NoFeeBoards.com!

No Fees! No Ads! No Spam!

Log in Register FAQ Memberlist Search NoFeeBoards.com! Forum Index

I am perplexed
Goto page 1, 2  Next
 
Post new topic   Reply to topic    NoFeeBoards.com! Forum Index » FIRE Board
View previous topic :: View next topic  
Author Message
ataloss
**** Heavy Hitter


Joined: 25 Nov 2002
Posts: 559

PostPosted: Fri Oct 31, 2003 1:57 am    Post subject: I am perplexed Reply with quote

About this issue of safe withdrawal rates depending on the size of the portfolio It seems to me that a 100 million portfolio with a 4 million withdrawal/ year has the same chance of success as a 1 million dollar portfolio with a $40,000 withdrawal assuming similar investment allocations. I would appreciate help with the math if this is not the case. I have never seen a proposed method for determining swr that includes an adjustment for portfolio size.

In a portion of the coin toss post (and i think everyone concedes that this is 100% original to hocus), he asserts that:
Quote:
I know that there have been some who have been perplexed when I have argued that there is not one safe withdrawal rate, but many, that the safe withdrawal rate varies according to the personal circumstances of the particular investor at issue.


I just don't see it. If we are saying that a person with a 100 million portfolio can live on less than 4 million, I think that isn't the same as saying the safe withdrawal rate is different.

I don't think this makes sense. I guess I will just have to agree to disagree with hocus on this one. Smile



_________________
Have fun.

Ataloss
Back to top
View user's profile Send private message
[KenM]
*** Veteran


Joined: 04 Mar 2003
Posts: 133

PostPosted: Fri Oct 31, 2003 3:30 am    Post subject: Reply with quote

Ataloss
To an extent I can see some circumstances where it might apply to someone with my way (chicken-little Laughing) of thinking. If I was struggling along with a barebones $500,000/4%/$20,000 a year scenario I'd be very scared if my portfolio dropped 15% and I'd probably immediately cut down to,say, $16,000 a year just in case the portfolio dropped further. For a scenario of $2m/4%/$80,000 a year and a 15% drop I may not make immediate cuts in expenditure because the portfolio may go up again in the near future - however at a drop of 25% I'd probably make immediate cuts.

The figures are examples only - and probably it doesn't make sense - but I've never claimed to be an entirely logical human being Very Happy



_________________
KenM
Never try to teach a pig to sing. It wastes your time and annoys the pig.
Back to top
View user's profile Send private message
BenSolar
*** Veteran


Joined: 25 Nov 2002
Posts: 242
Location: Western NC

PostPosted: Fri Oct 31, 2003 4:00 am    Post subject: Reply with quote

KenM wrote:
To an extent I can see some circumstances where it might apply to someone with my way (chicken-little Laughing) of thinking. If I was struggling along with a barebones $500,000/4%/$20,000 a year scenario I'd be very scared if my portfolio dropped 15% and I'd probably immediately cut down to,say, $16,000 a year just in case the portfolio dropped further. For a scenario of $2m/4%/$80,000 a year and a 15% drop I may not make immediate cuts in expenditure because the portfolio may go up again in the near future - however at a drop of 25% I'd probably make immediate cuts.

The figures are examples only - and probably it doesn't make sense - but I've never claimed to be an entirely logical human being Very Happy


I think Ken's example is a good one of how the psychology of humans and the utility of money comes into play. Of course if the 2 million dollar portfolio owner is so extended that they really need every penny of the 80k per year to stay afloat, then the psychology wouldn't be much different.
Quote:
If we are saying that a person with a 100 million portfolio can live on less than 4 million, I think that isn't the same as saying the safe withdrawal rate is different.

That is at the core of the issue of course, even if the higher port person never has to drop their spending, the psychological comfort provided changes investment decisions, allowing them to assume riskier higher return positions and stay in them in extended downturns. Something I believe a reasonable person living close to the edge wouldn't do, unless we assume a computer or third party is running the show.

In a way I totally agree with your perspective, ataloss, because I dont' see any way to address this issue directly with math, but I think the psychological factor is there, it is an influence, whether we can stick it in an equation or not. If we can't then why worry about it other than to suggest 'sensible WR' strategies?



_________________
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
Back to top
View user's profile Send private message
ataloss
**** Heavy Hitter


Joined: 25 Nov 2002
Posts: 559

PostPosted: Fri Oct 31, 2003 4:06 am    Post subject: Reply with quote

That makes sense to me kenm. By taking a 20% cut in distributions after a 15% portfolio decline you are moving back toward a 4% withdrawal which seems prudent. I would not be one of rehp's March 03 retirees who could cheerfully accept a 7.2% withdrawal rate (even though higher withdrawal rates during the depression did not fail)

Also I think that you are implicitly recognizing that although higher withdrawal rate from the 2 million portfolio may be less safe in the sense that it it more likely to fail if you blindly took 29 more years of inflation adjusted withdrawals, you presumably have a cushion wrt nonessentials that could be cut if declines continued.

Besolar, I have found it interesting that the mathematicians seem to see the swr idea as a rule of thumb. Some imagine much more significance.



_________________
Have fun.

Ataloss
Back to top
View user's profile Send private message
[KenM]
*** Veteran


Joined: 04 Mar 2003
Posts: 133

PostPosted: Fri Oct 31, 2003 4:46 am    Post subject: Reply with quote

The other psychological factor in the $2m scenario is how the portfolio was accumulated. If it was accumulated over 20 years of DCAing and then given a big boost by the bubble then the portfolio owner may not be so concerned about a 25% drop - nobody truly believed in the bubble so only lost money that shouldn't have been gained anyway. But for someone, say, selling a business built up over a lifetime of hard work and then putting the whole lump sum into stocks at the height of the bubble, then a 25% drop would be very hard to take ........ I agree, math ain't much good if an attempt is made to use it as the over-riding factor in trying to fix a personal SWR strategy.



_________________
KenM
Never try to teach a pig to sing. It wastes your time and annoys the pig.
Back to top
View user's profile Send private message
hocus
Moderator


Joined: 02 Dec 2002
Posts: 435

PostPosted: Fri Oct 31, 2003 5:37 am    Post subject: Reply with quote

I have found it interesting that the mathematicians seem to see the swr idea as a rule of thumb. Some imagine much more significance.

The time is not right for a discussion of the realities of SWRs at this board.

That said, I would not want a statement like this to cause further confusion. It is perfectly acceptable to use a SWR as a rule of thumb in determining one's personal withdrawal rate (PWD). In a year in which the SWR is 3 percent, a pessimist might set his PWR at 2 percent and an optimist might set his PWD at 4 percent.

At the calculation stage, the SWR is a data-based construct. Calculation of the SWR is an objective exercise. When doing the math, there are right and wrong answers.


Back to top
View user's profile Send private message
raddr
*** Veteran


Joined: 25 Nov 2002
Posts: 265

PostPosted: Fri Oct 31, 2003 5:38 am    Post subject: Reply with quote

KenM wrote:
The other psychological factor in the $2m scenario is how the portfolio was accumulated. If it was accumulated over 20 years of DCAing and then given a big boost by the bubble then the portfolio owner may not be so concerned about a 25% drop - nobody truly believed in the bubble so only lost money that shouldn't have been gained anyway.


Hi Ken,

Good point. When I retired in Sept. 2001 I discounted my large cap holdings back to normal valuation levels before calculating my SWR. Since I didn't have much large cap exposure it didn't make a huge difference but it could have if I'd had the large cap allocation recommended by most advisors at the time.


Back to top
View user's profile Send private message Visit poster's website
BenSolar
*** Veteran


Joined: 25 Nov 2002
Posts: 242
Location: Western NC

PostPosted: Fri Oct 31, 2003 6:15 am    Post subject: Reply with quote

Tra la la. Cool



_________________
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus


Last edited by BenSolar on Sat Nov 01, 2003 10:52 am; edited 2 times in total
Back to top
View user's profile Send private message
ataloss
**** Heavy Hitter


Joined: 25 Nov 2002
Posts: 559

PostPosted: Fri Oct 31, 2003 7:04 am    Post subject: Reply with quote

Quote:
At the calculation stage, the SWR is a data-based construct. Calculation of the SWR is an objective exercise. When doing the math, there are right and wrong answers


Quote:
I know that there have been some who have been perplexed when I have argued that there is not one safe withdrawal rate, but many, that the safe withdrawal rate varies according to the personal circumstances of the particular investor at issue.


My only confusion is how to recocile apparently contrradictory statements.
Quote:
The time is not right for a discussion of the realities of SWRs at this board.

That said,
followed by discussion of swr Smile



_________________
Have fun.

Ataloss
Back to top
View user's profile Send private message
hocus
Moderator


Joined: 02 Dec 2002
Posts: 435

PostPosted: Fri Oct 31, 2003 8:15 am    Post subject: Reply with quote

My only confusion is how to recocile apparently contrradictory statements.

If you or any other board member posts a question about this at the SWR board, I will respond there.


Back to top
View user's profile Send private message
ataloss
**** Heavy Hitter


Joined: 25 Nov 2002
Posts: 559

PostPosted: Fri Oct 31, 2003 8:57 am    Post subject: Reply with quote

Thanks I am comfortable posting here, if you don't want to participate in threads here that is fine with me too.



_________________
Have fun.

Ataloss
Back to top
View user's profile Send private message
ElSupremo
Admin Board Member


Joined: 21 Nov 2002
Posts: 343
Location: Cincinnati, Ohio

PostPosted: Fri Oct 31, 2003 10:05 am    Post subject: Reply with quote

Greetings FIRE folk Smile

WOW! You folks managed to get through that without me having to delete one post! :shock:Good job! I knew you could do it!!! Very Happy



_________________
"The best things in life are FREE!"

www.nofeeboards.com
Back to top
View user's profile Send private message Send e-mail
peteyperson
**** Heavy Hitter


Joined: 26 Nov 2002
Posts: 525

PostPosted: Fri Oct 31, 2003 3:58 pm    Post subject: Reply with quote

Hey ataloss,

Nice to talk to ya.

Just wanna pick up on one of your points here:
ataloss wrote:
I would not be one of rehp's March 03 retirees who could cheerfully accept a 7.2% withdrawal rate (even though higher withdrawal rates during the depression did not fail)


This analogy is commonly used and I think misunderstood. During the 1928-32 depression, dividends were around the 7% mark. This made up for the lack of growth. In more recent times of overvaluation we saw dividends drop to 1%-1.5% levels despite large drops. Partly this was connected to the market still being overvalued after the large drops and investors not understanding intrinsic value. If they had understood it, they would have known that the market went from (for example) a 150% overvalued level to a 75% overvalued level and so it wasn't a recession from a market value perspective.

High w.d. rates during the depression did not fail per se because of the high dividends. This is not necessarily the case in the future. A very specific series of events have to happen to generate high dividends, so they shouldn't be relied upon in planning IMHO.

Petey


Back to top
View user's profile Send private message
peteyperson
**** Heavy Hitter


Joined: 26 Nov 2002
Posts: 525

PostPosted: Fri Oct 31, 2003 4:02 pm    Post subject: Reply with quote

Sorry, Ken. Your remark below is just plain wrong. Many many people believed in the valuations, investment publications proclaimed a new paradigm due to dot com IPOs and everything went a bit mad. Only those with an understanding of the history of various industries that went thru a similiar bubble and were able to draw the comparison accurately would have realised what was happening. If so, you could have (as I plan to) revalued your stock holding based on intrinsic value via average price to earnings, price to book etc type measurements. Due to the number of busted retirements and people going back to work after "retiring", I think you'll find many didn't understand.

Hindsight is 20/20.

Petey
KenM wrote:
nobody truly believed in the bubble so only lost money that shouldn't have been gained anyway.


Back to top
View user's profile Send private message
peteyperson
**** Heavy Hitter


Joined: 26 Nov 2002
Posts: 525

PostPosted: Fri Oct 31, 2003 4:07 pm    Post subject: Reply with quote

Hi raddr,

I had determined that this was the only way to fly and that thinking largely fell on deaf ears. Many people just couldn't understand why you would discount the value of your portfolio or simply argued over the correct measurement for intrinsic value or referred to Siegel's quote stating that no one can know intrinsic value..

Buffett recently said his purchases over the last 5 years were bought at roughly 7x sales vs 14x sale average valuation on the market over that period. This in itself sort of demonstrates what is possible.

I commend you for having the smarts to know to revalue the large cap stuff. I've yet to read a book that included this vital piece of information. Revaluation of EAFE & EM is less easy however.

Petey
raddr wrote:
When I retired in Sept. 2001 I discounted my large cap holdings back to normal valuation levels before calculating my SWR. Since I didn't have much large cap exposure it didn't make a huge difference but it could have if I'd had the large cap allocation recommended by most advisors at the time.


Back to top
View user's profile Send private message
peteyperson
**** Heavy Hitter


Joined: 26 Nov 2002
Posts: 525

PostPosted: Fri Oct 31, 2003 4:08 pm    Post subject: Reply with quote

You da man, ES.

Petey
ElSupremo wrote:
Greetings FIRE folk Smile

WOW! You folks managed to get through that without me having to delete one post! :shock:Good job! I knew you could do it!!! Very Happy


Back to top
View user's profile Send private message
raddr
*** Veteran


Joined: 25 Nov 2002
Posts: 265

PostPosted: Fri Oct 31, 2003 4:17 pm    Post subject: Reply with quote

peteyperson wrote:
High w.d. rates during the depression did not fail per se because of the high dividends. This is not necessarily the case in the future. A very specific series of events have to happen to generate high dividends, so they shouldn't be relied upon in planning IMHO.


Petey,

I agree. Dividends per se don't really matter. What matters is total return and volatility. That said, low dividend yields tend to indicate overvalued markets. But they don't cause portfolio failure. Portfolios fail because returns are lower than the retiree plans for. Crying or Very sad


Back to top
View user's profile Send private message Visit poster's website
ataloss
**** Heavy Hitter


Joined: 25 Nov 2002
Posts: 559

PostPosted: Fri Oct 31, 2003 4:20 pm    Post subject: Reply with quote

hi petey,

the withdrawal rate went to 9.7% in July 1932! regardless of dividends that seem high!

http://www.retireearlyhomepage.com/worstre.html

I like your idea of re-valuation



_________________
Have fun.

Ataloss
Back to top
View user's profile Send private message
wanderer
*** Veteran


Joined: 26 Nov 2002
Posts: 363
Location: anytown, usa

PostPosted: Fri Oct 31, 2003 4:51 pm    Post subject: Reply with quote

WOW! You folks managed to get through that without me having to delete one post! Good job! I knew you could do it!!!

my post, that pointed out that The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts., was deleted.

Especially problematic are the people who know what SWR will survive, 27 years in advance. (see signature).



_________________
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
Back to top
View user's profile Send private message
wanderer
*** Veteran


Joined: 26 Nov 2002
Posts: 363
Location: anytown, usa

PostPosted: Fri Oct 31, 2003 5:12 pm    Post subject: Reply with quote

The time is not right for a discussion of the realities of SWRs at this board.

Why should anyone accept you as the arbiter of anything? es, please take action on this derogatory statement.

That said, I would not want a statement like this to cause further confusion.

You would certainly be the first person I'd turn to to clear up confusion.

At the calculation stage, the SWR is a data-based construct.

That's not what gummy, an ex-math professor, says.

Calculation of the SWR is an objective exercise.

That's not what gummy, an ex-math professor, says.

When doing the math, there are right and wrong answers.

How ironic to hear this from a 'non-numbers guy'. I wonder what gummy, an ex-math professor, says.



_________________
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
Back to top
View user's profile Send private message
Display posts from previous:   
Post new topic   Reply to topic    NoFeeBoards.com! Forum Index » FIRE Board All times are GMT - 9 Hours
Goto page 1, 2  Next
Page 1 of 2

 
Jump to:  
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum


Powered by phpBB © 2001- 2004 phpBB Group
Designed for Trushkin.net | Styles Database