Three posts for my doctor.

Research on Safe Withdrawal Rates

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JWR1945
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Three posts for my doctor.

Post by JWR1945 »

I saw my doctor yesterday. He has become a big fan of the write-ups that I bring from this board. I brought him the following three posts.

Many Different Objectives dated Sunday, Aug 22, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2904

Our Strong Theoretical Foundations Friday, Aug 27, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2919

This post from the High Dividend Strategies thread of Saturday, Sep 25, 2004. The post is dated Sunday, Sep 26, 2004.
http://nofeeboards.com/boards/viewtopic ... 888#p23888

This list of posts should be helpful for people with limited time.

Have fun.

John R.
hocus2004
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Post by hocus2004 »

"I saw my doctor yesterday. He has become a big fan of the write-ups that I bring from this board."

I am interested in hearing stories of people who have been exposed to the insights set forth at this board who at first feel a reluctance to accept them and who in time come to see their merits. Did you doctor express surprise when he first became aware that long-term timing is possible? If so, can you say what particular argument it was that brought him around? Does he now feel comfortable with all of our most important findings or are there some that he still is uneasy about? Does he have any thoughts as to how these ideas might be presented to make the case to other investors in the most effective way possible?

Reporters have a tendency to ask lots of questions, JWR1945. My wife complains about this all the time. Please feel free to just respond to any one of the questions above or to offer any reflection that is not in direct response to these questions but which relates in some way to the issue of how best to get these ideas across to people who have an interest in learning how to invest successfully but who do not have the time or inclination to engage in extensive examination of the historical data themselves.
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Post by JWR1945 »

hocus2004 wrote:Did you doctor express surprise when he first became aware that long-term timing is possible? If so, can you say what particular argument it was that brought him around?
No. He just followed the rationale. Most of our information is new to him. His primary source of information has been his stock broker.

My guess is that he has heard wide ranging claims that timing is impossible but that he does not believe them. I don't think that he has looked into the matter. His background is sophisticated enough for him to reject broad claims of absolute certainty on just about everything.
Does he now feel comfortable with all of our most important findings or are there some that he still is uneasy about?
He is enthusiastic about our findings. He told me that my write ups are much better than what he gets from his stock broker.

His first reaction was to try to get me to work with (or for) his stock broker. I said NO.
Does he have any thoughts as to how these ideas might be presented to make the case to other investors in the most effective way possible?
This has not come up. From his initial reaction: possibly by getting them included into or along with his stock broker's mailings.

I expressed my concern about the length of my latest write ups. It didn't bother him at all. I asked him if he would like me to deliver an occasional article between visits. [I suggested three month intervals.] He said yes.

[Doctors are very busy. I had limited my first article to a single page. He now knows what to expect. Adding a few extra pages is now OK.]

Have fun.

John R.
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Post by JWR1945 »

I have located only two posts that explicitly address market timing in light of what we do. Other posts have indirect remarks such as "in times like these.."

This was the first thing that I gave my doctor. It turns out to be two pages, not one.
Retirement Investment Summary dated Thu Sep 25, 2003.
http://nofeeboards.com/boards/viewtopic.php?t=1451
9. Isn't that market timing? Doesn't market timing always fail? Yes, technically it is market timing. But it is strictly founded on fundamental value. In this very narrowly defined sense, Benjamin Graham, Warren Buffett and Sir John Templeton have all engaged in market timing. Prices do matter. When you base your decisions on the long-term record of earnings and purchase for the long-term, you are not engaged in the kind of activity that fails. Technically, however, this is a form of market timing. The sensible form.
Here are additional remarks specifically related to market timing. This was among the posts that I gave to my doctor during my most recent visit.

Many Different Objectives dated Sunday, Aug 22, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2904
Much of what people think that they know about investing is false. Demonstrably so. Some of this can be attributed directly to advocacy. Key qualifiers are left unmentioned. Over-generalization is commonplace.

Different people have different needs.

The most commonly used, misleading assertion is that nobody can beat the market. Along with this is the observation that the average investor receives the average return of the market (before taking fees and expenses into account). That might be true if everybody shared the same goals subject to the same constraints. It is not true, because the phrase beat the market has been left undefined. The market consists of lots of groups with lots of different objectives. Each can do better than the overall market in terms of its own objectives, provided only that its objectives are realistic.
..
Perhaps the most complicated situation has to do with market timing. The time frame is usually left unmentioned. Great generality is claimed although the time frame is almost always restricted to one or two years. The effects of transaction costs are ignored or left unstated. It has been demonstrated that short-term market timing can beat a buy-and-hold strategy when fees are low enough. Earlier academic studies had assumed much higher transaction costs. The seemingly high potential advantage of short-term timing shrinks dramatically when models are restricted to using information available before the fact. Unstated, but important, is that a successful short-term timing model necessarily influences prices simply because its application results in large purchases and sales of securities. This limits its advantage further still.
Have fun.

John R.
hocus2004
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Post by hocus2004 »

The reason why I focused on long-term timing in my question is that I see our findings re long-term timing to be the most fundamental. It is differences in views on whether long-term timing is possible or not that cause people to line up in support of the conventional SWR methodology or the data-based SWR methodology.

We accept that long-term timing is possible because the historical data shows this to be so. If people were capable of complete objectivity, even those who are skeptical of our timing claims would acknowledge that the REHP study gets the SWR number wrong. The SWR is a mathematical construct and the data just does not support the 4 percent number at today's valuation levels (for a 74 percent S&P allocation). Even if timing is impossible, the SWR is whatever the data says it is and people should be willing to acknowledge at least that much.

Many are not. They skip ahead to the question of "If I acknowledge that the REHP study is wrong, what am I going to do with my portfolio?" There are people who are worried that, if timing does not work, there are no good investment options out there, given the valuation level that applies for the stock indexes today. They prefer ignoring the reality that the REHP study got the number wrong to accepting that reality and having to deal with the follow-up reality that, unless timing is possible, it is going to be hard for them to come up with workable Retire Early investment strategies.

I see a bit of a common theme among people who have come to accept that intercst got the number wrong. These are generally people who are not dependent on high short-term returns from stocks to make their plans work. I am not dependent on stocks because I am still earning an income from work. You are not dependent because you have enough coming in from your pension to cover most of your essential spending needs. FMO also is relying largely on a government pension to finance his plan, and he also has lots of experience with real estate investing. Raddr has the numbers skills necessary to do his own studies, so he has studied the idea of investing in non-S&P indexes to a point at which he is comfortable with that strategy. Wanderer is relying to a large extent on the reduced costs of living associated with living outside the United States.

The people who I see as being threatened by the discovery that intercst got the number wrong are people who relied heavily on unrealistic returns expectations for stocks in putting their plans together. My sense is that the source of their fear is that they do not see any promising options available to people in their circumstances in the event that they acknowledge that the intercst recommendations are not likely to play out well in the real world. You can see this in a few of the comments on the REHP thread that I linked in the "FMO Gets Hocusmania!" thread. There was one comment to the effect of: "If not stocks, then what?" There was another in which the poster argued that he has shown that he has the ability to stick with stocks through hard times because he did not sell out when prices dropped in the year 2000.

If these posters had confidence that long-term timing works, they would not have such an emotional problem in making the shift from support of the conventional methodology to support of the data-based approach. The problem is that the phrase "Timing Does Not Work" has been repeated so many times over the course of the past two decades that it has been drilled into people's consciousnesses. People don't even stop to consider anymore whether the studies backing up that claim examined short-term timing or long-term timing. ALL timing strategies have become suspect, even those which the data shows can provide a huge edge to middle-class investors who employ them.

Ultimately, I think that our most important finding is not going to be the findings we have come to re SWRs. I think that our most important finding is going to be the finding that long-term timing works. That's no small thing. Once an investor accepts that he can engage in long-term timing profitably, there are all sorts of strategies that open up to him that were closed to him before. Once you see that long-term timing is possible, you no longer worry that you will "miss out" on something or other by lowering your stock allocation for a time,. All that you miss out on is the low SWRs that apply to stocks at times of extremely high valuations. And you no longer worry that there are no good alternatives to stocks. The alternative to buying a small number of shares of stock when they are being sold at high prices is to buy a large number of shares when they are being sold at moderate or low prices.

The message of the data-based SWR tool is not to get out of stocks. It is to open yourself to strategies that permit you to buy more stocks, to gain more profits from this wonderful growth-oriented investment class. The tool is not anti-stock, it is pro-stock. But it is pro-stock in a realistic way. It is not a get-rich-quick approach, as the conventional methodology with its assumption that valuations never make any difference can fairly be accused of being. It is a get-rich-slow approach, one in which those investors who have the patience to purchase stocks at times at which it is reasonable to expect to actually be able to hold them for the long-term obtain the financial rewards of being sufficiently informed of the historical data to know how to go about doing so. The added profits that go to investors following the data-based approach are profits that result from the extra effort it takes to dig into the data a bit and determine what it is actually saying rather than falling for the line put forward by analysts who take a surface look and turn whatever impressions first jump into their minds into now-and-for-always dogmas.
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Post by JWR1945 »

hocus2004 wrote:The people who I see as being threatened by the discovery that intercst got the number wrong are people who relied heavily on unrealistic returns expectations for stocks in putting their plans together. My sense is that the source of their fear is that they do not see any promising options available to people in their circumstances in the event that they acknowledge that the intercst recommendations are not likely to play out well in the real world.
This is ironic. People behave improperly because they are afraid of what abandoning a flawed study implies. They think that they have no alternatives. But they do. We have found several good alternatives precisely because we faced reality and looked into Data Based Safe Withdrawal Rates.

We have identified three attractive alternatives.
1) An all-TIPS portfolio, which has a much higher payout than most people imagine. Even at a 2% interest rate, TIPS have a Safe Withdrawal Rate of 4.46% for 30 years. This is a higher Safe Withdrawal Rate than the 4% claimed (incorrectly) for portfolios with large stock holdings.
2) Switching allocations between stocks and TIPS depending upon valuations (as measured by P/E10). This is attractive because, even if it never gets you into stocks, the all-TIPS backup portfolio (when stock prices are excessively high) still has a good Safe Withdrawal Rate and it offers absolute safety.
3) Dividend-based strategies, which turn out to be much more attractive than casual observers imagine. They can be superior to a basic S&P500 stock index/TIPS combination. In most instances, they continue to provide income well beyond 30 or 40 years. Typically, they continue to provide income into the indefinite future. Dividend-based strategies are superior at times such as these with today's sky high valuations.

Have fun.

John R.
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Post by JWR1945 »

If these posters had confidence that long-term timing works, they would not have such an emotional problem in making the shift from support of the conventional methodology to support of the data-based approach. The problem is that the phrase "Timing Does Not Work" has been repeated so many times over the course of the past two decades that it has been drilled into people's consciousnesses. People don't even stop to consider anymore whether the studies backing up that claim examined short-term timing or long-term timing. ALL timing strategies have become suspect, even those which the data shows can provide a huge edge to middle-class investors who employ them.
This is why I have not presented a review of A Random Walk Down Wall Street, 2003 edition (the seventh update) by Burton G. Malkiel.

So much has our knowledge advanced since the original 1973 version that Malkiel has edited most of his original assertions out of the book. No longer do we read that Timing Doesn't Work. Instead, we read that investors are not likely to overcome trading costs. And, of course, we read nothing about the details.

He has one chapter (number 11) about Potshots at the Efficient-Market Theory and Why They Miss. It is pathetic. I am sure that it was very strong when first written. It is weak today. Malkiel was unable to refute the arguments of David Dreman and others. Instead, he presents alternative explanations for the evidence presented against the Efficient-Market Theory that someone might be able to support through future research. That is, he puts up alternative explanations that might be true, but he presents no evidence and no proofs.

Have fun.

John R.
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Post by hocus2004 »

"So much has our knowledge advanced since the original 1973 version that Malkiel has edited most of his original assertions out of the book."

If you have time for this someday, I'd be grateful if you would post a few of the statements that he made in the 1973 version and refrained from including in later versions. There's a section in my book on investing (I now have only an outline prepared) where I will be discussing how some of the best-informed experts began to back away from the "Stocks for the Long-Term" Paradigm. It might be that I could use some of the changes in the language in the "Random Walk" book as illustrations of the phenomenon.
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Post by JWR1945 »

hocus2004 wrote:If you have time for this someday, I'd be grateful if you would post a few of the statements that he made in the 1973 version and refrained from including in later versions.
I do not have the 1973 version of the book. My observation is based upon the disjointed nature of many of his comments.

He frequently makes a detailed argument only to add a couple of remarks at the very end that completely undermine what he has said. If those added remarks had been in the original, they would have been blended in with the main text.

Book revisions in the past have been limited to changes on only a few pages because of the difficulty in setting up the press. [Obviously, with today's computers, this is limitation will disappear.] This process can lead to the kind of disjointed presentation that I see in the latest edition.

In this case there have been seven updates (for a total of eight editions).

Have fun.

John R.
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Post by hocus2004 »

OK. I think you might want to present your views on the book at some point. I read "Random Walk" a long, long time ago, more than 25 years ago I believe. It's a good book, no matter what. It has obviously had a huge influence. I think an argument can be made, though, that the message of that book needed to be heard in 1973 more than it needs to be heard today.

I don't believe that the original message is entirely in error. I view the undermining of the belief in timing that that book was responsible for as a forward step in middle-class workers' understanding of how stocks work. I think that this important message has been exagerrated in recent decades. I think that people need to pull back and reevaluate the message, gain a better appreciation of what aspects of the message are true for sure, what aspects may or may not be true, and what aspects are almost certainly not true.

Learning means moving the ball forward. It doesn't mean leaving the stadium and searching for a new field to play in. I see the work we are doing at this board as being an extension of valuable work that has been done at earlier times by all sorts of good people--people like Bogle and Bernstein and Shiller and Malkiel and all sorts of others. These people are due our respect for their contributions. But I don't think that any of them would want us to accept any of their claims uncritically. So I think we need to remain open to questioning even the masters when we come across historical data that compels us to do so.
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Post by JWR1945 »

Learning means moving the ball forward..But I don't think that any of them would want us to accept any of their claims uncritically. So I think we need to remain open to questioning even the masters when we come across historical data that compels us to do so.
I think that many writers want people to their accept claims regardless of the data.

David Dreman's discussion of his battles with academia is an example of how strongly economists held on to their assumptions in spite of all evidence to the contrary.

The biggest scandal, from my perspective, is how economists claimed that no stock picking strategy works. Their claim was based on their failure to show statistical significance. But the reason was that their tests were blind, not because of a lack of success. For the existence of a winning strategy to meet even the lowest of their statistical thresholds (95% in this case) required sustained outperformance of more than 5% per year! Evidence of an advantage of 2%+ for 14 years was not good enough.

In statistical jargon, just because you do not show statistical significance does not mean that the data are random. You have to consider the power of a test (and the type 2 error), which addresses missed detections as well as the likelihood of false alarms (the type 1 error), which is automatically addressed when you make a statistical test.

Benoit Mandelbrot has similar comments related to economic theories. He points out that many scientific theories of the past have fallen away in the light of real world measurements. There is no reason for economists to cling adamantly to discredited theoretical structures, but they do. (He was referring to the Efficient Market Hypothesis at the time.)

Have fun.

John R.
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Post by Mike »

Benoit Mandelbrot
I just borrowed a copy of his latest book at the library, The Misbehavior of Markets. He makes an interesting case for markets being far more dangerous than most experts realize, which makes timing more important.
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Post by JWR1945 »

Mike wrote:I just borrowed a copy of his [Benoit Mandelbrot's] latest book at the library, The Misbehavior of Markets.
Pay special attention to Financial Heresy number 2, Markets are Very, Very Risky--More Risky than Standard Theories Imagine on pages 230-233.

Many people think that insurance companies have an easy time. From the charts on page 232, they would be right if the standard statistical assumptions about markets were right. Insurance companies would be hugely profitable. The real world is different. Five or six thousand year floods (and other such nonsense) can happen inside of a single decade. In fact, such radical behavior is typical, not unusual.

In terms of the cotton market, Benoit Mandelbrot says on page 233:
According to the standard model of finance, in which prices vary according to the bell curve, the odds of ruin are about..one chance in ten billion billion. With odds like that, you are more likely to get vaporized by a meteorite landing on your house..But if prices vary wildly, as I showed in the cotton market, the odds of ruin soar. They are of the order of one in ten or one in thirty. Considering the disastrous fortunes of many cotton farmers, which estimate of ruin seems most reasonable?
Have fun.

John R.
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Post by Mike »

I see what you mean. Benoit is a good teacher. He explains things in a way that I can understand.
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Post by hocus2004 »

I think of this thread as our "How Do We Go About Explaining Our Findings to the Big Bad Outside World?" thread. The most important point that we need to make, in my view, is that we are NOT anti-stock. We are pro-stock. It is the DCMs who are anti-stock.

Why? The DCM view is that long-term stock prices are entirely unpredictable. If that were so, stock investing would be an act of gambing. It is the fact that long-term stock prices are correlated with the profits generated by the underlying business enterprises that makes informed stock purchasing an act of investment instead of pure speculation. We develop realistic strategies for winning financial freedom early in life. We believe that Get Rich Quick schemes in the long term do harm to investor's efforts to become financially free. We point out the flaws inherent in Get Rich Quick schemes like the investing approach described in the REHP study.

I posted the words below this morning in response to a comment by SalaryGuru that I saw at the board associated with the RetireEarlyHomePage.com web site. On reviewing some old threads at this board, it occured to me that I should post these words at this thread too because they deal with the distinction between investing (facilitated by the Data-Based SWR Tool) and gambling with your life savings (facilitatated by the REHP study and other conventional SWR methodology studies). The quoted words at the top are from SalaryGuru.

"This is the problem all of the "regression to the mean" doom and gloom prophesiers face. "

I disagree with the idea that a belief in regression to the mean is indicative of "gloom and doom." Stocks are my favorite asset class, and it is largely because of regression to the mean that I like stocks so much. If there were not regression to the mean, stocks would be gambling chips and long-term returns would be entirely unpredictable. I would not feel comfortable putting my savings in an asset class that might return zero over the long term.

The reality is that stocks are not gambling chips, but shares of businesses. People can gamble with stocks, and that can push prices to absurdly high or low levels. In the long term, however prices revert to levels that reflect the value of the underlying business enterprise. So long as businesses make profits, the return on stocks will not be zero. The return will reflect the gains of the underlying business profits, plus or minus whatever regression to the mean is needed to pull prices back to reasonable levels from any gambling-induced move in one direction or the other.
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Post by JWR1945 »

"This is the problem all of the "regression to the mean" doom and gloom prophesiers face. "
This is the wrong way to look at the world.

It does not matter whether a particular outlook is associated with problems. The real issue is whether it reflects reality. If an outlook reflects reality, it does not matter whether one likes what it reveals. The problems are there anyway. They don't go away by ignoring them. In fact, they get worse.

Have fun.

John R.
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Post by hocus2004 »

"The real issue is whether it reflects reality."

You may recall that I once put up a thread with the title "Reality Matters." It's incredible that I should have to put forward an argument on this point. But it is indeed a claim that is being implicitly denied by the DCMs. The DCMs are acting on the principle that "if we do not permit people to inform others of the realities on discussion boards, then those realities cease to exist." I think it is safe to say that this is not a position that is going to prevail in the long term.

It's particularly incredible that it was SalaryGuru putting forward the claim that there is some question as to whether there will be a reversion to the mean. There was a long thread at the Early Retirement Forum titled something like "SWR of 6.2 Percent for 27 Years?" on which SalaryGuru argued that Reversion to the Mean DOES exist. The reason he was taking the other view there is that he was defending the Reset Method advocated in the REHP study. REHP study enthusiasts believe that it is safe to go with withdrawal rates HIGHER than 4 percent when there have been recent price declines. The argument is that those who retired prior to the price declines are now taking withdrawals of greater than 4 percent as a result of the price declines and their retirements are "100 percent safe," so it should be safe for new retirees to take withdrawals of greater than 4 percent too. It 's a logical follow-up to the insane premise at the root of the study's methodology.

So the view of the REHP study enthusiasts is that it is safe to assume that reversion to the mean does NOT exist when consideration of its effects would generate a SWR of less than 4 percent, but that it is also safe to assume that reversion to the mean DOES exist when consideratiion of its effects generates a SWR of greater than 4 percent. The REHP study ain't science. It's science fiction.

The signs are that this is going to end badly. When it does, the field will be cleared and those of us remaining will pick up the pieces and begin rebuilding.
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Post by unclemick »

Well - lets hope it doesn't get as screwy as the 1970's - I knew guys with gun, coin collections as their retirement nest egg as well as raw land in the boonies, art??, and a few speculated in commodities - before Hilary and ?cattle?.

I have a 10% interest in a patented non working gold mine left from those days.
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