as a FIRE investor with an SWR you are speculating that it WILL recover.
If my previous posts about intrinsic value haven't covered this then there isn't anything new I can say.
i see your points on intrinsic value. i agree that during the accumulation phase market price doesn't matter so you're not speculating.
(sorry, i keep saying "you." i don't mean you personally.) my caveat is that once you are no longer in the accumulation phase, if you have a 4% SWR (by historic and current market metrics) then any year there's a bear market, or a crash, a flat year, or even only modest returns, you'll have to lose principal (sell mutual fund shares) to maintain your SWR. if there's a long-term bear market and you keep rebalancing into stocks, you accelerate your principal loss because your withdrawal rate stays the same. you are taking the risk that a bull market, not even a gradual recovery, won't occur before you lose too much principal.
Some of your thoughts seem contradictory. In the same post you said I am speculating because I need markets to recover after a crash and then you agreed that a portfolio could survive a 1929 style crash where prices took decades to recover and then you even said, "recovery to exactly market peak levels doesn't need to occur."
you're right -- i should have said "strong bull market" not "recovery." rebalancing into stocks following the crash, and then the '32-'37 bull market, would have helped investors through that crash. i don't see a contradiction in the semantics there. i'm saying a bull market is not guaranteed to happen shortly after a crash, but it did in that case.
On the topic of speculation, technically making any guess or assumption about the future is speculation. Assuming the world won't end tomorrow is speculation. I believe that is how you are using the definition.
nope, i'm talking about that accepted investment-world definition of "speculation."
using the quoted definition of "speculation," let's step through how a 4% SWR index investor with a stock-heavy asset allocation fits that description:
(again, you personally are accumulating, and not even planning for a 4% SWR, do don't be offended by the below)
"... In finance, speculation is also the practice of engaging in risky financial transactions ..."
having the majority of your portfolio in stock index funds, where you can't live off the dividends (4% SWR), where you gradually own fewer and fewer fund shares, is taking the risk that there won't be a long period of bear/crash/flat/modest markets without a subsequent bull market. it's a calculated risk with 100+ years of history to look at. no sensible investor would argue stocks aren't a "risk." look at Japan, for example, or the history of US stock market crashes.
"... in an attempt to profit from short term fluctuations in the market value of a tradable financial instrument ..."
rebalancing is considered a sound strategy to take advantage of "short-term fluctuations." sell winners and buy losers. if we all agreed that losers tend to stay losers for a few years, then annual (or more often) rebalancing wouldn't be recommended.
rebalancers are literally attempting to "profit from short-term fluctuations."
"... rather than attempting to profit from the underlying financial attributes embodied in the instrument such as capital gains, dividends, or interest."
again, 4% SWR index investors get dividends and market price returns. they can't even survive, let alone "profit from," dividends: the 4% SWR was arrived at INCLUDING earnings/dividends/buybacks/etc AND market price. if you don't get the market price returns you are expecting, your SWR has to be below 4%. many people on this forum, including yourself, are shooting for a less than 4% SWR because you are not expecting the market price returns.
BTW, yes you could sustain a SWR of 4% on dividends and/or bond income, especially in any period where the yield was greater than 4%. I assume that is self explanatory.
i fully agree that if you get great returns, your SWR is fine.... i think we're on the same page there. but again the 4% rule was arrived at by the trinity study by including both dividends and market price.
In addition, a 4% SWR doesn't require 4% returns. It requires returns sufficient to keep the portfolio positive over the given time horizon. The Trinity study was only looking at 30 years, and you would only need 1.219% real returns to achieve a 4% SWR over 30 years.
agreed. yet there is nonzero risk that you will run out of principal too soon, or you wouldn't be able to afford a large medical bill, or whatever, which is why you're not even targeting a 4% SWR.
a FI non-speculator, who remains in the accumulation phase perhaps with part-time work or a side hustle, would almost never run out of principal and would be more likely to afford large unexpected purchases.
Yes, given higher valuations and a longer time horizon, I am aiming for 3.75%. If valuations are lower by the time I FIRE then I would go back to 4%. In addition, I am assuming lower market returns on my way to FIRE. If we keep experiencing pleasant returns I will be pleasantly surprised, but my spreadsheets don't assume that.
i think the exact number is debatable but i think we both agree, by current metrics, that once you are somewhere below a 4% SWR, you are no longer speculating because in any given year, no matter what the markets do, you will most likely not have to lose much principal (sell mutual fund shares) if any, to maintain your SWR.
speculators look at the risk of losing principal, look at the chance of getting returns, and pull the trigger. if you're happy to take that chance and go back to work if you lose your principal, you're still speculating. if you're shooting for a very low SWR or a short retirement period, and don't care about market price returns, then you're not speculating. most posters i've seen on this forum are in the former category.