Gyroscopic Investing

Combining this thread with the one about all PP assets trending down, I think maybe we should put the idea of the PP offering a SWR of 4-5% on hold for a while to see what happens. In the other thread, the point is raised that the PP has never encountered the kind of economic conditions we are seeing now with interest rates at zero percent for such a long time (for that matter, have they ever been zero percent before?)

If you are a long way off from retirement then it is mainly an academic question that you can sit back and ponder but if you're like me and getting very close to the moment of truth I don't feel as confident with the PP going forward as I would like to be. I'll feel more confident if I can get to where I only need around a 2.5% SWR to tell the boss goodbye. Expected to be there next year but if there is no return this year, maybe not.

Tyler wrote: Mathjak makes a good point that not all SWRs are necessarily equal.  In essence, that's one aspect of my entire point.

The SWR from the Bengen study cannot be compared directly to the Trinity study because they used different bond indices and also different methodologies.  Likewise, mine cannot be compared directly to either because it does not look back as far.  I expect SWRs over longer timeframes to eventually hit a new low point, and the numbers can only go down from what is shown.  Use each tool in isolation to study a portfolio, and be careful not to draw too many conclusions by overlapping results. 

On the other hand, The Trinity and Bengen studies really do not apply to the vast majority of people that quote them because they do not personally invest in the specific indices studied.  Unless you do, I would not recommend drawing any significant conclusions from them at all!

it took us a few months but we finally see eye to eye about this stuff .

the only thing i will add is that while in conventional investing we all do not hold what the portfolio's were  in  academic study after study your allocations are 80% of your returns . so that being the case just following the standard equity bond mixes will likely have you  well in the ball park of the results .

so far the worst modern day group is the y2k retiree. so far they are on par with the 1929  retiree . they still may get a passing grade but they will have one of the lowest balances left .


the 2008 retiree is not even a blip on the radar and is right in their with any other group and where they stood 7 years in .

Actually we can compute a swr based on history.

We are able to do that in real time because by studying the failures we know every failure happened when the 15 year real return average was less than 2%  .

Mathamatically you need to have more than that to sustain that 4% .

It is like  5+5=10  7+3  8+2 all =10.

It doe not matter what numbers got us to 10

All we need to know is when we get to 10 we have to cut spending to mathamatically have something happen

sophie wrote: One thing that always bothered me about a safe withdrawal rate expressed as a fixed percentage, is that it assumes your spending is going to increase or decrease along with portfolio value.  In practice, there is a "floor" of spending that won't decrease (property taxes, rent, mortgage, home repairs, food, utilities, medications etc).  Conversely, spending doesn't necessarily increase when the portfolio value goes up.

We had a thread a while back where portfolio sustainability was calculated by determining nominal portfolio value after an annual cash withdrawal that started at a fixed amount (3%, 4%, or 5% of the portfolio) and then increased according to inflation.  While that's still somewhat idealized, it's far more useful a representation I think.  Perhaps injecting random large expenses on top of a basic living "stipend" would be yet more realistic.  Like, the house needs a new roof or a new heating system, you decide to take an expensive vacation for your 50th wedding anniversary, a major medical expense comes up, etc.

Of course I'm suggesting this for the Tylers and Pet Hogs of the world, whose contributions have been amazing and incredibly appreciated.  I'm afraid I don't have time to monkey with spreadsheets for fun anymore.

I prefer a "greedy SWR" model for most people:  Start at 4% baseline income and increase the baseline by CPI every year.  Every year, withdraw the greater of the baseline income and 4% of the current portfolio value.  Basically, most people who see a giant portfolio balance are likely to get a little over-exuberant, and withdraw a bit more.  On the other hand, they will be resistant to lowering their baseline expenses (for example, by selling their house or making other major life changes).

Pointedstick wrote: I also think Sophie's point about expenses being unpredictable is a very salient one. My own expenses have been either flat or declining over the past couple of years as I have learned to do more and more myself rather than paying other people to do them for me at the wildly inflated prices that are necessary to sustain oneself in many fields. Plumbers here charge north of $100 an hour for labor alone!

It might be useful to have options for determining spending, or even adding of subtracting from inflation to account for people who don't trust CPI. If it could be shown that a given portfolio would survive even if CPI were only half of the supposed real value, for example, that would be a very powerful piece of information to have.

Good ideas. Inflation is a lot more variable than most people think, and I also appreciate Sophie's point about unpredictable expenses.  I'll ponder on that.

Desert wrote:

mathjak107 wrote: Actually we can compute a swr based on history.

We are able to do that in real time because by studying the failures we know every failure happened when the 15 year real return average was less than 2%  .

Mathamatically you need to have more than that to sustain that 4% .

It is like  5+5=10  7+3  8+2 all =10.

It doe not matter what numbers got us to 10

All we need to know is when we get to 10 we have to cut spending to mathamatically have something happen

That's correct, you can calculate a withdrawal rate that would have worked in the past.  Unfortunately, to know what will work in the future, you have to know the future. 

I'm not sure what you meant by the numbers equaling 10.  -2 x -5 equals 10 also ... I'm not trying to be snarky, I just don't see what point you're trying to make with the arithmetic exercises at the end of your post.

what i mean by the numbers example is mathematically we do know what works .


the past teaches us what the mathematical  numbers are that do not work.  it does not matter how the numbers are arrived at .  all we need to know is whatever model we are using and whatever the events , if the combo equals less than a 2% real return and it is close to the 15 year mark 4% will not hold .



studying the past itself may not mean much but what it does do is let us extract a number that no matter how it is arrived at will pretty much stay true


trying to draw 4% inflation adjusted with less than a 2% real return average the first 15 years will not mathematically support it .

but with out the past data we would never have known what that common denominator  was  so my example means no matter the events or combinations that lead to that real return if it equals less than 2% that is your red flag .

One good thing about examining portfolio stability between the mid 1970s and present time is that all major economic climates are represented in the data:  inflation/stagflation (1970s), prosperity in pretty much every other decade, deflation, and recession.  However, I think the stock-heavy portfolios look good because prosperity is overrepresented, compared to what I think is going to be the case going forward.

Several reasons for this.  One is our continued high rate of importation of an economic underclass that will under-contribute (i.e. not paying taxes, keeping wage rates low) and over-consume (i.e. require more than their share of welfare/government services).  That's not so troubling if it is a time-limited condition, which was the case with the immigration wave in the early 20th century.  Instead, they are creating their own self-perpetuating, independent subculture.  Another reason is that the underclass has a far higher birth rate than the middle and upper classes - so they will one day be in the majority.

As my dad used to say...too many people in the wagon, and not enough pulling it.  That's not a recipe for prosperity in the long run.  Maybe I'm wrong about this but I can't see how it can turn out any other way.

while yes , while it represented an assortment of climates  the climates it represented the issue still remains that they  were not representative of the real worst times .

hypothetically if we were actually able to measure the pp during those times while that 60/40 mix may have passed muster at 4% inflation adjusted and had lots of money let over the pp may have been restricted over those poor time frames to maybe 3% safe withdrawals  with very little money left over or maybe 5% safe withdrawals on the flip side of what if . .

that is why we can't compare the amounts or use the same terminology  as a safe withdrawal rate , we just do not know what the pp would have done under the same benchmarks .

if we go by a 25% equity allocation using the traditional benchmark worst case time frames  that allocation  would have failed 20% of all the time frames at 4% and 69% of the time at  5%

we also know that using longer term more volatile corporate bonds in the mix in the trinity study resulted in more failures than bill bengans 5 year bonds . so not sure how really long term bonds would have done .  you would possibly be locked in to lower rates for a very long time in a rising rate environment .

with gold tracking the cpi and not much more we can't say what effect gold would have on the results .  my feeling is buying the gold at the expense of buying equity's would not have resulted in better performance since equity's far and away had much higher returns over most of history .

we can't predict the future of course but my guess is the pp would likely have measured more like a 25% equity portfolio being limited to about 3% as an swr  not 4%  over those benchmark time frames  and certainly not 5% under the same benchmarks .

if i was going to use the  pp in retirement and i really wanted to have the same conservative level of a swr that a 4% swr gives a conventional  allocation of 60/40 or 50/50  i would start the pp based on a 3% draw rate .

if  after the first  3 years in retirement  the portfolio was 2x what i started with i would take another 10% raise on top of inflation adjusting ,  3 years later if i was still at a level of 2x what i started with  i would take another 10% raise.

better to start with lower expectations and go up then plan a life around a budget that may have to be cut .

mathjak107 wrote: while yes , while it represented an assortment of climates  the climates it represented the issue still remains that they  were not representative of the real worst times .

Neither were the original studies. There have been "real worst times" in other places that were worse than the Great Depression. Since the Trinity study didn't have a way to include those in the model, should we also throw away the results of that study?

mathjak107 wrote: that is why we can't compare the amounts or use the same terminology  as a safe withdrawal rate , we just do not know what the pp would have done under the same benchmarks .

Yes we can. It's totally valid to compare the SWR of a 60/40 to the SWR of the PP using Tyler's data. I understand that you object to using the term "Safe Withdrawal Rate" when applied to any data set that isn't from the original studies, but I think you're in the minority there.

the trinity included all ibbotson data from 1925 to 1995 . with the actual worst of times being 1965/1966 in this country  in the study .

tyler agrees , you cannot benchmark the pp against a true swr as defined by the 4% "rule" the data does not exist . nor does tyler's chart account for anything  balance left over . the actual 4% swr has more than you started with over 90% of all those time frames left over .

you may have a 4% draw rate that held up over other selected time frames  but , no , they were not as bad as 1966/1965 to date .

if we eliminated the worst time frames  the pp can't measure against the actual safe withdrawal rate would be 6.50% with more than 90% of the time more than you started with left over  .

mathjak107 wrote: if we go by a 25% equity allocation using the traditional benchmark worst case time frames  that allocation  would have failed 20% of all the time frames at 4% and 69% of the time at  5%

we also know that using longer term more volatile corporate bonds in the mix in the trinity study resulted in more failures than bill bengans 5 year bonds . so not sure how really long term bonds would have done .  you would possibly be locked in to lower rates for a very long time in a rising rate environment .

with gold tracking the cpi and not much more we can't say what effect gold would have on the results .  my feeling is buying the gold at the expense of buying equity's would not have resulted in better performance since equity's far and away had much higher returns over most of history .

we can't predict the future of course but my guess is the pp would likely have measured more like a 25% equity portfolio being limited to about 3% as an swr  not 4%  over those benchmark time frames  and certainly not 5% under the same benchmarks .

I thought you already agreed that it's pointless to talk about how the PP would have done during the time periods you're talking about here. 

What we do know is that since gold has been available as a freely traded investment, the long term return of the PP has been fairly close to that of even a 100% stock portfolio (within the margin of error, depending on your start and end dates) and that its volatility and max drawdowns have been significantly less.

How can this be if (as you keep insisting) the amount of stocks in your portfolio is the primary driver of long term returns?

What you seem to be missing is that gold does not simply match CPI, but is a volatile investment (as volatile or even more volatile than stocks).  And that long term bonds are also volatile.  And that mixing these three highly volatile assets together creates a very stable portfolio.  BTW - you're never "locked in to lower rates for a very long time in a rising rate environment".  You sell long term bonds after holding them for 10 years and rebalance as well, so in a rising rate environment you'd be rebalancing into long term bonds meaning you're benefiting from rising rates as they rise.

The theory that the assets act together to shield you from the wild swings in value that a mostly stock portfolio endures has not been invalidated in the past 40+ years.  In 2008 (on an annual basis) a 60/40 stock/bond portfolio dropped about 25% while a vanilla PP (using t-bills as cash) dropped less than 2%.  Rather than require a 33% increase to get back to even the PP only needed a 2.04% increase.  Note that this particular case was covered by Browne's theoretical framework (long term bonds will strongly react in a deflationary environment) but he had never seen an example.  This is at least as out of sample as the years you seem to be focused on in which the PP could not have existed.

mathjak107 wrote: if i was going to use the  pp in retirement and i really wanted to have the same conservative level of a swr that a 4% swr gives a conventional  allocation of 60/40 or 50/50  i would start the pp based on a 3% draw rate .

if  after the first  3 years in retirement  the portfolio was 2x what i started with i would take another 10% raise on top of inflation adjusting ,  3 years later if i was still at a level of 2x what i started with  i would take another 10% raise.

better to start with lower expectations and go up then plan a life around a budget that may have to be cut .

If after 3 years the portfolio was 2x what you started with?  To double in 3 years requires a return of 26% per year.  That clearly isn't going to happen with any portfolio, so what do you really mean?

ooops you are correct , i screwed it up .

what i meant to say is anytime your balance is up 50% above the starting amount ,  not double , that was a mistake , you can take the 10% raise but do not take it more than once every 3 years.

so once you take it even if we have great years the next 2 and you are still above 50% more  than you started with while spending down hold off taking it until at least 3 years have passed to avoid ratcheting up to fast ..

as far as the pp comparison . the big difference is not returns but sequence risk .    the pp could have identical returns to the 60/40 mix over any time frame . but what it will not have is the same sequence risk and the difference sequence risk makes is a difference of 15 years in how long the money will last even with the same average return.

moishe milevsky in his paper sequence risk and retirement ruin  pointed this out .

because the pp is so radically different comparing average returns when spending down means nothing .  so there is no way to make sure the pp would have passed muster here in the usa in  the 1965/1966 30 year time frames .


you guys are looking only at average returns which only mean something when not spending down .



the biggest factor is the order of the gains and losses when spending down and not the returns which play a tiny roll.

as an example the years from 1987 to 2003 had an amazing run for stocks .

17 years at just under a 14% average return cagr .  but if each year we held back the percentage of  inflation with our balance  to grow it  and spent everything else  a 100k portfolio would have an ending balance 17 years later  depending on the order of the gains and losses  we go from minus  187.606.00 dollars to a plus of 76,269.00 j with the exact same average return.


the same average return left a balance that was that wide just by changing the orders around .

interesting right ?

FYI -- The calculators I provide account for sequence of returns. They do not rely on averages.

I also do account for ending balance, but in a different way.  I provide a Sustainable WR rather than mess with percentages that obscure the worst times that the original Bengen study was written to document in the first place. 

As with any study, one should fully understand the assumptions and limitations of the data.  I have no problem with someone pointing out the different timeframes, although I disagree that just because one does not look at the exact same timeframe as other studies that the information is not valuable.  The entire point of my article is that too many people do not actually understand retirement study assumptions and thus completely misapply the conclusions.  The SWR calculated from my data may not exactly match one calculated in the Trinity study, but there's a good chance the Trinity study doesn't even apply to your portfolio anyway! 

i would assume you follow the same format of the trinity which would allow for sequence risk.

but my point is more  about the fact that as we spoke about yesterday not only do we  not know what the pp returns would likely have been during the 1965/1966 benchmark time frame but more important we do not know what the sequence out comes would have been .

folks attempt to guess at average returns but when  sequence risk is involved they can't without actually knowing , which we can't because of the gold issue .

so you really can't go look the pp got a  5% withdrawal rate vs the 60/40 which is based on 4% since the benchmark time frames and minimum requirements to get that figure are very different .

That's fine.

One should not assume that a SWR calculated since 1972 would still hold up in all timeframes before that.  Just as one should not assume that a SWR calculated since 1926 would still hold up in all timeframes before that.  One should also not assume that either can accurately predict the future.

And one should not assume that a SWR calculated for a bucket of stocks and bonds not representative of the portfolio they actually hold applies to them no matter how far back the study goes. 

as usual good chatting .  going off to the gym for a while . c-ya later .

Pointedstick wrote: It's a glorious tool. There are all kinds of amazing options out there, like this:

(image here)

5-6% sustainable withdrawal rate!

My favorite PP-like option so far is a simple 5x20 portfolio that adds small cap value stocks as the 5th asset class.  Compared to the PP, the real CAGR is a full 1% higher with the same volatility and an even smaller(!) max single-year drawdown (-9% vs. -12%).  As a result, the long-term withdrawal rates are also about 1% higher.  A 5%+ Sustainable WR is pretty impressive, and the ride is remarkably smooth.

[img width=300]http://s13.postimg.org/lwvqxyzdz/5x20.jpg[/img]

It isn't a perfect analogy, but my hypothesis is that adding SCV to complement the TSM fund (dominated by large caps) sorta extends the barbell concept to stocks.  That helps boost returns without necessarily increasing volatility.  Not bad.  It has me considering shifting the cash in my tax-deferred accounts to SCV to start a small VP. 

with the exception of 2014 the last 6 years had midcaps and small caps beat the s&p 500 by 5 to 6% .  you wouldn't notice it with a total market fund much as the s&p dominates it to the point that you saw less than a 1% difference between an s&p 500 fund  and the a total market fund .


but seasoning with an extended market fund could let you capture more of that action . but the flip side is it can hurt more when things go down .  don't be fooled by the ytd .  they were up more than an s&p 500 fund and fell more  but they had such a big cushion it looks like they barely fell at down 1.40% for vxf

Nice!

I was thinking of buying a small cap fund for my next taxable stock purchase, instead of simply adding to the total stock market index fund.  The idea was to add a bit of volatility to stocks while minimizing yield in taxable.  Small cap value is a great idea and yield still comes in under the total market index.

Tyler, can you add your "Tyler 5x20 PP" to the selections of portfolios in your great website?

Thanks!

PS: Are we supposed to be able to click on Calculator and get anything to happen?  Nothing happens when I do...

Thanks for your great charts and work!

PP67 wrote: Tyler, can you add your "Tyler 5x20 PP" to the selections of portfolios in your great website?

Thanks!

PS: Are we supposed to be able to click on Calculator and get anything to happen?  Nothing happens when I do...

Thanks for your great charts and work!

Good idea.  I'll add it to the list.  But it definitely needs a better name. 

Yes, each calculator page has an embedded excel spreadsheet.  They may take a few seconds to load, and you may occasionally have to refresh.  If nothing shows up at all, you might see if an ad blocker is filtering it out.  If that doesn't work, please PM me with what device/browser you're using so that I can look into any compatability issues.  Thanks!

Food for thought - I use the paul merriman index fund mix (which he calls the ultimate buy and hold portfolio) for my 25% stock portion of the HBPP.  It includes large cap, large cap value, small cap, small cap value and emerging markets, and is roughly 50% US and 50% International.  Here is a link:  http://paulmerriman.com/the-ultimate-bu ... tegy-2014/ and http://paulmerriman.com/vanguard/.  I use the stock only mix.

If one were to buy some SCV, what would be a good fund or etf?