CTVR80 versus Earnings Yield

Research on Safe Withdrawal Rates

Moderator: hocus2004

JWR1945
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Post by JWR1945 »

hocus2004 responding to comments from unclemick:
"I still don't like SWR. Maybe we could have a naming contest - Expected Future Results based on valuation, or something "

In the long run, I see us using labels other than "SWR analysis" for what we are doing here. The SWR is one point on a spectrum of possibilities, and we have already at times ventured beyond just identifying that point. We will be using the tool that we developed to identify the SWR to do all sorts of other things down the road.

One thought that I have for a board title to use down the road is "Probability Investing." Our core task is to make use of historical stock-return data to assess probabilities of various investment outcomes.

"SWR will continue to be misconstrued"

I hear you. But it didn't have to be that way.
Our research is centered around retirement investing. One might choose an alternative phase such as retirement related investing or retirement oriented investing.

Regardless, safety will always be central to retirement finances.

Safe Withdrawal Rate investigations, defined broadly and accurately, will always be a key element of our investigations. Defined narrowly and inaccurately, the words can be twisted into a tool for deception.

To do our research properly, we need to separate the objective review of what the historical record tells us from our subjective preferences. That is why we appeal to the data when making Safe Withdrawal Rate calculations, but we do not limit our actions simply because of such calculations. We broaden our outlook. The calculations assist us. They do not rule over us.

We have taken a few steps outside of the distribution stage and into the accumulation stage. There are some important differences. In that sense, we have moved a little bit beyond Safe Withdrawal Rate investigations. Still, in the background, there is always a need to know something about the distribution stage in order to set our goals during the accumulation phase.

Have fun.

John R.
hocus2004
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Post by hocus2004 »

"Our research is centered around retirement investing.... We have taken a few steps outside of the distribution stage and into the accumulation stage."

Are you OK with taking additional steps in the direction of examining accumulation stage issues? Or are you saying that you would you prefer to keep the focus on distribution stage issues?
hocus2004
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Post by hocus2004 »

"I was thinking more along the lines of changing from the standard answer of 4% to something like 3.8% to 6% depending upon valuations. I had no idea that we would ever cut the safe withdrawal rate in half."

It' can be a helpful mental exercise to try to banish from your mind for a moment everything you have ever heard about SWR studies and ask yourself what sort of SWR you would intuitively EXPECT to apply for an asset class with the high-growth potential of stocks. I think that most people who make a sincere effort to think this through will come to the conclusion that a 4 percent number for stocks is an exceedingly high one to have apply at times of the highest valuations we have ever seen in history.

I do not believe that the Efficient Market Theory is an accurate description of reality. But I do believe that there are some ways in which markets are indeed efficient and some senses in which investors are indeed rational. If that is so, then all investment classes should have some pros and some cons. If there were one investment class that was always and everywhere better than all others, interest in the alternatives would dry up and those asset classes would disappear. That hasn't happened. So there must be some way in which investing in stocks possesses real risk, not just that paper-tiger sort of risk that can be avoided by taking a vow to hold onto stocks "for the long run."

What sort of form should we expect to see this risk assume? Obviously, it reveals itself in the form of lower long-term returns. Stocks offer the potential of amazingly great returns. We all saw how true that is in the late 90s, when there were three years in succession in which stocks provided returns of about 30 percent or so (at least that is my recollection, I don't the exact numbers). Such an asset class must also possess the potential for sharp drops in prices, no?

The SWR is determined by looking at the worst possible scenario, the biggest possible price drop (presuming that stocks perform in the future as they have in the past). Should we not expect to see an asset class with the potential for large gains (and, thus, also large losses) to have an SWR on the low side relative to the SWRs that apply for alternate asset classes? It seems so to me.

I have the sense that many people view the findings of this board as "anti-stock." I don't see things that way at all. I think stocks are wonderful. My Life Project is to help middle-class workers win financial freedom early in life, and my personal viewpoint is that stocks are the best investment class for doing so. I have nothing whatsoever against people who make the case for real estate or other options. I love to hear the cases for alternative investment classes put forward. Still, my personal favorite is stocks.

The question being posed in SWR analysis is not "Are stocks a good investment or not?" The question being posed is "What is the worst that can happen if you invest in stocks?" Stocks are a great investment class, but they are also a risky asset class. They are a risky class for the same reason they are a great class--they offer the potential of outsized returns and you only gain access to outsized returns by taking on volatility and volatility is a form of risk.

It is just not reasonable to excpect stocks always to have an SWR of 4 percent and still be able to provide the handsome growth potential that is characteristic of stocks. People who say that the SWR for stocks is always 4 percent are trying to create a square circle. You can have an asset class that is safe but that provides less-than-thrilling growth potential (TIPS anyone?). Or you can have an asset class that provides thrilling growth potential but that at times of high valuation ranks not so well in an SWR analysis. It is not reasonable to expect to find a single asset class that both provides fantastic great potential and also possesses an always high SWR. Things just don't work out that way in the real world. As FoolMeOnce might observe, people who expect things to work that way are really only fooling themselves.

There is no such thing as a square circle. There is no such thing as hot coldness. There is no such thing as dry wetness. And there is no such thing as a high-growth investment class that also provides high SWRs even at times of extreme overvaluation.

Our findings have proven to be controversial. If people were not caught up in the feverish pro-stock sentiment characteristic of the tippy tops of white-hot bull markets, our findings would be matter-of-fact stuff. OF COURSE the SWR for stocks is not 4 percent when you get to the sorts of valuation levels we reached in the late 1990s. How could any reasonable person realistically think otherwise?
JWR1945
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Post by JWR1945 »

hocus2004 wrote:"Our research is centered around retirement investing.... We have taken a few steps outside of the distribution stage and into the accumulation stage."

Are you OK with taking additional steps in the direction of examining accumulation stage issues? Or are you saying that you would you prefer to keep the focus on distribution stage issues?
Sure, it is OK to include issues from the accumulation stage.

I would like there to be a connection to retirement, but it can be loose.

For me, the biggest issue is coming up with good topics to investigate.

Have fun,

John R.
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