The 1881 to 1920 Anomaly

Research on Safe Withdrawal Rates

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JWR1945
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The 1881 to 1920 Anomaly

Post by JWR1945 » Wed Jul 23, 2003 7:10 pm

Introduction

When I examined Big Swings and Valuations, I noticed a difference in how the data behaved from 1881-1920 as compared to 1921-1980. I have now extended my analysis to include Price-Adjusted Safe Withdrawal Rate calculations. The effect is even more pronounced.

Ordering by P/E10

I ordered the years from 1881 through 1920 according to P/E10.

The fifteen lowest values of P/E10 occurred in the following years, listed according to increasing P/E10:
1920, 1919, 1918, 1915, 1917,
1914, 1908, 1916, 1913, 1885,
1912, 1911, 1884, 1910, 1909.
The P/E10 ranges from 5.9 to 14.7.

The middle ten values of P/E10 occurred in the following years, listed according to increasing P/E10:
1883, 1888, 1891, 1882, 1894,
1904, 1889, 1895, 1896, 1886.
The P/E10 ranges from 15.2 to 16.6.

The highest fifteen values of P/E10 occurred in the following years, listed according to increasing P/E10:
1897, 1890, 1907, 1887, 1893,
1881, 1905, 1900, 1892, 1898,
1906, 1903, 1901, 1902, 1899.
The P/E10 ranges from 17.0 to 22.9.

I ordered the years from 1921 through 1980 according to P/E10.

The twenty lowest values of P/E10 occurred in the following years, listed according to increasing P/E10:
1921, 1922, 1924, 1923, 1933,
1980, 1975, 1978, 1979, 1932,
1925, 1942, 1943, 1949, 1948,
1950, 1944, 1976, 1926, 1935.
The P/E10 ranges from 5.1 to 11.4.

The middle twenty values of P/E10 occurred in the following years, listed according to increasing P/E10:
1947, 1977, 1951, 1945, 1954,
1952, 1934, 1953, 1927, 1938,
1974, 1958, 1941, 1939, 1946,
1955, 1940, 1971, 1931, 1957.
The P/E10 ranges from 11.4 to 16.7.

The highest twenty values of P/E10 occurred in the following years, listed according to increasing P/E10:
1936, 1970, 1972, 1959, 1956,
1960, 1961, 1973, 1928, 1963,
1967, 1962, 1969, 1968, 1937,
1964, 1930, 1965, 1966, 1929.
The P/E10 ranges from 17.0 to 27.0.

Test Conditions

I used the dory36 calculator FIRECalc for all calculations. In all cases, my starting amount was $1000, my portfolio lifespan was 30 years, my expenses were set at 0.20%, my cash equivalent was commercial paper and my inflation index was the CPI. I looked at withdrawal amounts of $50 and $60, corresponding to 5% and 6% of the portfolio's initial value. I looked at stock allocations of 50% and 80%. Other values were left in their default conditions.

I identified which years failed and the year in which failures occurred. Early failures are those that occur on or before year twenty.

Test Results

The results for 1881-1920 behaved strangely.

These are the results for 1881-1920 at $50 withdrawal amount and 50% stocks:
P/E10 from 5.9 to 14.7: 15 cases, 5 failures, no early failures.
P/E10 from 15.2 to 16.6: 10 cases, no failures.
P/E10 from 17.0 to 22.9: 15 cases, 5 failures, no early failures.

These are the results for 1881-1920 at $50 withdrawal amount and 80% stocks:
P/E10 from 5.9 to 14.7: 15 cases, 5 failures, no early failures.
P/E10 from 15.2 to 16.6: 10 cases, no failures.
P/E10 from 17.0 to 22.9: 15 cases, 2 failures, no early failures.

These are the results for 1881-1920 at $60 withdrawal amount and 50% stocks:
P/E10 from 5.9 to 14.7: 15 cases, 10 failures, six early failures.
P/E10 from 15.2 to 16.6: 10 cases, 4 failures, no early failures.
P/E10 from 17.0 to 22.9: 15 cases, 11 failures, two early failures.

These are the results for 1881-1920 at $60 withdrawal amount and 80% stocks:
P/E10 from 5.9 to 14.7: 15 cases, 10 failures, six early failures.
P/E10 from 15.2 to 16.6: 10 cases, no failures.
P/E10 from 17.0 to 22.9: 15 cases, 7 failures, two early failures.

The results for 1921-1980 were very well behaved.

These are the results for 1921-1980 at $50 withdrawal amount and 50% stocks:
P/E10 from 5.1 to 11.4: 20 cases, no failures.
P/E10 from 11.4 to 16.7: 20 cases, 5 failures, no early failures.
P/E10 from 17.0 to 27.0: 20 cases, 15 failures, one early failure.

These are the results for 1921-1980 at $50 withdrawal amount and 80% stocks:
P/E10 from 5.1 to 11.4: 20 cases, no failures.
P/E10 from 11.4 to 16.7: 20 cases, no failures.
P/E10 from 17.0 to 27.0: 20 cases, 13 failures, two early failures.

These are the results for 1921-1980 at $60 withdrawal amount and 50% stocks:
P/E10 from 5.1 to 11.4: 20 cases, 2 failures, no early failures.
P/E10 from 11.4 to 16.7: 20 cases, 13 failures, four early failures.
P/E10 from 17.0 to 27.0: 20 cases, 20 failures, eleven early failures.

These are the results for 1921-1980 at $60 withdrawal amount and 80% stocks:
P/E10 from 5.1 to 11.4: 20 cases, no failures.
P/E10 from 11.4 to 16.7: 20 cases, 3 failures, one early failure.
P/E10 from 17.0 to 27.0: 20 cases, 20 failures, twelve early failures.

Conclusions

The early years 1881-1920 behave much differently than those that followed (1921-1980). It would be helpful to understand why. We know of some of the qualitative differences between the two eras, but it would take a financial historian to get to the root of the matter.

If anything, data from the earlier era appears to have made analysis much more difficult than it has needed to be. The correlation between P/E10 and the safety at various withdrawal rates has been very high since 1921. Inclusion of the 1881-1920 data has masked a very strong relationship.

Recommendations

I strongly recommend using the years after 1920 for projecting safe withdrawal rates. We live in an era with the Federal Reserve and without a gold standard. That is sufficient to favor the later time period.

I also recommend that we identify this anomaly clearly in our context when we discuss safe withdrawal rates.

Data Sources

I used the dory36 FIRECalc retirement calculator at http://capn-bill.com/fire/ .
I have extracted P/E10 numbers from Yale Professor Shiller's website at http://www.econ.yale.edu/~shiller/.

Have fun.

John R.

peteyperson
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Re: The 1881 to 1920 Anomaly

Post by peteyperson » Thu Jul 24, 2003 4:08 am

I agree with your thinking on this, John. There were also issues of non-regulation of the market and reporting in particular.

I would be interested to see w/d of less than 5% to see at what point it becomes safe. You seem to be only using 5% and 6% here, both of which are known to be unsafe. For me, I would only be able to use a 0.53% expense ratio to make the analysis valid.

What data does the fire calculator use? I tend to associate it with intercst's information and invalidate it automatically in my mind..

P.S. I'm unclear what I'm supposed to be posting on the FIRE board and what I'm posting here. Lucked onto this board. Thought it had been discussed with hocus and it was felt this board was redundant!

Petey

JWR1945 wrote:The results for 1921-1980 were very well behaved.

These are the results for 1921-1980 at $50 withdrawal amount and 50% stocks:
P/E10 from 5.1 to 11.4: 20 cases, no failures.
P/E10 from 11.4 to 16.7: 20 cases, 5 failures, no early failures.
P/E10 from 17.0 to 27.0: 20 cases, 15 failures, one early failure.

These are the results for 1921-1980 at $50 withdrawal amount and 80% stocks:
P/E10 from 5.1 to 11.4: 20 cases, no failures.
P/E10 from 11.4 to 16.7: 20 cases, no failures.
P/E10 from 17.0 to 27.0: 20 cases, 13 failures, two early failures.

These are the results for 1921-1980 at $60 withdrawal amount and 50% stocks:
P/E10 from 5.1 to 11.4: 20 cases, 2 failures, no early failures.
P/E10 from 11.4 to 16.7: 20 cases, 13 failures, four early failures.
P/E10 from 17.0 to 27.0: 20 cases, 20 failures, eleven early failures.

These are the results for 1921-1980 at $60 withdrawal amount and 80% stocks:
P/E10 from 5.1 to 11.4: 20 cases, no failures.
P/E10 from 11.4 to 16.7: 20 cases, 3 failures, one early failure.
P/E10 from 17.0 to 27.0: 20 cases, 20 failures, twelve early failures.

hocus
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Post by hocus » Thu Jul 24, 2003 4:50 am

Thought it had been discussed with hocus and it was felt this board was redundant!

Somebody probably said something like that. I didn't listen!

There is no such thing as having too many boards dedicated to the work of helping people achieve financial independence early in life, so far as I am concerned. I'd like to see a thousand FIRE boards bloom, each new one better than all the earlier ones.

I like big waves. Sure it's a little scary looking down from the top. But that's the fun of the thing too!

I'm unclear what I'm supposed to be posting on the FIRE board and what I'm posting here.

Read my "About This Board" post. Then go with your gut.

If your gut doesn't know, my advice is to do like Neil Young and head down the road less travelled. His experience is that you run into more interesting people there.

Lucked onto this board.

That just sort of slipped out, didn't it? That tells me right there that you have the right stuff for taking a walk on the wild side of the FIRE movement.

You are now part of the history of this board, Pete. Your post stays in the Archives forever. You contributed. You made the thing grow and live just a little. I hope that you are feeling pleased with yourself for what you have just done.

peteyperson
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Posts: 525
Joined: Tue Nov 26, 2002 6:46 am

Post by peteyperson » Thu Jul 24, 2003 6:06 am

I've pushed the ' About ' post to my read review folder for this weekend (if I get to it). Long one, don't have time right now.

I'm actively splitting my time, dealing with posting/posts on things that move the SWR issues forward, putting off posts about the idea of that which doesn't necessarily move things forward and tends to eat more time than the former.

Petey

hocus wrote:Thought it had been discussed with hocus and it was felt this board was redundant!

Somebody probably said something like that. I didn't listen!

There is no such thing as having too many boards dedicated to the work of helping people achieve financial independence early in life, so far as I am concerned. I'd like to see a thousand FIRE boards bloom, each new one better than all the earlier ones.

I like big waves. Sure it's a little scary looking down from the top. But that's the fun of the thing too!

I'm unclear what I'm supposed to be posting on the FIRE board and what I'm posting here.

Read my "About This Board" post. Then go with your gut.

If your gut doesn't know, my advice is to do like Neil Young and head down the road less travelled. His experience is that you run into more interesting people there.

Lucked onto this board.

That just sort of slipped out, didn't it? That tells me right there that you have the right stuff for taking a walk on the wild side of the FIRE movement.

You are now part of the history of this board, Pete. Your post stays in the Archives forever. You contributed. You made the thing grow and live just a little. I hope that you are feeling pleased with yourself for what you have just done.

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