Juicy SWR Thread on "Early Retirement Forum"
Posted: Wed Oct 08, 2003 3:13 am
Here's the thread:
http://www.early-retirement.org/cgi-bin ... 080;start=
Excerpts:
mikey: What counts is not where the hyper-emtional Mr. Market happens to value your portfolio on a given date, but the underlying long term earning power of your shares in the companies represented in that portfolio
Cut-Throat: The high value of the starting funds is already accounted for in the 4% rule analysis. Investments were overvalued in 1929 and the mid-60s too. If you are going to ignore the historical analysis whenever starting investment values were overvalued, then then we would end up with a 4.5% rule or a 5% rule.
unclemick: The ultimate 'safe withdrawal rate' is dividends and interest, reinvesting cap. gains. Thats what they used to do before computers, spreadsheets and all that stuff.
mikey: You exactly and clearly explain that once the SWR concept and method of calculation is accepted as valid, it wouldn't matter if the S&P had been 2500 or 3000 in 2000, or any other year. ...It's just that there is a very big ? regarding the phrase "assuming the validity of the 4% SWR"....
This analysis shows only a few of the most glaring problems with SWR as it has been advanced. In reality, the situation is quite a bit worse.
I am afraid that Emperor SWR has no clothes.
Telly: For that matter, are any of the Monte Carlo calculators any better? Someone had to make their own assumptions about what was "plausible" in setting up their model. Were they exceedingly, or ridiculously pessimistic in the bounds they set? I sure don't know. And what would be "too pessimistic"? What a quagmire!
mikey: To me, a useful way to think about this problem is to focus on the sustainable cash generated by the portfolio. Imagine that one is going to live on a private business....Would the amount of cash you could take out have anything to do with what valuation was put on the business?
salaryguru: I agree that there are plenty of reasons to question the validity of the 4% rule.
Bob Smith: Another significant variable in the SWR equation has to do with the makeup of the portfolio. The individual with 70% in TIPS and 30% in stocks can be far more certain about his/her SWR than the person with 30% TIPS and 70% stocks, for example.
newellcr: It's kind of interesting to me that many of you think that the application of the SWR is optimistic. I think it is a very pessimistic tool. It would be more useful to me to have a tool that allowed me to see what history did to a range of withdrawals.
cutthroat: I agree that the ability to vary withdrawal rates based on the performance of the market, would be a real eye opener.
bongo2: You have to understand that there is always a chance that your portfolio will be depleted, and once it has fallen in value by 30-50%, then that chance is going to be much greater than it was when you started. In the 130 years of history the stock market has always rallied strongly off of 30%+ drops -- are you going to count on a rally like that this time?
http://www.early-retirement.org/cgi-bin ... 080;start=
Excerpts:
mikey: What counts is not where the hyper-emtional Mr. Market happens to value your portfolio on a given date, but the underlying long term earning power of your shares in the companies represented in that portfolio
Cut-Throat: The high value of the starting funds is already accounted for in the 4% rule analysis. Investments were overvalued in 1929 and the mid-60s too. If you are going to ignore the historical analysis whenever starting investment values were overvalued, then then we would end up with a 4.5% rule or a 5% rule.
unclemick: The ultimate 'safe withdrawal rate' is dividends and interest, reinvesting cap. gains. Thats what they used to do before computers, spreadsheets and all that stuff.
mikey: You exactly and clearly explain that once the SWR concept and method of calculation is accepted as valid, it wouldn't matter if the S&P had been 2500 or 3000 in 2000, or any other year. ...It's just that there is a very big ? regarding the phrase "assuming the validity of the 4% SWR"....
This analysis shows only a few of the most glaring problems with SWR as it has been advanced. In reality, the situation is quite a bit worse.
I am afraid that Emperor SWR has no clothes.
Telly: For that matter, are any of the Monte Carlo calculators any better? Someone had to make their own assumptions about what was "plausible" in setting up their model. Were they exceedingly, or ridiculously pessimistic in the bounds they set? I sure don't know. And what would be "too pessimistic"? What a quagmire!
mikey: To me, a useful way to think about this problem is to focus on the sustainable cash generated by the portfolio. Imagine that one is going to live on a private business....Would the amount of cash you could take out have anything to do with what valuation was put on the business?
salaryguru: I agree that there are plenty of reasons to question the validity of the 4% rule.
Bob Smith: Another significant variable in the SWR equation has to do with the makeup of the portfolio. The individual with 70% in TIPS and 30% in stocks can be far more certain about his/her SWR than the person with 30% TIPS and 70% stocks, for example.
newellcr: It's kind of interesting to me that many of you think that the application of the SWR is optimistic. I think it is a very pessimistic tool. It would be more useful to me to have a tool that allowed me to see what history did to a range of withdrawals.
cutthroat: I agree that the ability to vary withdrawal rates based on the performance of the market, would be a real eye opener.
bongo2: You have to understand that there is always a chance that your portfolio will be depleted, and once it has fallen in value by 30-50%, then that chance is going to be much greater than it was when you started. In the 130 years of history the stock market has always rallied strongly off of 30%+ drops -- are you going to count on a rally like that this time?