolio mixes, portfolio lifespans and historical sequences. It calculated the probability of success (portfolio remains above zero throughout its specified lifespan) versus exact historical sequences of investment returns. That was then applied as a reasonable estimate of what might happen in the future.

There never was any guarantee, going forward, that the exact historical sequences would produce accurate numbers. It seemed very reasonable until we looked deeply into the matter of valuations. Today, we would make adjustments to such estimates.

Again, it is the intent that a calculation satisfy some specified constraints. It is not a guarantee. I think that you can see why I am so interested in spotting whenever a particular withdrawal strategy is about to fail. The sooner that we know about it, the better that we can react.

Have fun.

John R.

JWR1945
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I wrote:
Still, I have noticed that Warren Buffett's numbers are matching ours these days. It makes you wonder....
and peteyperson would like an explanation.

This is a repeat of an old joke. A while back (last December?), raddr, BenSolar and I worked towards estimating stock returns going forward. raddr was the most pessimistic (staying with a 3.0% to 3.5% annualized real return, going forward). But BenSolar and I came up with some new numbers (around 4.7% real return, going forward). Both are well below the 6.5% to 7.0% real return that you hear so much about.

As far as actually believing our numbers, BenSolar tends to split the difference while I am willing to stick with my own calculations.

More recently, someone quoted an estimate that Warren Buffett made about stock returns for the next decade. He gave a range, but it clearly included our own numbers (IINM, his high end estimate was 5%) and it was clearly less than the traditional 6.5% to 7.0%.

I put up my own post in response stating that Warren Buffett must be reading these boards, since he came up with the right answers. BenSolar took that as a joke. However, we did come up with our numbers first....

Have fun.

John R.

JWR1945
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Joined:Tue Nov 26, 2002 3:59 am
Location:Crestview, Florida
I have consistently made an important technical error in my personal use of the term Safe Withdrawal Rate for which I apologize. Refer to this post for details.

http://nofeeboards.com/boards/viewtopic ... 9492#p9492

Have fun.

John R.

JWR1945
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Joined:Tue Nov 26, 2002 3:59 am
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It is critically important to differentiate between individual lines from a traditional (historical sequence) Safe Withdrawal Rate calculator such as FIRECalc and the words: Safe Withdrawal Rate. These are not the same thing. They never have been. A Safe Withdrawal Rate is always based on information up to its calculation. It is never influenced by events that take place later.

The quality of a Safe Withdrawal Rate calculation should never be judged solely on the basis of future events for the same reason that mathematical probability theory should never be judged in terms of the outcome of a single sequence of coin tosses. Probability theory allows for the possibility that someone will toss coins that come up heads twenty times in a row. If that event were to occur, however, it would behoove someone to reexamine his assumptions. It may be that somebody is cheating. It is not guaranteed. It is simply something worth looking into.

I have coined a new term, the Historical Database Rate (HDBR) to draw attention to this distinction. This is essentially the same thing as the older term, the Historical Safe Withdrawal Rate (HSWR). The Historical Database Rate (and the HSWR) is not a Safe Withdrawal Rate calculation.

I had failed to draw this distinction prior to August 2, 2003. The result has been a tremendous amount to confusion. (I corrected myself in this post: http://nofeeboards.com/boards/viewtopic ... 9524#p9524 .)

I have gone into greater detail in the introduction to my recent post about Recent Advances from Safe Withdrawal Rate Research. I have quoted part of that discussion below:
http://nofeeboards.com/boards/viewtopic.php?t=1238
A Safe Withdrawal Rate is a prediction, an estimate, of how much one can withdraw from his retirement portfolio while satisfying well-defined constraints....

A Safe Withdrawal Rate is not an arbitrary estimate or prediction. It must be based upon historical evidence and it must be as objective as possible. Excluding a limited number of special cases, it is always the result of a mathematical calculation and it is taken from information available before the year in which it applies. The quality of a Safe Withdrawal Rate calculation is never defined in terms of what actually takes place in the future. A Safe Withdrawal Rate calculation seeks to identify the most likely outcome of future events. Just as probability theory is never judged by a single, actual outcome as when one flips a coin ten or twenty times, a Safe Withdrawal Rate calculation seeks to identify what is reasonably likely and what should be treated as unusual. It is never a guarantee.

(and later)
A Historical Database Rate (HDBR) is the result of assuming various allocations and strategies to calculate what would have happened for a historical sequence of returns beginning at a specified year. This is the output for a single year from a conventional Safe Withdrawal Rate calculator based upon historical sequences. A good example is the FIRECalc, which is very user friendly and which I have used frequently in my research. With FIRECalc, for example, if you set the portfolio lifespan to 30 years, the line for 1935 tells you what would have happened from 1935-1965. It is based entirely on the actual sequence of events that happened during 1935-1965, all of them occurring after 1935. In no sense whatsoever is it an estimate (or prediction) based entirely upon the information available in 1935.

You can meaningfully talk about a Safe Withdrawal Rate that includes some historical information. One could talk about the years 1935-1965, assuming that the first ten years matched the historical record exactly, with an estimate provided based solely upon information available in 1945. That would be the Safe Withdrawal Rate for 1945 for the 1935-1965 sequence. The initial ten years would influence the answer in a variety of ways, the most obvious of which is that it would establish the portfolio balance in 1945. With rare exception that balance would be different from what would have been predicted (for 1945) based on information available on or before 1935.

Results from Historical Database Rates are quite useful in helping us understand what has happened in the past. We extract information from those results and apply that information to produce our Safe Withdrawal Rate estimates...

Have fun.

John R.