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ataloss
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PostPosted: Thu Jul 01, 2004 4:12 pm    Post subject: squared one- from the beating a dead horse department Reply with quote

on the hocus board he has a quote from livabord at tmf suggesting that he express his views on swr. but he left off this part of the quote:

Also keep it short so everyone will be able to read it.

Here's an example of a short description on Intercst's plan:

Based on historical data, the highest safe withdrawl rate for a 30 year period is about 4%. This is achieved with an 80/20 stock/bond allocation, rebalanced annually.

it was sort of a plea to write a brief post that actually related to swr


http://boards.fool.com/Message.asp?mid=18179867



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hocus2004
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PostPosted: Fri Jul 02, 2004 2:11 am    Post subject: Reply with quote

Here's a link to the "Square One" thread:

http://www.nofeeboards.com/boards/viewtopic.php?t=2698

Here's a link to a thread which provides SWRs for recent years as determined through use of a methodology that is analytically valid for purposes of determining SWRs. Please note that these findings are consistent with the statement by William Bernstein in his book "The Four Pillars of Investing" that the results of the REHP study are "misleading" at times of high valuation.

http://www.nofeeboards.com/boards/viewtopic.php?t=2657

Here is a link to a thread discussing the changes immediately required in the REHP study. I will be adding more detail to the description of changes immediately required in the REHP study in coming days.

http://www.nofeeboards.com/boards/viewtopic.php?t=2637


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peteyperson
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PostPosted: Sat Jul 03, 2004 9:47 am    Post subject: Reply with quote

Hi Rob,

On your general point about high valuation start points on FIRE..

The danger to the long-term viability of living off assets is when the majority of asset classes invested in do not provide a standard of living and capital is lost over time. Given the propensity for bear markets to follow bull markets and for each good/bad market run to last 15-18 years (see John Maudlin's latest book for reference on this), it does stand to reason that starting at a high valuation could lower your ability to live off your assets. Now what is there to be done?

Diversification between asset classes will certainly help. I do believe that few Americans have much invested internationally. This makes sense based on recent US equity outperformance vs Global, the uncertainty of currency exchange rates in the future and the dominant position America holds in both the global economy & financial markets where many investments are denominated in US dollars even if they don't have their origin in America (Oil, emerging market debt, to name but two).

Over the short-term, the one to two year period, a market shock usually affects all marketable equity. During the Asia crisis and the 1987 crash for that matter, equities were down across the board. In the case of 1987 which was caused by short-term liquidity problems with key market makers and not due to real economic problems, the markets rebounded over time. So, geographic marketable equity diversification doesn't help in the short-term. This is true even for market neutral absolute return strategies which had their worst quarter during the Asian crisis. I believe therefore it is necessary to separate out short-term market declines (1-2 years) from the longer-term secular bear market that can last a decade or more.

To combat the short-term, one might consider keeping a degree of liquidity at all times. This has an opportunity cost that needs to be carefully weighed with the loss one might suffer if needing to sell marketable equity down follow a 1973-74 40% decline in value. Higher cash levels reduce overall portfolio annual return most years but allow one to spend down the cash rather than sell underwater equities before they would have bounced back a year or two later (opportunity cost is therefore a measure of occasional capital preservation via market hedging by holding more cash vs lost long-term return in the other years when that cash could have been employed better). Two such events have taken place over the past 20 years, which indicate this is worth consideration. The value of such a strategy depends partly on how much of an annual budget is covered by regular dividends and how likely those dividends will stay at those levels. Someone holding 50% REITs will have far fewer problems funding a 4% w/d rate as only in dire real estate markets does the avg REIT yield fall in dollar terms (REIT capital values move down as well as up, but with sufficient yield you are not forced to sell capital at a loss to fund your spending budget). An investor invested mostly in stocks with an avg yield nearer 1.5% is more susceptible as they need to sell off shares each year to fund their living expenses. This touches on asset allocation, the ability to invest in higher dividend paying investments like oil & gas, REITs, high dividend stocks etc, playing off increased taxation on the yield vs increased risk to capital when not holding these kinds of investments and living off capital in good and bad capital years. For contrarian investors, understanding market valuations presents investment opportunities. Buying REITs when they are priced below net asset value (NAV) or buying marketable equities when market PE ratios are lower than historical average.

Portfolio structuring allows one to avoid some of these issues. Keeping a year of cash in short-term instruments with an average portfolio dividend of 2%, would allow an investor to split their living expenses between what the dividends provide and the cash covers the shortfall. When markets have rebounced from their temporary decline, you can rebalance accordingly. This isn't so much tactical rebalancing but more specifically avoiding forced capital sales due to short-term unavoidable factors. A 2% yield doesn't require an overly high allocation to high dividend paying investments. A low allocation to commercial real estate or oil & gas trusts would boost the average S&P 500 yield up to nearer 2%, for instance.

Coming back to the key issue of valuation affecting withdrawal rates, one needs to understand the valuation of the asset classes you are invested in. It is not enough to be well diversified and be a know little investor to that end. It is helpful to understand that while the NASDAQ is valued much higher on a PE basis than the S&P 500, when companies average a PE of 100, this makes any capital invested there very vulnerable to a sharp decline. An 80% correction following the dot com collapse demonstrates this well. Since this time, the past or new investors have now reinvested in the NASDAQ and it has rebounded strongly. However, when assessing your assets to determine whether you have enough funds to support yourself, one needs to grasp the true value of your portfolio. You can come at this from two different angles. One is to revalue your portfolio based on the fair value or average market values for your investments. The other is to consider what damage to your capital would occur if markets reverted to the mean valuation and how the smaller capital base would affect the funding of your living expense. The emphasis here is on avoiding being wrong-footed by temporily high portfolio values when some asset classes are in a bubble and judging your ability to fund your expenses reliably. If the characteristics of asset classes remain reasonably constant then we can expect a certain fundamental withdrawal rate from a mix of asset classes. This withdrawal rate will vary depending on the asset mix. It won't be 4% for all asset mixes, it cannot be. As I see it, rather than trying to correct the future withdrawal rate based on bubble valuations, it makes more sense and for better clarity to keep the known expected withdrawal rates on various asset classes over time and simply adjust the asset values where bubble valuations exist in order to determine if you have enough to retire. That way you're able to use market history to provide reasonable long-term return expectations rather than try to mess with the long-term data.

As an abstract comparison to illustrate the point:

Imagine you are flying a plane. You are adjusting sea level downwards as if you are nearer the ground (your portfolio holds less value because the bubble valuations won't last). Your direction though holds true & steady. You don't change how you fly nor forget what you learnt about flying. Similarly, by adjusting the portfolio value down, you aren't changing the way you invest nor ignoring the historical return data which can serve as a guide to how to invest.

P.S. Apologises for length. As someone famous once wrote at the end of a letter to a friend. "Sorry the letter is long. I didn't have time to write a shorter one."

Petey
hocus2004 wrote:
Here's a link to the "Square One" thread:

http://www.nofeeboards.com/boards/viewtopic.php?t=2698

Here's a link to a thread which provides SWRs for recent years as determined through use of a methodology that is analytically valid for purposes of determining SWRs. Please note that these findings are consistent with the statement by William Bernstein in his book "The Four Pillars of Investing" that the results of the REHP study are "misleading" at times of high valuation.

http://www.nofeeboards.com/boards/viewtopic.php?t=2657

Here is a link to a thread discussing the changes immediately required in the REHP study. I will be adding more detail to the description of changes immediately required in the REHP study in coming days.

http://www.nofeeboards.com/boards/viewtopic.php?t=2637


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ben
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PostPosted: Sun Jul 04, 2004 5:56 am    Post subject: Reply with quote

Petey; good points. I like your dividend angle (I am taxed 15% on USA dividends and interest as you know).

My current base portfolio pay about 3% dividends /interest after taxes. That is mainly from assets such as ICF, TEI, PCRIX Etc. While some of these dividends/interest earners are more risky than others, it still makes me feel better about my base plan of $1mill w. 2-5% WR depending on actual market returns. Just taking the dividends/interest will put me squarely in the middle range ($30k/year after tax).

With the high level dividend/interest - I do not mind keeping less of a cash buffer, thereby minimising oppurtunity costs.



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peteyperson
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PostPosted: Sun Jul 04, 2004 9:39 am    Post subject: Reply with quote

Ah Ben. You get my central points. Excellent mate!

You get a boost due to the 8% divs on PCRIX which I mentioned to raddr on the other board that it was too tax inefficient for me during accumulation phase. So I totally get why your dividend yield is higher than my planned one. That will mean that some of your asset allocations aren't providing real growth as it is all coming out in dividends and you're including that in the dividend rate assumption.. Need to reinvest inflation-based return like with bonds otherwise long-term you would reduce the principle value & the dividend stream vs inflation-adjusted spending budget. Always worth considering..

Deploying cash if preferable if you can get a reasonable return and balance the risks. I was only thinking about perhaps 4% allocation to short-term, nothing excessive, but as I said to hocus I haven't done the calculations to see what the opportunity cost differences are between investing it and capital loss in a major market fall. As you might be able to tell, I'm experimenting with various methods on capital protection vs return for the distribution phase at present. It is likely to fall somewhere near what you have at present, a mix. Right now that is mainly global commercial REITs and a dash of timberlands. Oil & gas is a little tricky. I'm unsure about investing in a Shell as they announced recently that they have 41 years of proven oil reserves. If my FIRE were in twenty years time, holding oil & gas would represent a stock with a declining return as the asset runs out. I would probably prefer holding an oil & gas trust with direct oil holdings but that is all dividend returns so return gets killed thru taxes during accumulation phase. Instead I am likely to invest in speculative oil & gas and commodity stocks.

I have looked at investing in timberland during the next 10-20 years, but it doesn't seem it will deliver what commercial real estate fundamentals will so I may layer some timberland in as I get closer to FIRE and want the diversification in exchange for a lower total return but the 4% timber harvest yields.. riding out the changes in capital value of the timberlands as the price of the timber commodity moves up and down. The last 3 years of US timber value fundamentals show this well with declines in value even though PCL has grown in value. During this time the dividend yield whilst it was cut from being unsubstainably high 8%, is now 5% and is funded directly from timber harvest cash flow. Rayonier is similar. Of course the timber REIT dividend might vary as harvest cash flow varies with timber prices and they manage to get the best prices but PCL has enough diversity in US regions to harvest occasionally in the best prices spots and do better than Rayonier than is limited to a few States. Their States are also in areas with extreme weather wet and dry, and so they have to harvest when weather is suitable. Market prices fall reflecting the oversupply for all timber producers in the regions where this happens, delivering lower harvest revenues to Rayonier (this coming from PCL's last presentation).

A few people over on the Fool have 50% in US REITs and 50% in high dividend paying stocks. Whole idea being to have reliable high income and not have to worry about capital sales in equity down years. Nice idea in theory but I don't think it holds water. You're stuck in oil & gas, banking and real estate sectors only. You don't get enough diversification by asset class or geographically. I know personally I'll likely net more with investments that are based around capital gains and not dividends. Dividends may incur single or double taxation with US/Canadian dividend withholding taxes. By contrast, some UK sourced lower fee investments can be shielded in zero capital gains tax wrappers like the US ROTH IRA accounts using net income. So I think it is a case of balancing the returns between income and capital return, with a dash of cash on hand to cover unexpected bumps. I plan to use absolute return in place of bonds that deliver similar or better net returns without the risk of rising inflation/interest rates hitting capital. Hoping hedge funds get regulated over the next few years both sides of the Atlantic so I can get exposure to the full range of strategies used rather than solely merger arbitrage which limits returns with merger activity.

This is my thinking at the moment. Hope I didn't confuse you with all that! Laughing

Petey
ben wrote:
Petey; good points. I like your dividend angle (I am taxed 15% on USA dividends and interest as you know).

My current base portfolio pay about 3% dividends /interest after taxes. That is mainly from assets such as ICF, TEI, PCRIX Etc. While some of these dividends/interest earners are more risky than others, it still makes me feel better about my base plan of $1mill w. 2-5% WR depending on actual market returns. Just taking the dividends/interest will put me squarely in the middle range ($30k/year after tax).

With the high level dividend/interest - I do not mind keeping less of a cash buffer, thereby minimising oppurtunity costs.


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ataloss
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PostPosted: Mon Jul 05, 2004 10:42 am    Post subject: Reply with quote

Petey, good point about asset multiple classes. This is part of telegraph's response to hocus back in 02. Telegraph green hocus (being quoted from the post he is so proud of is red.) Many attempts to educate hocus have failed. Some people have lost patientce. Maybe th will have better luck Laughing



again we go with hocus

Some portion of your investment portfolio needs to be absolutely safe, but not all of it.

NOthing is absolutely safe for a 30 year withdrawal period. CDs/MMF can kill you in high inflation.

Other than a 5 year ladder, which has been the topic of discussion for over two years, you haven't said anything.

For example,I don't want to take any chances with the money used to finance the grocery or heating bills. But I am not so worried about the portion of my portfolio that supports my annual beach vacation.

You can't win. NOthing is 100% safe for 20 or 30 years.

And we know from historical data that the most risky strategy is putting all your eggs into a 'safe' investment like CDs (2% withdrawal ratre) or all stocks (under 2.5% SWR).

Which means a mixture.....


So I believe it is a good thing to know the safe withdrawal rate for various asset classes. I don't always go with the asset class that provides 100 percent safety, because those tend to be asset classes with low long-term growth potential. But I need to know the safe withdrawal rate for the various classes to make effective comparisons between them.


Again, you fail to understaid (and berstein makes it perfectly clear) there is no 100% asset class. Major problem with you and your posts.

And the data is all in Berstein and elsewhere to determine the SWR for each and every asset class, with the PROBABILITIES and CROSS CORRELATION factors.

Of course , you admit you have no understanding of probability or cross correlation, so all of Bernstein's work and the Trinity study mean nothing to you.



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th
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PostPosted: Mon Jul 05, 2004 10:52 am    Post subject: Reply with quote

So I'm not the only one who has had the same opinion. Cool, I like it when someone else is as dumb as I am Wink

I dont feel any need to change their minds, or to refute what they've said for an audience. I just wanted to understand it and see if it makes any sense for me and my situation. It didnt and it doesnt.

Now its history. :shrug:



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ataloss
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PostPosted: Mon Jul 05, 2004 11:05 am    Post subject: Reply with quote

I find it sort of unplesant to watch them go on claiming to have some secret "swr tool" while the gullible apparently fall for it which is why this board is of less interest to me.

I arrived at the rehp board at tmf after people had given up reasoning with hocus and turned toward sneering insults. I didn't understand why Laughing

hocus started it off declaring that intercst was "intentionally misleading" people with an "analytically invalid" study then claimed that any intercst response was a personal attack. hocus then claims to consider intercst a freind and teacher and to be mystified by the fact that he isn't allowed to get out the truth about the wonderful new swr tool.



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th
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PostPosted: Mon Jul 05, 2004 11:19 am    Post subject: Reply with quote

Dont you think the gullible will simply be gulled by something else, if not the topic of discussion? Most likely where they cant be protected by less gullible folks like you and I?

Is there nothing to be learned or considered in these eye bleedingly long posts?

I got a few 'take aways'.

As far as the 'he said/she said' bickering and all the hoopla about censorship and banning...I think most people can figure that out on their own. If they cant, then its their cheap entertainment.

I wonder sometimes if we dont instinctively miss the politics and drama from our working lives and therefore feel compelled to create auras of importance in issues and become drama queens. I certainly have found that little things in my current life would have been insignificant nits to me five years ago.

Time will tell though. The stock market could go up at a nice rate for the next 15 years for any variety of reasons. Then we'd be geniuses. It might go down for 15 straight and these guys might be the brainiacs.

For 8 years with my former company I sold my stock options when they vested and diversified. For the first 7 years I was an idiot because the company stock more than doubled every year and my diversified portfolio slightly lagged. The last year when the stock fell 85% a few months after I sold? I was a genius and I retired early.

But I didnt feel any smarter, and I hadnt done anything any differently.

I guess I wasnt an idiot for those 7 years, or a genius in that last one after all. I simply laid in a plan that was more effective in 8 year periods than it was in the first 7.

We'll see how it goes for 30 or 40 or 50, or however long i'm to be a blight on the planet.

One thing is for sure, I'm not going to spend all of it talking about things I cant predict, nor need to. Or feeling angry or bitter.

So lets talk about something else, eh?

I'll go start one...



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hocus2004
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PostPosted: Mon Jul 05, 2004 12:10 pm    Post subject: Reply with quote

"hocus started it off declaring that intercst was "intentionally misleading" people with an "analytically invalid" study then claimed that any intercst response was a personal attack."

I stand by my statements re intercst employing deliberate deception to block reasoned debate re the flaws in his study.

And it is not just attacks that intercst directed at me that are a problem. Many of his attacks were directed at the entire posting community.

One key post was the one in which he declared that the "board culture" of the Motley Fool board demanded "ridicule" of any poster who asked questions about the methodology used in his study. This is an insult to the entire REHP community. The board culture there demands no such thing. How dare he proclaim that the entire board posts in contempt of the rules that they agreed to follow when signing up at the site?

The threats of physical violence are of course also an insult to the entire community. That so few community members spoke up when intercst employed this low tactic tells you that that board has indeed become a "cult of personality," as one community member there termed it. Self-respecting posters don't permit threats of physical violence against fellow community members to go unchallenged. The community of posters who remain there today is a community of enablers.

That doesn't mean that we cannot attract fine community members to that board once again. We can and we will. We will do it the second time in the same way that we did it the first time. But we must deal with the intercst problem first. Otherwise we are just pushing things back up hill so that he can send them rolling downwards once again.

Solve the intercst problem and all sorts of exciting possibilities for bringing new people into the movement open up to us. Continue to put our heads in the sand on that issue and we pass up opportunity after opportunity to do great things.

I built up that board on the first go-around with the intention of doing great things with it once the task was accomplished. I know that the scores of other fine posters also responsible for making that board the most exciting board on the internet duriing its Golden Age also had construtive goals in mind when they did so. There is no reason why one poster's personal agenda should stand in our way just because he happened to be the one who took 10 minutes to send an e-mail to Motley Fool asking that the board be opened.

He had a legitimate claim to being moderator at an earlier time. He doesn't today. The sooner we all come to recognize that reality and deal with it in constructive ways, the better things will be for every single community member who wants to make use of the various FIRE/Passion Saving/Retire Early boards for the purposes for which they were created.


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JWR1945
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PostPosted: Mon Jul 05, 2004 12:23 pm    Post subject: Reply with quote

Quote:
NOthing is absolutely safe for a 30 year withdrawal period. CDs/MMF can kill you in high inflation.

At the time that that was written, the conventional methodology claimed that 4% was the maximum safe withdrawal rate. It required a high stock allocation. It said that you would not be assured of any final balance better than zero after 30 years.

At the same time, the writer of the above remark had rejected the entire notion that you could have ever gotten a 4% withdrawal rate safely from treasury instruments. He was denying that 4% TIPS bonds had already been sold!

With 4% TIPS a retiree could withdraw 4% of his initial balance (plus increases to match inflation) for 30-years and still ended up with his original balance (plus inflation).

Even if we had insisted on using 2002 TIPS rates, a person could easily withdraw 4% for 30 years and end up with a significant final balance. The conventional methodology insisted that the final balance had to be zero.

The model used for the conventional methodology treats all treasuries as trading instruments, always sold at the end of the year and replaced with new treasuries with the original maturity. The computer model did not allow anyone to hold TIPS to maturity.

The quoted remark was demonstrably false when it was made. Yet that was typical of the time and the place (discussion board).

Have fun.

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JWR1945
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PostPosted: Mon Jul 05, 2004 12:25 pm    Post subject: Reply with quote

Quote:
So I'm not the only one who has had the same opinion. Cool, I like it when someone else is as dumb as I am.

Embarassing, isn't it!

[See my previous post.]

Have fun.

John R.


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peteyperson
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PostPosted: Mon Jul 05, 2004 12:28 pm    Post subject: Reply with quote

Rob,

Instead of continuing to talk about intercst, do you think you might be able to reply to your lengthy reply to you in this thread that I made several days ago? I think it contained some useful points worth exploring.

The discussion related directly to your point about starting from a high valuation point and approaches with this situation. I had hoped you would get into a subject close to your heart. About halfway down this thread from the length it is thus far.

Petey
hocus2004 wrote:
"hocus started it off declaring that intercst was "intentionally misleading" people with an "analytically invalid" study then claimed that any intercst response was a personal attack."

I stand by my statements re intercst employing deliberate deception to block reasoned debate re the flaws in his study.

And it is not just attacks that intercst directed at me that are a problem. Many of his attacks were directed at the entire posting community.

One key post was the one in which he declared that the "board culture" of the Motley Fool board demanded "ridicule" of any poster who asked questions about the methodology used in his study. This is an insult to the entire REHP community. The board culture there demands no such thing. How dare he proclaim that the entire board posts in contempt of the rules that they agreed to follow when signing up at the site?

The threats of physical violence are of course also an insult to the entire community. That so few community members spoke up when intercst employed this low tactic tells you that that board has indeed become a "cult of personality," as one community member there termed it. Self-respecting posters don't permit threats of physical violence against fellow community members to go unchallenged. The community of posters who remain there today is a community of enablers.

That doesn't mean that we cannot attract fine community members to that board once again. We can and we will. We will do it the second time in the same way that we did it the first time. But we must deal with the intercst problem first. Otherwise we are just pushing things back up hill so that he can send them rolling downwards once again.

Solve the intercst problem and all sorts of exciting possibilities for bringing new people into the movement open up to us. Continue to put our heads in the sand on that issue and we pass up opportunity after opportunity to do great things.

I built up that board on the first go-around with the intention of doing great things with it once the task was accomplished. I know that the scores of other fine posters also responsible for making that board the most exciting board on the internet duriing its Golden Age also had construtive goals in mind when they did so. There is no reason why one poster's personal agenda should stand in our way just because he happened to be the one who took 10 minutes to send an e-mail to Motley Fool asking that the board be opened.

He had a legitimate claim to being moderator at an earlier time. He doesn't today. The sooner we all come to recognize that reality and deal with it in constructive ways, the better things will be for every single community member who wants to make use of the various FIRE/Passion Saving/Retire Early boards for the purposes for which they were created.


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hocus2004
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PostPosted: Mon Jul 05, 2004 12:36 pm    Post subject: Reply with quote

"Instead of continuing to talk about intercst...."

Intercst is pretty much the entire problem, Petey.

Does getting rid of intercst mean that we all are going to come to instant agreement on SWRs? Obviously it does not.

But so what? I don't want to come to instant agreement.. I want to engage in reasonsed debate. All community members other than intercst have shown a capacity and willingness to engage in reasonsed debate on this question. So if we get rid of intercst all the ugliness that has come to be associated with the SWR discussions goes "poof!"

That's what I want to see happen. I am not seeking agreement. I am seeking reasonsed discussion. The key to making that happen is persuading the community to deal in a reasonable and realistic way with the intercst problem.

There is no other way to get to the good stuff that lies on the other side of dealing with the intercst matter.


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PostPosted: Mon Jul 05, 2004 12:43 pm    Post subject: Reply with quote

ataloss wrote:
I find it sort of unplesant to watch them go on claiming to have some secret "swr tool" while the gullible apparently fall for it which is why this board is of less interest to me.

I arrived at the rehp board at tmf after people had given up reasoning with hocus and turned toward sneering insults. I didn't understand why Laughing

hocus started it off declaring that intercst was "intentionally misleading" people with an "analytically invalid" study then claimed that any intercst response was a personal attack. hocus then claims to consider intercst a freind and teacher and to be mystified by the fact that he isn't allowed to get out the truth about the wonderful new swr tool.


Hi ataloss,

I find a discussion about investing strategies to be a more meaty discussion than numerical engineering. Partly because I don't believe you can achieve a higher withdrawal rate given most asset classes propensity to have decade long declines and pretty much all non-listed non-equity asset classes delivering lower long-term returns which automatically reduces the portfolio withdrawal rate when you try to circumvent marketable equities. Therefore as I have posted to Rob, playing with the numbers seem pointless to me. Finding strategies that mitigate some of the major market declines will likely increase portfolio survivability due to 1) lower capital declines, 2) lower future compounding needed to regain previous capital values before the correction and 3) less reliance on balanced capital values year to year with dividends that provide livable levels of budget funding. This in turn will help maintain a reasonable withdrawal rate during traditionally poor markets.

In real estate I'm ideally looking for a lower leverage (25%) or no leverage investing option which allows for survivability in dire economic conditions with vacancy rates rising dangerously and leases being renegotiated lower to keep remaining tenants from leaving, whilst still being able to service interest payments (if there were any). I don't see REITs with traditional 50% leverage able to weather such a situation and it is a risk factor few consider fully. So far I've only found funds that directly own & manage commercial properties but charge a 5% load and 1.5% fees a year. The lower unlevered 8% total return pre-fees falls to 5% nominal when fees & dividend taxes are netted off, meaning REIT return delivers almost 5x the real return. Costs drowning out the risk-adjusted returns on unlevered.

Just part of the work I've been doing in constructing portfolios that grow but protect precipitous declines and/or allow for reasonable levels of substainable income during harsh economic conditions.

On withdrawal rates at various valuation levels, risk increases at high valuations as withdrawal percentages increase as capital values decline and the need to continue to fund the same dollar cost lifestyle impacts portfolio values. The survivability is clearly affected by the amount of the portfolio decline, length of the value decline, investment costs over the period, withdraws when prices are depressed, inflation and asset allocation. There is no mystery to any of that once you grasp the key issues. Whether the studies are misleading, I don't know. For one it depends on the dividend rate applicable to your portfolio at the time.

A 2% dividend would require a 2% capital sale which in a 50% equity decline on a 100% equity portfolio would cause a 4% sale to fund the remainder of the budget. i.e $1m portfolio, pre-tax budget $40,000, $20,000 coming from dividends, $20,000 from annual capital sales. If capital values fall 50% to $500,000, $20,000 capital sales are still required, which constitutes 4% of the remaining $500,000 capital (I know you know this but some lurkers may be reading this and find the numbers useful). So how to get a reasonable return to deliver a 3%-5% substainable withdrawal rate but muffle the capital loss risk of an all equity portfolio? I see that as the goal and not boosting the w/d rate which is dependent on asset class returns which are unknown until they happen ultimately. Portfolio construction on the other hand can protect against capital loss thereby protecting whatever w/d rate becomes viable thru your asset class mix. What I have yet to see, for instance, is a 20% allocation to REITs which boosts the income and lessens the capital selloff in downmarkets and see how a Trinity Study would come out on survivability rates etc. I don't expect the w/d rate to climb by much as real estate, even leveraged, does not deliver equity returns long-term (that said, not far off it). I'm not sure the studies show enough data on the capital value during declines and how much they matter. Meaning something like standard deviation doesn't show a true measure of portfolio survivability nor does correlation ratios. If 20% REITs and correspondingly lower common stock allocation boosts my dividends and lowers my capital sales needed, then whilst it is less tax efficient, I'm less vulnerable during bad capital years even if that includes bad REIT capital years too. You don't need to sell off REIT capital necessarily. No measurements or studies really get to the core of the improvements to FIRE planning that higher income reducing deliberate capital selloffs creates. It is too subjective to the asset class mix, the dividend stream and the reliability of such in various economic conditions perhaps.

So I think you just have to understand how and why the data says what it does, rather than get into semantics about it. That's why I try to sidestep any discussion of SWR tools and the like and just focus on the core. This is what I've done in my post to Rob tonight, attempting to redirect him back to my post on portfolio valuation to see if I can get a discussion with him going on that, a "cause" close to his heart I understand.

Petey




Last edited by peteyperson on Mon Jul 05, 2004 5:10 pm; edited 1 time in total
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th
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PostPosted: Mon Jul 05, 2004 12:55 pm    Post subject: Reply with quote

JWR1945 wrote:
Quote:
NOthing is absolutely safe for a 30 year withdrawal period. CDs/MMF can kill you in high inflation.

At the time that that was written, the conventional methodology claimed that 4% was the maximum safe withdrawal rate. It required a high stock allocation. It said that you would not be assured of any final balance better than zero after 30 years.

Uhh..I said that. And it had nothing to do in its original context with the "conventional methodology". Further, 60% stock is not something i'd consider "high". Further, the study absolutely showed many end balances higher than zero.
JWR1945 wrote:

At the same time, the writer of the above remark had rejected the entire notion that you could have ever gotten a 4% withdrawal rate safely from treasury instruments.

I did no such thing.


JWR1945 wrote:
He was denying that 4% TIPS bonds had already been sold!

(game show "wrong" buzzer) I never said that either.
JWR1945 wrote:
With 4% TIPS a retiree could withdraw 4% of his initial balance (plus increases to match inflation) for 30-years and still ended up with his original balance (plus inflation).

True, if you could buy 4% tips today without paying a 25% markup, resulting in a sub 3% real yield. But you cant. So whats your point? That you were right once? I was right once too. Wink
JWR1945 wrote:
Even if we had insisted on using 2002 TIPS rates, a person could easily withdraw 4% for 30 years and end up with a significant final balance. The conventional methodology insisted that the final balance had to be zero.

Guess that requires one is in agrement with what is "significant". And wrong again, the 'conventional method' makes no such insistence. I hate to have to keep defending something I dont believe in, but you're forcing my hand with these completely out of context, incorrect and ridiculous statements.
JWR1945 wrote:
The quoted remark was demonstrably false when it was made. Yet that was typical of the time and the place (discussion board).

Still wrong.


I think its safe to say that everything anyone ever said about you and Hocus is 100% true. You take statements out of context, twist them to support your own weak arguments, and jump to conclusions that are not only incorrect, but arent necessary!

But I can see how you suck people in and get the 'troll' name applied liberally by misquoting.

What a big waste of time... Rolling Eyes



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hocus2004
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PostPosted: Mon Jul 05, 2004 1:02 pm    Post subject: Reply with quote

"I think its safe to say that everything anyone ever said about you and Hocus is 100% true. You take statements out of context, twist them to support your own weak arguments, and jump to conclusions that are not only incorrect, but arent necessary! But I can see how you suck people in and get the 'troll' name applied liberally by misquoting."

I could be wrong, but to me you sound sort of angry, TH.


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PostPosted: Mon Jul 05, 2004 1:07 pm    Post subject: Reply with quote

A little angry at myself, and disappointed.

I think you know why.



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peteyperson
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PostPosted: Mon Jul 05, 2004 1:21 pm    Post subject: Reply with quote

John,

It is true that an investor could indeed own 100% TIPS at 4% real and live happily on a 4% w/d rate. There are risks however.

The instrument is newish. You are reliant on the US Government not defaulting and staying solvent to keep paying you. Many say that the US Govt is "risk-free" and ignore or aren't aware that the US Govt defaulted on their financing agreements on War Bonds. History is replete with examples of nations that were once strong that are now in a worse position and so it isn't necessarily safe to have 100% of one's assets in one country and one currency.

This is also ignoring that it is discussing a strategy for investments that are no longer available, were only available for a year or two? and a strategy that cannot be replicated by anyone reading the posts now. This makes it something very few people can use in a practical sense and so not very useful in post or book form to discuss. It is like guys getting together talking about current dating opportunities and women and discussing Marilyn Monroe and everyone failing to mention that she's not available as she's dead. The 4% TIPS are dead too.

So, yes of course, the option in hindsight was there for an investor to place all their assets or even a large chunk into US TIPS at 4% yield but there were still risks and it was a rare opportunity that expired quickly as it was essentially a mispricing/wrongly applied interest structure by the Fed.

Petey
JWR1945 wrote:
Quote:
Nothing is absolutely safe for a 30 year withdrawal period. CDs/MMF can kill you in high inflation.

At the time that that was written, the conventional methodology claimed that 4% was the maximum safe withdrawal rate. It required a high stock allocation. It said that you would not be assured of any final balance better than zero after 30 years.

At the same time, the writer of the above remark had rejected the entire notion that you could have ever gotten a 4% withdrawal rate safely from treasury instruments. He was denying that 4% TIPS bonds had already been sold!

With 4% TIPS a retiree could withdraw 4% of his initial balance (plus increases to match inflation) for 30-years and still ended up with his original balance (plus inflation).

Even if we had insisted on using 2002 TIPS rates, a person could easily withdraw 4% for 30 years and end up with a significant final balance. The conventional methodology insisted that the final balance had to be zero.

The model used for the conventional methodology treats all treasuries as trading instruments, always sold at the end of the year and replaced with new treasuries with the original maturity. The computer model did not allow anyone to hold TIPS to maturity.

The quoted remark was demonstrably false when it was made. Yet that was typical of the time and the place (discussion board).

Have fun.

John R.


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PostPosted: Mon Jul 05, 2004 1:40 pm    Post subject: Reply with quote

peteyperson wrote:
It is like guys getting together talking about current dating opportunities and women and discussing Marilyn Monroe and everyone failing to mention that she's not available as she's dead.


ROFL.

I guess you could date her. It'd be a bit messy though.

I wonder if she had a monkey? Question



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