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How will you use a "new/improved" swr analysis
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Which comes closest to your outlook regarding the planned inflation adjusted "best" swr.
I will bank on it
0%
 0%  [ 0 ]
undecided, some of both, don't like the other responses
15%
 15%  [ 2 ]
I will consider it as one factor among many
84%
 84%  [ 11 ]
Total Votes : 13

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ataloss
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PostPosted: Mon Jun 02, 2003 12:26 pm    Post subject: How will you use a "new/improved" swr analysis Reply with quote

In post 6650, Hocus has much confidence that an unequivocal convincing result can come from swr analysis:
Quote:
We can each of us offer our subjective views as to the "best" take-out percentage and the "best" allocation percentage from now until the end
of time, and never really get anywhere. When you are speaking
subjectively, 4 percent is a good number and 1 percent is a good number
and 11 percent is a good number, and they are all good numbers. Who is
to say which of the various possibilities is really "best"?

What I like about SWR analysis is that it gets you out of that
quicksand. The SWR is a number generated by data You don't have a right
to an opinion different from mine on what the data says. It says what it
says, and that's that.


OTOH, I am thinking that this ultimate swr analysis would just be another "rule of thumb" that I would consider. Along with historical swr, the chips "preservation of maneuvering room" approach, fixed withdrawal rate, multi bucket approach, and Gummy's canasta/trip to China method. Along with these potential approaches I am planning to consider demographics and life expectancy with anticipation of changing the withdrawal method and rate depending on circumstances,

Which comes closest to your outlook regarding the planned inflation adjusted "best" swr.



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JWR1945
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PostPosted: Mon Jun 02, 2003 1:28 pm    Post subject: Reply with quote

I am hoping that my "official" definition will resolve this issue. I ended up demanding that Safe Withdrawal Rates be the results of mathematical calculations and that any such SWR calculation has a unique right answer. I just demand that you include a full explanation of its context. You act after considering several such numbers in light of your own situation and your own understanding of what those numbers mean to you.

hocus's concern is that people want to start at the end of this process and force-fit a single answer for all. If you start with a single number and work backwards, you can always find some special circumstance that justifies the number. If you do it that way, you really don't need a mathematical calculation. You are just figuring out where to introduce your fudge factor.

When done right, a Safe Withdrawal Rate calculation provides objective information that you understand. It has no hidden fudge factors. (It can include honest mistakes. That is a different matter. Such mistakes get corrected when they are identified.)

Have fun.

John R.


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FMO
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PostPosted: Mon Jun 02, 2003 2:42 pm    Post subject: Reply with quote

Quote:
In post 6650, Hocus has much confidence that an unequivocal convincing result can come from swr analysis:


IMO there will never be an unequivocal result. There are too many variables. There are only opinions backed variously by calculations, simulations, models, intuition and individual personal biases and limitations. I would bet that 50 years from now, no two experts will agree upon an unequivocal figure.



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raddr
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PostPosted: Mon Jun 02, 2003 3:49 pm    Post subject: Reply with quote

FMO wrote:


IMO there will never be an unequivocal result. There are too many variables. There are only opinions backed variously by calculations, simulations, models, intuition and individual personal biases and limitations. I would bet that 50 years from now, no two experts will agree upon an unequivocal figure.


I agree. I would only feel comfortable giving some sort of range for a specific allocation such as 3-4% or whatever. I believe that some portfolios will sustain much different SWR's than others, maybe even as much as 2% per year difference. We just need to know which asset allocations to follow. Wink


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hocus
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PostPosted: Mon Jun 02, 2003 5:04 pm    Post subject: Reply with quote

Which comes closest to your outlook regarding the planned inflation adjusted "best" swr.

Why adjust for inflation, Ataloss? And why adjust for volatility? Ignore those factors and you can report a SWR of about 10 percent. Isn't that a lot better than 4 percent?

The problem with a 10 percent withdrawal rate is that the data does not support it. Thus, it cannot validly be termed "safe." It's the same with any number developed without taking into consideration the valuation level at the time the retirement begins. Since this factor always affects the results you obtain from your investments, you cannot tell whether your investment plan is "safe" without taking it into account.

You can use any technique you like to determine your withdrawal rate. But only a technique that takes all the data that bears on the question into account can reveal to you a withdrawal rate that is "safe."


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[KenM]
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PostPosted: Mon Jun 02, 2003 7:53 pm    Post subject: Reply with quote

I voted "don't like the other responses".

I would have voted yes to :-
"I can't predict the future of the market so will adjust the swr at the appropriate time to suit future prevailing conditions " or some such similarly long-winded response.



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PostPosted: Tue Jun 03, 2003 12:53 am    Post subject: Reply with quote

I would have voted yes to :-
"I can't predict the future of the market so will adjust the swr at the appropriate time to suit future prevailing conditions " or some such similarly long-winded response.

KenM:

I would like to point out a practical problem with the approach you suggest above.

If stock prices go into a serious decline, you are going to feel tempted to sell. That's what everyone else you know will be doing. It may be a bad idea to sell when prices are down. By doing that, you may be locking in losses that could have been overcome by sticking with the plan you formulated on the day of retirement. The problem is--to stick with stocks when prices are going down fast, you need to have some idea of what the chances are that prices will go back up again in time to save your retirement from going bust.

That is what a validly done SWR provides you. Use historical data to determine your withdrawal rate, and so long as the future is like the past, it will work. You can never have absolute confidence that the future will be like the past; you have to buy into that premise for the rest of this to work. But if you buy in, you can have confidence that stock prices will recover in time to save your retirement. That can give you the fortitude needed to keep your head when others are losing theirs.

Perform the analysis in an invalid way, and you lose this benefit. Base your plan on a withdrawal rate developed through use of the conventional methodology, and you have no way of assessing whether stock prices will likely recover in time to save your retirement or not. That number ignores critical data that in the past has always affected the result. So you have no reasonable grounds on which to have confidence in it.

There are some circumstances in which a validly done SWR study generates a number lower than the one generated by the conventional methodology. Some people see that as a downside of performing the calculations in an analytically valid way. There is a payoff in the long term, however. The payoff is that you can have confidence that the number produced by a valid analysis will work (presuming, as always, that the future is like the past).


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ataloss
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PostPosted: Tue Jun 03, 2003 1:46 am    Post subject: Reply with quote

Why adjust for inflation, Ataloss?

I think the attraction is obvious but it isn't obvious (to me anyway) that inflexibly raising the annual withdrawal amount to match inflation is the best way to go. Some investors may be living so close to the poverty line that they have no discretionary spending and no discretion. The rest of us should be able to alter spending somewhat from year to year reducing portfolio damage in down years. Also there are ways to reduce exposure to inflation (eg homeownership.) Are we looking for a practical approach to retirement withdrawals or are we fixated on competing with some other approach that has defined withdrawals in a specific way?


And why adjust for volatility? Ignore those factors and you can report a SWR of about 10 percent. Isn't that a lot better than 4 percent?

The rule of thumb is 4%. 10% worked only in 34% of cases in the Trinity study for 30 years (btw the best allocation for the 10% rate was 100% stocks.) If you develop a "tool" that suggests I can withdraw 10%/year I will reject it based on the Trinity Study even if you have valuation evidence to suggest that we are in one of the periods of time where it would have worked. I am not sure why we can't have more than one method of analysis.


Your response to KenM sounds like a defense of the Trinity study and its derivatives:
Quote:
That is what a validly done SWR provides you. Use historical data to determine your withdrawal rate, and so long as the future is like the past, it will work. You can never have absolute confidence that the future will be like the past; you have to buy into that premise for the rest of this to work. But if you buy in, you can have confidence that stock prices will recover in time to save your retirement.


I must admit I am a little uncomfortable using historical data and the historically safe 4% with current market conditions even though my portfolio is tilted toward investment in less overvalued secotrs/ asset classes.



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hocus
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PostPosted: Tue Jun 03, 2003 2:44 am    Post subject: Reply with quote

The rest of us should be able to alter spending somewhat from year to year, reducing portfolio damage in down years.

What I am picking up from your recent posts is that you want flexibility in application of the number generated by a SWR analysis. I have no problem whatsoever with allowing complete flexibility in application.

My concern is not with the application stage of the process. My concern is with the calculation stage. At the calculation stage, you need to employ a proper methodology or the integrity of the analytical process is compromised. There is nothing wrong with saying "I want to be less conservative (or more so) than what the data requires." There is something wrong in stating incorrectly what withdrawal rate the data indicates is "safe."

Are we looking for a practical approach to retirement withdrawals or are we fixated on competing with some other approach that has defined withdrawals in a specific way?

I am favoring the use of a methodology that enhances the practical use of the tool. Methodologies that ignore factors that always have an effect on the question being examined diminish the value of the tool. I cannot think of any circumstance in which this is not so. A methodology that always generates more accurate results is always better than a methodology that always produces less accurate results.

The rule of thumb is 4%.

Why do you say this? On what do you base this claim? If you are basing it on something you learned from a study prepared using a methodology since determined to be invalid, then you need to update the statement. The "rule of thumb" as determined by a valid SWR analysis is no longer 4 percent. It was 4 percent at one time, but we now know that the old number is wrong. The "rule of thumb" needs to be brought up to date to reflect our current understanding of what goes into the calculation of an SWR.

10% worked only in 34% of cases in the Trinity study for 30 years

So it was not "safe," right?

Well, raddr did an analysis showing that a 4 percent withdrawal for a retirement beginning in the year 2000 has only a 50 percent chance of working. It is no more "safe" to ignore changes in valuation levels than it is to ignore inflation and volatility. You cannot determine a "safe" rate unless you are willing to look at all data that bears on the question of what is "safe."

If you develop a "tool" that suggests I can withdraw 10%/year, I will reject it based on the Trinity Study even if you have valuation evidence to suggest that we are in one of the periods of time where it would have worked. I am not sure why we can't have more than one method of analysis.

We can have as many methods of analysis as anyone wants to have. I am saying that we should not refer to the results of those methods of analysis not based on data as "safe." It is the use of a data-based methodology that justifies referring to the numbers produced as "safe" numbers.

There is no law that says that you must use a "safe" number in your retirement plan. Some people are open to more risk than others. "Safe" has long been defined for purposes of SWR analysis as being a number that would work in the event that the future is like the past. We now know that the number produced by the conventional methodology will in many circumstances not work if the future is like the past. Thus, we should stop referring to that number as a "safe" number. The data does not support the claim.

Your response to KenM sounds like a defense of the Trinity study and its derivatives:

I support the goals of the Trinity study, to be sure. The goal of that study was to determine the "safe" withdrawal rate by making reference to the data that bears on this question. That's precisely what I propose doing. Since we now are aware that the methodology used in the Trinity study does not take into account all of the factors that determine what is "safe," we need to revise the methodology. We should not alter the purpose of the analytical tool, in my view.

I must admit I am a little uncomfortable using historical data and the historically safe 4% with current market conditions even though my portfolio is tilted toward investment in less overvalued sectors/ asset classes.

My sense is that you still believe on some level of consciousness that the historical data indicates that a 4 percent withdrawal is always safe. This is the point that I am disputing. I am saying that the historical data reveals that a 4 percent withdrawal is not safe in some circumstances. That is why I say that we should not encourage people to put out studies saying that the data says that it is safe. To say that the data supports a particular number when the reality is that the data does not support that particular number is a dangerous practice.

I have no objection to anyone using or urging any withdrawal rate whatsoever so long as they do not claim that it is supported by a valid analysis of data. It is the claim that the 4 percent number is supported by data that concerns me. If is not supported by an analytically valid examination of the data for retirements beginning in the year 2000.


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PostPosted: Tue Jun 03, 2003 3:30 am    Post subject: Reply with quote

hocus
Quote:
The rest of us should be able to alter spending somewhat from year to year, reducing portfolio damage in down years.

What I am picking up from your recent posts is that you want flexibility in application of the number generated by a SWR analysis. I have no problem whatsoever with allowing complete flexibility in application.

This last post by hocus is exceptionally well done. It is worth reading and studying carefully. This quote is just the beginning of several important insights.

Have fun.

John R.


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[KenM]
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PostPosted: Tue Jun 03, 2003 3:48 am    Post subject: Reply with quote

Use historical data to determine your withdrawal rate, and so long as the future is like the past, it will work. You can never have absolute confidence that the future will be like the past; you have to buy into that premise for the rest of this to work. But if you buy in, you can have confidence that stock prices will recover in time to save your retirement.

hocus
I think you misunderstand me - I wouldn't sell stocks - but I would allow for varying the withdrawal rate to suit current market conditions - good years take out more - bad years take out less.

...but I could never buy in to any study or any analysis with complete certainty for the next 30 years . To me, and to be blunt, that's an absurd proposition unless the SWR was very, very conservative and it amazes me that anyone would consider that. But the point I was trying to make in the vote (and probably I'm getting as pedantic as everyone else Very Happy) is that I wouldn't "bank on" a best SWR but also I wouldn't consider it "as one factor among many". All other factors come first such as income objectives, strategy, current valuations, etc, etc and then, and only then, comes the resulting SWR.



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PostPosted: Tue Jun 03, 2003 5:07 am    Post subject: Reply with quote

I could never buy into any study or any analysis with complete certainty for the next 30 years . To me, and to be blunt, that's an absurd proposition unless the SWR was very, very conservative

It is very, very conservative. "Safe" is defined in SWR analysis as the take-out number that works in the worst-case scenario. I don't see how you could come up with a definition any more consersavtive than that.

The only factor that introduces an element of uncertainty is the ever-present caveat, the possibility that the future may be worse than the past. SWR analysis does not provide you any cover re that possibility. But I am not sure it matters all so much. Remember, we have had a lot of bad things take place in the 130-year period that produced the data being examined--world wars, depressions, stagflation. We have to have something worse than all that stuff take place for a validly done analysis to fail.

I'm not even sure that there is anything you can do to cover yourself in the event that something worse than all that stuff happens. Taking a lower withdrawal rate is not going to make much difference if there is a nuclear war. Why factor in possibilities that you can't do anything about anyway?

My inclination is to ignore the 5 percent possibility (I believe that is Bernstein's estimate of the odds that the caveat will apply) of the future being worse than the past and form my strategies based on what a valid SWR tells me. If you do not agree, there's no reason why you shouldn't subtract a bit from the SWR number to arrive at a personal take-out number even "safer" than the valid SWR. number. You can always tailor the application of a validly calculated number to satisfy your own personal inclinations.

The point that I am stressing is that you need access to a calculation performed in an analytically valid way to even know what sort of customization is required to achieve the level of safety you seek. You need to first determine what the data says, and then customize the number. The time for incorporating subjectivity into the process is at the application stage, not the calculation stage.

Say that you were buying a tramboline for your kid, and you wanted to be absoluely sure that the thing was built to handle a weight of up to 100 pounds. Say that the manufacturer's statement is that the model you are thinking of buying will hold up to 100 pounds. In theory, that should work. But if you really want to play it safe, you might pay a few extra dollars for a model which the manufactuer says can handle up to 120 pounds. You are customizing a safety assessment to satisfy your own stringent safety desires.

Now, what happens if you learn that the assessment done by the manufacturer.is flawed? You read in Consumer Reports that the model described as working for body weights up to 100 pounds really only works for body weights up to 50 pounds, and that the model you bought only works for body weights up to 60 pounds.

Are you satisfied with your purchase? Is your reaction "Oh, I never thought that these safety estimates were perfect in the first place, that's why I went with the 120 pound model instead of the 100 pound model. So I really see no reason to be concerned that the 120 pound model only works for body weights up to 60 pounds. This stuff is really all just rules of thumb anyway."

I say that's an inappropriate reaction. You have learned that the safety assessment you were using to decide on which model to buy was wrong. Had you known that all the safety assessments were calculated in such a way as to indicate they would work on body weights of double what they really work on, you would have bought a model that was said to work for body weights up to 200 pounds (that would cover you for a 100 pound body weight, which is the safety level you wanted to be certain you had purchased) or even 240 pounds (if you were determined to buy a model with some safety slack built in).

The manufacturer did you no favor by providing you with an invalid safety assessment.. You would have been better off if the manufactuer has provided you with valid information. You still might have customized the safety assessment process by buying a more expensive model that the manufactuer said was necessary, just to be sure that the model you purchased was "safer than safe." But you can't even count on achieving safety by purchasing a "safer than safe" model if you do not have confidence that the safety assessment methodology being employed to calculate the numbers you are basing your adjustments on is a valid one.

There is no problem with customization of safety assessments. But the entire process breaks down if the calculations preceding the customization effort are done in an analytically invalid way. Introducing unnecessary subjectivity at that stage serves no constructive purpose whatsoever.


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ataloss
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PostPosted: Tue Jun 03, 2003 7:31 am    Post subject: Reply with quote

Ataloss
Quote:
The rest of us should be able to alter spending somewhat from year to year, reducing portfolio damage in down years.


Hocus
Quote:
What I am picking up from your recent posts is that you want flexibility in application of the number generated by a SWR analysis. I have no problem whatsoever with allowing complete flexibility in application.


Since we haven't seen the swr "tool" that will give objective numbers I am thinking that flexibility will be needed. More importantly, some approach other than fixed inflation adjusted annual withdrawals may be better in terms of a higher withdrawal rate at the cost of some volatility. I think that this is actually a potentially fruitful are to explore.


Ataloss
Quote:
The rule of thumb is 4%.


Quote:
Why do you say this? On what do you base this claim? If you are basing it on something you learned from a study prepared using a methodology since determined to be invalid, then you need to update the statement
.

Please explain how the Trinity study is invalid.

I know that you feel that the future will be worse than the past in terms of stock returns withdrawal rates and you may be correct. Still I don't think anything was invalid.

hocus
Quote:
You cannot determine a "safe" rate unless you are willing to look at all data that bears on the question of what is "safe."


I agree with this so I would not take a 10% withdrawal rate even during a time when raddr's simulations indicated that it was safe. I would base this on the historical analysis/ rule of thumb. I think we need multiple lines of evidence.



Hocus
Quote:
. Since we now are aware that the methodology used in the Trinity study does not take into account all of the factors that determine what is "safe," we need to revise the methodology.


Please list all the factors

KenM
Quote:
I could never buy into any study or any analysis with complete certainty for the next 30 years . To me, and to be blunt, that's an absurd proposition unless the SWR was very, very conservative


Hocus
Quote:
It is very, very conservative. "Safe" is defined in SWR analysis as the take-out number that works in the worst-case scenario. I don't see how you could come up with a definition any more consersavtive than that.


Is this a past or future worse case scenario. If past, it is covered in the Trinity study. If future please explain how this does not involve predicting the future.

Hocus
Quote:
The only factor that introduces an element of uncertainty is the ever-present caveat, the possibility that the future may be worse than the past. SWR analysis does not provide you any cover re that possibility. But I am not sure it matters all so much. Remember, we have had a lot of bad things take place in the 130-year period that produced the data being examined--world wars, depressions, stagflation. We have to have something worse than all that stuff take place for a validly done analysis to fail.


This reminds me of what defenders of the historical method say. I am not sure how this does not apply equally to that situation.


Hocus
Quote:
My inclination is to ignore the 5 percent possibility (I believe that is Bernstein's estimate of the odds that the caveat will apply) of the future being worse than the past and form my strategies based on what a valid SWR tells me.



Almost certainly Bernstein was referring to Monte Carlo generated results. Looking at the extremes is problematic. We don't know what the future holds and can't project a swr with a 5% chance of failure. We can find a swr with a 5% chance of failure based on Monte Carlo simulation. This is an entirely different matterand has nothing to do with excluding nuclear wars from consideration.



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PostPosted: Tue Jun 03, 2003 7:59 am    Post subject: Reply with quote

KenM
Quote:
KenM Quote:
I could never buy into any study or any analysis with complete certainty for the next 30 years . To me, and to be blunt, that's an absurd proposition unless the SWR was very, very conservative

I submit this statement as proof positive of my assertion that KenM is light years ahead of many. IMHO, he is light years ahead of most.

hocus is burdened by the ghosts of the recent past. This specific proposition has been offered repeatedly (elsewhere) as being absolutely certain...absent the most extreme of unlikely circumstances.

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PostPosted: Tue Jun 03, 2003 8:14 am    Post subject: Reply with quote

ataloss
Quote:
Almost certainly Bernstein was referring to Monte Carlo generated results. Looking at the extremes is problematic. We don't know what the future holds and can't project a swr with a 5% chance of failure. We can find a swr with a 5% chance of failure based on Monte Carlo simulation. This is an entirely different matter and it has nothing to do with excluding nuclear wars from consideration.

ataloss is burdened by the ghosts of the recent past that exist elsewhere. I quote from page 236 of William Bernstein's The Four Pillars of Investing.
Quote:
But at the end of the day, you also have to realize that it is impossible to completely eliminate risk. I'm amused when financial planners and academics talk about methods that predict a 40-year success rate of, say, 95%. If you think about it, this implies that our political and financial institutions will remain intact...(40 years divided by failure rate of 5% equals 800 years).

William Bernstein's observation is profound. He is not talking about any specific method of calculation. He is translating some numbers into meaningful terms.

Have fun.

John R.


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PostPosted: Tue Jun 03, 2003 10:54 am    Post subject: Reply with quote

Please explain how the Trinity study is invalid.

The Trinity study methodology does not take into account how the SWR changes with changes in valuation levels.

I know that you feel that the future will be worse than the past in terms of stock returns withdrawal rates and you may be correct.

What I know is that valuation levels were high in the year 2000. It is the high valuation levels that applied in that year that brought the SWR for retirements beginning in that year so low. I do not believe that the future will be worse than the past. I also do not think it is prudent to assume that it will be better. I think the reasonable thing to do is to presume that the future will be more or less like the past. Using that assumption, the SWR for retirements beginning in the year 2000 is 2 percent, or something close to it.

I would not take a 10% withdrawal rate even during a time when raddr's simulations indicated that it was safe. I would base this on the historical analysis/ rule of thumb. I think we need multiple lines of evidence.

It's up to you what sort of withdrawal you take. It's none of my business. But just because you prefer a particular "line of evidence" does not mean that the number suggested by that line of evidence is safe. My view is that a number generated by a data-backed analysis is "safe" in a way that a number generated by an analysis that ignores key data is not. It is only by looking at data that you can determine what is safe.

Is this a past or future worse case scenario. If past, it is covered in the Trinity study.

This is where you are going off the track, ataloss. Changes in valuation levels have always affected SWRs in the past. The Trinity methodology assumes that they never will again in the future. This is an unreasonable assumption.

This reminds me of what defenders of the historical method say

Defenders of the historical method are right about many things. I endorse the things that they say that are correct. They made an honest mistake in not realizing that changes in valuation levels affect SWRs. I recommend that they revise their methodology to take account of our new understanding of the realities of SWRs.

We don't know what the future holds and can't project a swr with a 5% chance of failure.

The idea that there is a 5 percent chance that the future will be worse than the past is just a guess on Bernstein's part. Nobody knows for sure. Still, I think it is better to say that a valid SWR analysis has a 95 percent chance of working because there is a 5 percent chance that the future will not be like the past than to say that it has a 100 percent chance of working, as some do. Even a valid SWR analysis cannot give 100 percent assurances since there is always some chance that the ever-present caveat will apply, and the future will turn out different than the past.


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PostPosted: Tue Jun 03, 2003 11:13 am    Post subject: Reply with quote

Quote:
This is where you are going off the track, ataloss. Changes in valuation levels have always affected SWRs in the past. The Trinity methodology assumes that they never will again in the future. This is an unreasonable assumption.


This makes no sense. Changes in valuation are implicit in the study. The swr is not based on the average case/valuation it is based on the worst case/valuation.


Quote:
My view is that a number generated by a data-backed analysis is "safe" in a way that a number generated by an analysis that ignores key data is not. It is only by looking at data that you can determine what is safe.


Hocus I don't really think you understand Monte Carlo analysis.

The idea that there is a 5 percent chance that the future will be worse than the past is just a guess on Bernstein's part. Nobody knows for sure. Still, I think it is better to say that a valid SWR analysis has a 95 percent chance of working because there is a 5 percent chance that the future will not be like the past than to say that it has a 100 percent chance of working, as some do.


I am not sure who makes these 100% safe statements. I guess when you say that a swr is 95% safe I thought this would imply something other than a guess that it was "pretty safe." I would be interested in seeing exactly what Bernstein said.



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PostPosted: Tue Jun 03, 2003 12:00 pm    Post subject: Reply with quote

KenM: I could never buy into any study or any analysis with complete certainty for the next 30 years

JWR1945: hocus is burdened by the ghosts of the recent past. This specific proposition has been offered repeatedly (elsewhere) as being absolutely certain...absent the most extreme of unlikely circumstances.

You are a little off with this comment, in my view, JWR1945. I will try to work down the logic chain a bit.

When I say that Bernstein puts the odds of a future worse than the past at 5 percent, I am going by what some people quoted him as saying on the other board. I have not looked at the quote myself and it is possible that the interpretations of it that I read were inappropriate. I am not at all dogmatic in the view that the chance of the future being worse than the past is 5 percent. It could be 10 percent or 15 percent or 20 percent or whatever. But I don't see that it matters all that much for practical purposes.

Let's say that the chances of the future being worse than the past is 20 percent rather than 5 percent. I still don't see that there is anything that I can do about it. What sort of event would be worse than any that has occured in the past 130 years? Nuclear war? What am I going to do about it if I think that there is going to be a nuclear war, increase my allocation to TIPS? How is that going to help me?

The point we are discussing here is one in which I am more or less in agreement with intercst. He states things in a more dogmatic fashion than I would, but I think that his basic approach on this particular point is generally sound. He acknowledges that the future may be worse than the past, but he argues for making your investment decisions based on the premise that it will not be. I am to a large extent sympathetic to that argument.

I think that what is confusing people is that people are thinking that stock returns that are lower than we have seen in the past constitute a case of the future being worse than the past. This is a mistaken interpretation of the caveat, in my view. If the caveat referred to lower stock returns, SWR claims would be a tautology. The claim would be: "The future will be like the past unless the future is not like the past." That is such a silly claim that it rules out interpreting the caveat in that way, in my view.

The more reasonable way to interpret the caveat is the way in which intercst always interpreted it prior to May 13, 2002. The caveat refers to terrible events outside of the sorts of things considered in the SWR analysis. The caveat does not refer to the possibility that returns will be worse than the past for normal sorts of reasons. That possibility is what the analysis is aiming to examine. It refers to the possibility that returns will be worse for entirely different sorts of reasons, catastrophic developments that never took place in the 130 years, like nuclear war or political instability.

The reason why the possibility of these sorts of events is covered in a caveat is that there is no way to assess the possibility of them occuring by making reference to data. They must be covered by a caveat because the SWR analytical process has no means by which to address them. They are outside the reach of the analytical process being set up.

You have two sorts of things with a potential to affect your returns. Investment-type things that can be measured and that should be incorporated into the SWR analysis. And non-investment type things that cannot be measured and which are not incorporated into the SWR analysis. As a general rule, there is nothing that can be done about things in the latter category anyway, so, even if you think that the odds of them turning up are greater than 5 percent, it does not necessarily influence your allocation choice to think that.

Things get sticky when you consider investment type things that cannot be incorporated into the SWR analysis.

Consider the demographics issue that has been raised from time to time as an example of something other than nuclear war that could make the future worse than the past. If you can show that demographics changes have affected stock returns in the past, and if you can gather reasonably good data on how they are likely to affect stock returns in the future, such data should be included in your SWR analysis. That's the best way to address this concern.

Let's say that you cannot gather reasonable data on this point, so you leave it out of your analysis. That's unfortunate, but it does not necessarily change your decisions re your take-out number or re your allocation percentage. If you do not have enough data to include the factor in the analysis,. you probably will not be able to say whether this factor is going to cause you to want to go with a lower stock allocation or not. If the factor does not affect your investment decisions, it does not have any practical significance re the purpose of SWR analysis--crafting a FIRE plan.

Pre-May 13, 2002, intercst defined the caveat to cover "things that cannot be calculated and which thus cannot be incorporated into the study" (those are my words to describe his position, not his own). I think that is a generally sensible way to go with the caveat. If you can measure it, include it. If you cannot, leave it out. But if you leave it out because you cannot measure it, don't worry too much about it because there probably is not a good way to use the factor in making investment decisions anyway.

Where it gets subjective is when you can measure the effect of the factor to some extent, but not to a satisfactory extent. What if you were sure that the demographics issue would cause some drop in long-term returns but not able to make much more than an educated guess as to how much? In that event, I think that the thing to do is to say that studies incorporating the factor are valid and studies not incorporating the factor are valid, but both types of studies should take note of how the factor is treated in the write-up section of the study. There is just not enough certainty on the point to permit dogmatism.

That does not mean, however, that there is not enough certainty on other points to justify some dogmatism on them. On the question of valuation levels, I am being dogmatic on the point that an adjustment of some sort must be included. I don't think it is clear which sort of adjustment is best, so I am not being dogmatic on the how-to-do-it question.

The goal should be to produce the most objective measure of the SWR possible. In essence, the analytical technique is not a rule of thumb. It aims at scientific accuracy. It fails to achieve this goal only because we do not possess access to perfect knowledge of what affects the result and we do not possess perfect data on the factors that we know do so. But methodology questions should still be addressed in such a way as to reflect the purpose of the tool, which is to provide an objective assessment of risk.

Bernstein is right to be skeptical of claims of 100 percent certainty or 95 percent certainty made in regard to existing studies. But that is largely because existing studies leave out several factors that bear on the result. If you included data on as many factors as possible, you would have a much more valid tool. Perhaps it would not provide 95 percent certainty. I don't know what the correct odds are that the future will be worse than the past. But if a study includes all the factors known to affect the result and for which data is available, doesn't it include pretty much all the factors that you could take into consideration in determining your take-out number and your allocation percentage anyway?

What I am looking for is an analytical tool that takes all the data that should go into deciding these two issues and makes use of them in an analytically valid way to transform a decision-making process that has long been a subjective one into a largely objective one. The thing that I like about SWR analysis is that it is largely not guesswork. Some guesswork is unavoidable because of the imperfection of the data available to us. But the whole idea is to limit the guessing part of the equation to the greatest extent possible.

We cannot make the tool a perfectly objective assessment of risk factors because we do not possess access to all the data needed to do so. But why not make it as objective as it can be, based on what we know today about the realities of SWRs and on what data is available to us to do so?


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BenSolar
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PostPosted: Tue Jun 03, 2003 12:21 pm    Post subject: Reply with quote

hocus wrote:
I think that what is confusing people is that people are thinking that stock returns that are lower than we have seen in the past constitute a case of the future being worse than the past.


Well, it does fit within the common usage of English. I think your insistance that this common sense interpretation is wrong causes much confusion. ConfusedI think that when you define a phrase such that the common English usage of those words is no longer correct, well, I think you've made a decision that can only muddy the waters.

Better to find another way of making your point which doesn't change the definitions of commonly understood words.

I feel quite strongly on this point. This issue caused endless tail chasing at the other place.

Ben



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hocus
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PostPosted: Tue Jun 03, 2003 12:27 pm    Post subject: Reply with quote

Changes in valuation are implicit in the study.

This is the source of our disagreement, ataloss. I am saying that changes in valuation levels are not factored into the analysis when it is done using the conventional methodology.

The reality is that the SWR changes each time the price level of the DOW changes. When the DOW goes up, the SWR for someone retiring at that moment goes down. When the DOW goes down, the SWR for someone retiring at that moment goes up. The conventional methodology indicates that the SWR is stable in the face of changes in valuation levels. I am saying that this is a fundamental flaw in the conventional methodology.

Hocus I don't really think you understand Monte Carlo analysis.

I am no statistics expert, if that is what you mean.

I am not sure who makes these 100% safe statements. I guess when you say that a swr is 95% safe I thought this would imply something other than a guess that it was "pretty safe." I would be interested in seeing exactly what Bernstein said.

There are three different percentage-of-safety assessments being thrown about in the discussion:

1) There is the percentage assessment that a particular take-out number is safe, according to whatever methodology is being used. This is where you often hear "100 percent safe" claims;

2) There is the chance that the caveat will apply and the future will be worse than the past. This is where you sometimes hear the 100 percent claim reduced to 95 percent (or some other number).; and

3) There is the level of confidence that people have in the analytical tool itself. Some are saying that they don't trust the SWR analytical process enough to assign 95 percent or 100 percent safety assessments any real significance, that it is all just rules of thumb anyway.

My view is that the conventional methodology is so flawed that no one should give the results it produces much credence. It fails to take account of several critical factors.

However, I also believe that, validly done, the tool could provide a good measure of safety. I don't know if the true level would be 95 percent safety or something a good bit less than that. But I am not too sure that I really care. Possibilities that I cannot evaluate well enough to include in a valid study methodology are probably not going to influence my investment decisions much anyway.

I am looking for a study that incorporates as many factors bearing on the question being posed as it is possible to incorporate in a reasonable manner. A methodology that does that is the most useful tool for helping me decide on a take-out number and an allocation percentage that it is possible to construct given the limitations of the data available to us, in my view.

I am saying that we should craft the best analytical tool that we possibly can. If we do that, we have a tool of many times the power of the tool we possess today. It's pointless and non-constructive to demand even more than that, in my view. When we see that the tool is flawed in ways that can be fixed, we should fix it. When we see that it is flawed in ways that cannot be fixed, we should make a mental note of it, but we should not let a concern over imperfection blind us to the benefits that a validly constructed tool can provide.


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