New Year Projects 2004

Research on Safe Withdrawal Rates

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JWR1945
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Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

New Year Projects 2004

Post by JWR1945 »

Have a very Happy New Year.

There are lots of worthwhile tasks awaiting us.

All investigations into portfolio switching are guaranteed to be useful. They will all break new ground. Getting the calculator and making the necessary modifications are not difficult. In addition, I have posted the details on how to make additional, optional modifications to make data analysis easier.

Now that we have calculators that use a simplified form of JanSz's algorithm and the JanSz-Chips calculator, we have opened up an entirely new area of investigation for those individuals who are technically oriented. It has to do with the probability of the price component of Historical Database Rates as opposed to the combination of price and dividends. Today's market is out of the historical range both in terms of P/E10 and in terms of dividend yields. It is dangerous to rely on the historical record when it is stated in terms of price plus dividends. That is what historical sequence calculators currently use. An initial investigation has shown that there can be a penalty of 1% or so when you depend upon price appreciation alone. How should we react?

I still have my new approach in the background. It will still take several months of data intensive investigations to determine whether it will be useful. If it is, it may be a breakthrough. If not, I will still provide you with sufficient information so as to know what not to do.

I have just completed my initial review of Rob Bennett's final draft of Passion Savings. Those who have read his finished products (as opposed to his intermediate thoughts) are well aware of how powerful they can be. This is even better. He has turned what seems to be a dreary task, gathering wealth, into an exciting adventure. I had focused on the word Savings when I should have focused on Passion. I rate his book a couple of levels higher than your typical blockbuster. It really is that good. I have offered to buy a copy of the draft as-is for each of my daughters in addition to the published version when it comes out.

Have fun.

John R.
JWR1945
***** Legend
Posts: 1697
Joined: Tue Nov 26, 2002 3:59 am
Location: Crestview, Florida

Post by JWR1945 »

Calculator Projects

Those new to making calculators can get a tremendous benefit from two modifications. The first was on the Request for assistance (with Excel) thread.
http://nofeeboards.com/boards/viewtopic ... 1002#p1002

You can make the latest data analysis improvements by following the instructions on Newer Deluxe Versions of the SWR Calculators dated Sunday, Jan 18, 2004 at 4:11 pm CST.
http://nofeeboards.com/boards/viewtopic ... 1144#p1144

When you finish, you will have some incredibly powerful calculators.

You must download the basic (unmodified) calculator first. It is both powerful and useful. intercst has made it available at the Retire Early Home Page website: www.retireearlyhomepage.com

This is the November 7, 2002 version of the calculator (version 1.61). Save this copy as-is. It includes the switching of stock allocations, but it uses commercial paper as the fixed income component. It is worth keeping.

The calculator is in a zip file. Non-commercial users may download a free Free ZIP wizard from Coffee Cup software: http://www.coffeecup.com/freestuff/ That is what I use. I learned about in one of Kim Komando's Tip of the Day emails: http://www.komando.com/newsletter.asp

The unmodified calculator has only a limited portfolio allocation switching capability. Although it was initially designed for two thresholds (of P/E10) and three allocations, only one of the thresholds worked. Allocations were limited to stocks and commercial paper.

The first modification upgrades the calculator to its originally intended portfolio allocation switching capability. It also tells you how to make versions that substitute TIPS or ibonds for commercial paper.

Switching of portfolio allocations is an exciting, new area of research. Switching with just a single threshold can increase Historical Database Rates at high levels of survival up to 0.8%. That is from something close to 4.0% to 4.8%, which is a substantial increase.

We now know that it can be best to take money out of stocks and place them into more secure investments such as TIPS and ibonds when stock prices (valuations) are high. Historically, the longest period of poor stock performance was 15 years. It is reflected in the low Historical Database Rates of the 1960s and early 1970s.

When the valuation, as measured by (Yale Professor) Dr. Shiller's P/E10, exceeds 20, it has always been best to have no money in stocks whatsoever. Mike discovered this and I have confirmed it. Today's valuations are even higher.

The second modification makes data analysis much easier. By jumping down to the new data summary tables, you can read both nominal and real current balances for up to 60 years for each historical sequence.

The annualized returns can be helpful in their own right. For example, if you set the withdrawal rate to zero and if you set the expenses to 0.20% or something similar, you can read out the annualized nominal and real returns of the market beginning from each start year. This shows you how long it has taken the market to produce a positive overall return in the past.

Have fun.

John R.
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