Author Topic: Stop worrying about the 4% rule  (Read 1062243 times)

nereo

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Re: Stop worrying about the 4% rule
« Reply #2100 on: October 06, 2022, 04:40:14 AM »
S&P 500 Market Cap is at a current level of 31.90T, down from 38.29T last month and down from 36.32T one year ago. Accurate today
https://www.slickcharts.com/sp500/marketcap#:~:text=The%20S%26P%20500%20has%20a,the%20outstanding%20float%20share%20count.


The total market capitalization of the U.S. stock market is currently $48,264,353.4 million (March 31st, 2022) different date. but doesn't include the CBOE, or AMEX.
https://siblisresearch.com/data/us-stock-market-value/

 This statistic presents the global domestic equity market capitalization worldwide from 2013 to June 2022. The value of global domestic equity market increased from 65.04 trillion U.S. dollars in 2013 to121.94 trillion U.S. dollars in 2021. As of June 2022, the total market capitalization of domestic companies listed on stock exchanges worldwide recorded as 105.07 trillion U.S. dollars.
https://www.statista.com/statistics/274490/global-value-of-share-holdings-since-2000/

To be fair there are many estimate of the market cap of the world stocks, and with different dates it is hard to compare.

I’m not sure what point you ar3 trying to make with these figures.

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Re: Stop worrying about the 4% rule
« Reply #2101 on: October 06, 2022, 05:42:37 AM »
Depending on what index you consider gospel, US accounts for about 62-65% of a global cap weighted index.

US is dominant now, but it hasn't always been this way - at its peak the Japanese market accounted for about 47% and is down to around 6% now.  You may think the US will always maintain a dominant position and be happy to keep your portfolio US based, but this itself is a form of extreme cherry picking.   If you run the numbers with a global stocks, global bonds, then 4% begins to look rather shaky. 

maizefolk

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Re: Stop worrying about the 4% rule
« Reply #2102 on: October 06, 2022, 07:58:53 AM »
Depending on what index you consider gospel, US accounts for about 62-65% of a global cap weighted index.

US is dominant now, but it hasn't always been this way - at its peak the Japanese market accounted for about 47% and is down to around 6% now.  You may think the US will always maintain a dominant position and be happy to keep your portfolio US based, but this itself is a form of extreme cherry picking.   If you run the numbers with a global stocks, global bonds, then 4% begins to look rather shaky.

The japanese stock market bubble was crazy. And it completely skewed the proportion of global stock market values.



A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.

nereo

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Re: Stop worrying about the 4% rule
« Reply #2103 on: October 06, 2022, 08:21:06 AM »
Quote from: maizefolk link=topic=39064.msg3066819#msg3066819
A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.

In other words
  • A 4% WR is a decent starting point
  • regions which historically haven’t held up (ie a much higher failure) are ones which experienced intense geopolitical disruption
  • in such periods “more  money” was the least effective of a variety of strategies

Metalcat

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Re: Stop worrying about the 4% rule
« Reply #2104 on: October 06, 2022, 09:04:44 AM »
Quote from: maizefolk link=topic=39064.msg3066819#msg3066819
A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.

In other words
  • A 4% WR is a decent starting point
  • regions which historically haven’t held up (ie a much higher failure) are ones which experienced intense geopolitical disruption
  • in such periods “more  money” was the least effective of a variety of strategies

Didn't think I could love you more.
I was wrong.

ChpBstrd

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Re: Stop worrying about the 4% rule
« Reply #2105 on: October 06, 2022, 10:32:15 AM »
A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.

A globally diversified stock/bond portfolio backtested across the 20th century would be expected to do worse than a US-only portfolio, because on top of the risk events experienced by US stocks, you'd have added all the risk from the countries wiped out in wars or economic crises. I.e. if the global SWR is lower than the US-only SWR, adding historical global returns to the historical US-only portfolio is not going to increase the SWR. E.g. US-only investors avoided the collapse of various markets during the world wars, the devaluations of the British pound, Communist nationalizations, multiple defaults by Argentina, etc.

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #2106 on: October 06, 2022, 12:47:27 PM »
Wade Pfau has actually done some of this work for us (up to 1986 at least) here.
The quick summary is:


There's also a surprising variation of optimal historical asset allocations globally -

maizefolk

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Re: Stop worrying about the 4% rule
« Reply #2107 on: October 06, 2022, 02:29:54 PM »
A globally diversified stock/bond portfolio backtested across the 20th century would be expected to do worse than a US-only portfolio, because on top of the risk events experienced by US stocks, you'd have added all the risk from the countries wiped out in wars or economic crises. I.e. if the global SWR is lower than the US-only SWR, adding historical global returns to the historical US-only portfolio is not going to increase the SWR. E.g. US-only investors avoided the collapse of various markets during the world wars, the devaluations of the British pound, Communist nationalizations, multiple defaults by Argentina, etc.

This may or may not be true in this specific case (it depends on how you weight different countries and the effects of the great depression in the USA hit at close to the same time as WWII wiped out a lot of european stock and bond markets).

But so long as the failure years the define the lower bounds of the safe withdrawal rates are different, you can absolutely add together two investment mixes that each have lower safe withdrawal rates and end up with a portfolio with a higher safe withdrawal rate than either of the underlying portfolios.

That's whole whole principle of why index funds provide higher SWR than investments in a single stock or why investments in stocks + gold or stocks + real estate often show higher SWR than investments in stocks alone, even though stocks have provided dramatically higher overall returns than either of those other asset classes (and a stock only portfolio has a bunch higher SWR than a gold only portfolio).

clifp

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Re: Stop worrying about the 4% rule
« Reply #2108 on: October 06, 2022, 02:38:09 PM »

I’m not sure what point you ar3 trying to make with these figures.

That the S&P isn't global world stock market or even 1/2.

grantmeaname

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Re: Stop worrying about the 4% rule
« Reply #2109 on: October 06, 2022, 03:55:27 PM »
It is half, though, almost exactly.

clifp

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Re: Stop worrying about the 4% rule
« Reply #2110 on: October 06, 2022, 04:23:07 PM »
It is half, though, almost exactly.
The figures I linked put it at 31.9 Trillion/ 105.07 Trillion= 30.3%

Of the links I provide only the S&P was current. However the other were at least from 2022, unlike the other posted in thread that were from 2017, 2020 etc.

The trick is to find an recent and accurate link for the total world stock market.

maizefolk

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Re: Stop worrying about the 4% rule
« Reply #2111 on: October 06, 2022, 04:54:16 PM »
The trick is to find an recent and accurate link for the total world stock market.

The trick is perhaps actually to define the total world stock market.

Do companies trading in China that aren't open to non-chinese citizens count?

What about Aramco? It's implied valuation is almost $2.5T (potentially a couple percent of global market cap) but only a trivial proportion of the total ownership is available for trade on public exchanges.

The USD has strengthened substantially in the last year (up perhaps 10%). Does that imply that the value of the global stock market has declined 10% in dollars terms?

grantmeaname

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Re: Stop worrying about the 4% rule
« Reply #2112 on: October 06, 2022, 04:54:48 PM »
Statista is not a high quality source. At best, it blindly plagiarizes a high quality source from time to time and you can pay a lot of money and support this behavior if you want to find out what that source is.

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Re: Stop worrying about the 4% rule
« Reply #2113 on: October 06, 2022, 06:03:06 PM »
A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.

A globally diversified stock/bond portfolio backtested across the 20th century would be expected to do worse than a US-only portfolio, because on top of the risk events experienced by US stocks, you'd have added all the risk from the countries wiped out in wars or economic crises. I.e. if the global SWR is lower than the US-only SWR, adding historical global returns to the historical US-only portfolio is not going to increase the SWR. E.g. US-only investors avoided the collapse of various markets during the world wars, the devaluations of the British pound, Communist nationalizations, multiple defaults by Argentina, etc.

Unless, of course, the fascists who support Trump and his ilk succeed in starting a Race War or a Civil War -- as many of them very much wish to do -- and the US suffers thru the devastation that would cause.  And I'll fight them tooth and nail, too.

PDXTabs

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Re: Stop worrying about the 4% rule
« Reply #2114 on: October 06, 2022, 06:41:53 PM »
A globally diversified stock/bond portfolio would do fine. The problem is people don't test that. They test the 4% rule using stock/bond data from specific non-USA countries and see that it fails when countries lose world wars or experience major civil wars and conclude "the USA is an outlier because it experienced unusually good stock returns in the last century" instead of the "USA is an outlier because our country wasn't destroyed by one or more wars in the last century". Results from other countries that weren't invaded/occupied and didn't experience major civil wars in the 20th century but still have 100+ years of investment return data (Canada, UK, South Africa, Australia, etc) come up with safe withdrawal rates that are much more consistent with the results we're all so familiar with from the USA.

A globally diversified stock/bond portfolio backtested across the 20th century would be expected to do worse than a US-only portfolio, because on top of the risk events experienced by US stocks, you'd have added all the risk from the countries wiped out in wars or economic crises. I.e. if the global SWR is lower than the US-only SWR, adding historical global returns to the historical US-only portfolio is not going to increase the SWR. E.g. US-only investors avoided the collapse of various markets during the world wars, the devaluations of the British pound, Communist nationalizations, multiple defaults by Argentina, etc.

Unless, of course, the fascists who support Trump and his ilk succeed in starting a Race War or a Civil War -- as many of them very much wish to do -- and the US suffers thru the devastation that would cause.  And I'll fight them tooth and nail, too.

Which, as a slight aside, is why I'm 60% US 40% RoW.

ChpBstrd

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Re: Stop worrying about the 4% rule
« Reply #2115 on: October 12, 2022, 09:25:41 PM »
Holy crap! Hell froze over.

EarlyRetirementNow.com, which has a reputation for poo pooing the 4% rule and advocating a WR closer to 3.25% based on meticulous actuarial analysis, just came out with this headline:

The 4% Rule Works Again! An Update on Dynamic Withdrawal Rates based on the Shiller CAPE – SWR Series Part 54


And he's applying that reasoning to 60 year retirement timeframes with bequests at the end.

The reasons are:
1) stocks have already fallen over 20% from a recent high, which makes it an inherently safer time to retire, and
2) ERN calculated an adjusted CAPE ratio that factors in things like buybacks and accounting adjustments, and this new adjusted CAPE offers a valuation-based milestone to estimate SWR in a dynamic withdraw retirement,
3) By using adjusted CAPE, the dynamic withdraws do not change as dramatically as if you use current values / prices.

Link:https://earlyretirementnow.com/2022/10/12/dynamic-withdrawal-rates-based-on-the-shiller-cape-swr-series-part-54/

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #2116 on: October 13, 2022, 07:55:57 AM »
...
EarlyRetirementNow.com, which has a reputation for poo pooing the 4% rule and advocating a WR closer to 3.25% based on meticulous actuarial analysis, just came out with this headline:

The 4% Rule Works Again! An Update on Dynamic Withdrawal Rates based on the Shiller CAPE – SWR Series Part 54

The reasons are:
1) stocks have already fallen over 20% from a recent high, which makes it an inherently safer time to retire, and
...

So basically ERN proves he can do simple math.  A 4% SWR is equivalent to 3.25% SWR if you take NW (at 4%SWR) and reduce it to 81.25% NW (3.25/4).  I don't need to read a whole article about it!

Must_ache

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Re: Stop worrying about the 4% rule
« Reply #2117 on: October 13, 2022, 08:56:40 AM »
Need I mention that the headline "The 4% Rule Works Again!" suggests that it did not work for a while. 

Quote

I also like to highlight the extreme sensitivity of failure rates as a function of the withdrawal rate. And the sensitivity is more extreme if equity valuations are elevated. For example, shifting withdrawal rates from 3.50% to 3.75% and then 4.00%, when the CAPE is below 20, the failure rates go from essentially 0% to 1.7% and then 5%. But when the CAPE was above 20, the failure rates go from 2% to 24% and then over 37%.

A small caveat here: This CAPE-based dynamic withdrawal rate is not a one-time, set-it-and-forget-it kind of deal. The CAPE-based withdrawal amounts are still subject to portfolio risk over time. If the market were to tank another 20% you’ll certainly start reducing your withdrawals as well. But the nice feature of the CAPE-based withdrawal amounts is that even if your portfolio drops you may not have to reduce your withdrawals one-for-one by the same percentage. That’s because a further drop in the equity market will also make equity valuations more attractive and thus raise the CAPE-based withdrawal rate again.


I'm not trying to be all doom-and-gloom here.  I think that there will be good buying opportunities in the stock market once inflation and the risk of interest rate increases subsides.  But anyone who "stopped worrying about the 4% rule" during the loftiest market valuations may live to regret it.

dividendman

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Re: Stop worrying about the 4% rule
« Reply #2118 on: October 13, 2022, 09:01:04 AM »
Need I mention that the headline "The 4% Rule Works Again!" suggests that it did not work for a while. 

Quote

I also like to highlight the extreme sensitivity of failure rates as a function of the withdrawal rate. And the sensitivity is more extreme if equity valuations are elevated. For example, shifting withdrawal rates from 3.50% to 3.75% and then 4.00%, when the CAPE is below 20, the failure rates go from essentially 0% to 1.7% and then 5%. But when the CAPE was above 20, the failure rates go from 2% to 24% and then over 37%.

A small caveat here: This CAPE-based dynamic withdrawal rate is not a one-time, set-it-and-forget-it kind of deal. The CAPE-based withdrawal amounts are still subject to portfolio risk over time. If the market were to tank another 20% you’ll certainly start reducing your withdrawals as well. But the nice feature of the CAPE-based withdrawal amounts is that even if your portfolio drops you may not have to reduce your withdrawals one-for-one by the same percentage. That’s because a further drop in the equity market will also make equity valuations more attractive and thus raise the CAPE-based withdrawal rate again.


I'm not trying to be all doom-and-gloom here.  I think that there will be good buying opportunities in the stock market once inflation and the risk of interest rate increases subsides.  But anyone who "stopped worrying about the 4% rule" during the loftiest market valuations may live to regret it.

They may live to regret it, but they'll probably die before they regret it.

TomTX

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Re: Stop worrying about the 4% rule
« Reply #2119 on: October 13, 2022, 09:56:30 AM »
Nobody is getting a real return of ZERO this year.  Year-to-date the major stock indices are -20%, Treasuries got you 2-4%, while inflation worsened things by an additional 8.5%?   That puts the real return on the stock market closer to -27%, and -6% for treasuries. 
At 9.62% (and better for an old bond) - my I-bonds are yielding a positive real return this year.

Small fraction of the portfolio, but meaningful enough to note.

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Re: Stop worrying about the 4% rule
« Reply #2120 on: October 13, 2022, 10:17:50 AM »
Need I mention that the headline "The 4% Rule Works Again!" suggests that it did not work for a while. 

Quote

I also like to highlight the extreme sensitivity of failure rates as a function of the withdrawal rate. And the sensitivity is more extreme if equity valuations are elevated. For example, shifting withdrawal rates from 3.50% to 3.75% and then 4.00%, when the CAPE is below 20, the failure rates go from essentially 0% to 1.7% and then 5%. But when the CAPE was above 20, the failure rates go from 2% to 24% and then over 37%.

A small caveat here: This CAPE-based dynamic withdrawal rate is not a one-time, set-it-and-forget-it kind of deal. The CAPE-based withdrawal amounts are still subject to portfolio risk over time. If the market were to tank another 20% you’ll certainly start reducing your withdrawals as well. But the nice feature of the CAPE-based withdrawal amounts is that even if your portfolio drops you may not have to reduce your withdrawals one-for-one by the same percentage. That’s because a further drop in the equity market will also make equity valuations more attractive and thus raise the CAPE-based withdrawal rate again.


I'm not trying to be all doom-and-gloom here.  I think that there will be good buying opportunities in the stock market once inflation and the risk of interest rate increases subsides.  But anyone who "stopped worrying about the 4% rule" during the loftiest market valuations may live to regret it.

Yes, ERN is being "data-dependent" here, and the previous few years of near-zero interest rates and a very high CAPE ratio was probably a dangerous time to retire at a 4% WR. ERN raised this alarm to anyone who would listen, based on the data. Now that the data are very different, and so is ERN's conclusion.

At ERN's level of analysis, we can see that the SWR rises as the market falls. The problem with the 4% rule is that it's static and naive to valuation. It basically says that rarely do stocks and bonds get so expensive that you cannot have a SWR of 4%. ERN's work has led us to a predictive SWR model that can help us make sense of SWR in the context of expensive markets or market crashes.

As seen below, SWR is anything but static. Most early retirement cohorts who try to hit the 4% rule are wasting years of their lives, while others are walking into a financial accident. With massive risks on either side of the OMY debate, ERN's work gets us a lot closer to confidence.


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Re: Stop worrying about the 4% rule
« Reply #2121 on: October 13, 2022, 03:23:23 PM »
Depending on what index you consider gospel, US accounts for about 62-65% of a global cap weighted index.

US is dominant now, but it hasn't always been this way - at its peak the Japanese market accounted for about 47% and is down to around 6% now.  You may think the US will always maintain a dominant position and be happy to keep your portfolio US based, but this itself is a form of extreme cherry picking.   If you run the numbers with a global stocks, global bonds, then 4% begins to look rather shaky.

Who cares about global cap weighted index? 

PDXTabs

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Re: Stop worrying about the 4% rule
« Reply #2122 on: October 15, 2022, 10:39:30 AM »
Depending on what index you consider gospel, US accounts for about 62-65% of a global cap weighted index.

US is dominant now, but it hasn't always been this way - at its peak the Japanese market accounted for about 47% and is down to around 6% now.  You may think the US will always maintain a dominant position and be happy to keep your portfolio US based, but this itself is a form of extreme cherry picking.   If you run the numbers with a global stocks, global bonds, then 4% begins to look rather shaky.

Who cares about global cap weighted index?

Lots of people are global cap weighted, especially people who don't live in the USA. Also, that way you didn't have a lost decade from 2000-2010.

clifp

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Re: Stop worrying about the 4% rule
« Reply #2123 on: October 15, 2022, 01:16:01 PM »


They may live to regret it, but they'll probably die before they regret it.

The life expectancy for 40-year-old woman is 40.8 years longer if you are college educated. I'd say if you did a lean retirement this year this and are withdrawing 4%, there is a good chance you'll be  down to basically Social Security by the time you pass.

waltworks

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Re: Stop worrying about the 4% rule
« Reply #2124 on: October 15, 2022, 11:09:38 PM »


They may live to regret it, but they'll probably die before they regret it.

The life expectancy for 40-year-old woman is 40.8 years longer if you are college educated. I'd say if you did a lean retirement this year this and are withdrawing 4%, there is a good chance you'll be  down to basically Social Security by the time you pass.

Yes, if you somehow never earn another dime, pick up a $20 bill on the sidewalk, or inherit anything, ever, from your Boomer parents/aunts/uncles, and also social security gets canceled completely, you might be in real trouble. Oh yeah and no spending flexibility allowed of any kind.

Keep that nose to the grindstone.

-W

grantmeaname

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Re: Stop worrying about the 4% rule
« Reply #2125 on: October 16, 2022, 03:06:36 AM »
No need to throw hands. Everyone here wants to be done as soon as possible.

Social security is already needed to get the Trinity study beyond a 30 year horizon and doesn't help much because it's so far down the road, especially for the extremely early retirees (it me, looking to be done at 32). ERN is the only person I know that has thought hard about spending flexibility and he came away not impressed.

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Re: Stop worrying about the 4% rule
« Reply #2126 on: October 16, 2022, 05:24:56 AM »


They may live to regret it, but they'll probably die before they regret it.

The life expectancy for 40-year-old woman is 40.8 years longer if you are college educated. I'd say if you did a lean retirement this year this and are withdrawing 4%, there is a good chance you'll be  down to basically Social Security by the time you pass.

Yes, if you somehow never earn another dime, pick up a $20 bill on the sidewalk, or inherit anything, ever, from your Boomer parents/aunts/uncles, and also social security gets canceled completely, you might be in real trouble. Oh yeah and no spending flexibility allowed of any kind.

Keep that nose to the grindstone.

-W

Giving the grindstone a nice kiss and compliment that she is looking really nice today…

Metalcat

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Re: Stop worrying about the 4% rule
« Reply #2127 on: October 16, 2022, 07:27:04 AM »


They may live to regret it, but they'll probably die before they regret it.

The life expectancy for 40-year-old woman is 40.8 years longer if you are college educated. I'd say if you did a lean retirement this year this and are withdrawing 4%, there is a good chance you'll be  down to basically Social Security by the time you pass.

Yes, if you somehow never earn another dime, pick up a $20 bill on the sidewalk, or inherit anything, ever, from your Boomer parents/aunts/uncles, and also social security gets canceled completely, you might be in real trouble. Oh yeah and no spending flexibility allowed of any kind.

Keep that nose to the grindstone.

-W

My personal perspective these days is more like "holy shit, look how well the system has held up during a massive, multi years long, global deadly crisis AND some of the most volatile political times in US history!"

Anyone who had the stones to retire during a global pandemic and just expect their pre-pandemic plan/lifestyle to hold up with no exception and no adjustment needed is...well...I don't know what to call that actually.

I mean, I "retired" during the pandemic, but not by choice. I most certainly didn't think "oh, the 4% rule's got me. I have nothing to worry about during this apocalypse that's going on right now."*

But as someone who has been profoundly affected by the pandemic myself** in massively lifestyle impacting ways, I'm actually quite impressed at how relatively little it's affected our finances compared to how drastically it's affected our lifestyle.

I've said all along, if the 4% rule fails, we have bigger things to worry about, and I would have definitely described a deadly global pandemic to be one of those bigger things to worry about, and for me, it very much has been, and will be for the next several years.

If people can weather this shit storm financially though with moderate adjustment to their financial planning, that's a miracle as far as I'm concerned.

If anything, I have *more* faith in the resiliency of the system than I did before. But I also never once believed that one could just blindly follow the 4% rule through massive, years long, unprecedented global emergencies.

Did anyone??? Really??? Did anyone?????

I've always been more concerned about real life risks than market risks, period, but a global pandemic is definitely one of those things I would expect to fuck with whatever "rules" one is working with.

This is why people should have various resiliencies within their systems. You NEVER know what the future holds.

Lastly, plans have never been about the future. No one can predict what their future will look like. FIRE simulators can't predict the future. Plans are about what the best decisions are *today*. The pandemic should have people modifying their plans, and many have. Many relocated, bought larger houses for remote working, have to plan for managing long covid, etc, etc.

For me, a big change the pandemic caused was that I knew a 6 figure lump sum was coming in 2021, and I normally would have just dumped it into index funds, but instead invested in real estate for multiple pandemic-related reasons, which then changed ALL of my plans**

Big, unpredictable things can and WILL happen. That's why the 4% "rule" is and always has been just a rough starting point for life planning.

Of course it's not a magic forcefield that can guarantee someone can live the exact same lifestyle through a years long global emergency. Of course it can't do that. It never could.

"Don't worry about the 4% rule" doesn't mean "Don't worry about risk." Risk in life is very real and often unavoidable. The best you can do is try to hedge, build resiliencies into your systems, and be as flexible as possible for adjusting to new realities.

Never, EVER expect your plans or your calculations to predict your future. They just don't have that power.

As I've said before, you can't Boglehead your way to total security.

Would I retire right now with exactly 25X my estimated expenses with no back up plans and no flexibility? Fuck no. I mean, I wouldn't do that under any circumstances. But would I leave my job right now if it was hurting my quality of life and I had a massive 'stache and could take my time to pivot, adjust my plans, and figure out next steps??

Well yeah...I did.

Now is NOT the time for people to be leaving comfortable jobs they enjoy with no plans for managing risk. Now is the *perfect* time for people to be leaving jobs that are damaging their quality of life. Actually 2020 was the perfect time to leave a job you don't like, hunker down and retrain in new skills, and then hop back into the white hot job market of 2021/2022 where companies were hurting badly for staff.

I can't actually think of a better time to bail on a shitty career, regroup, and make a new plan.

In summary: if you like your job, now is not the time to retire with no contingencies for flexibility (is it ever that time??), and now is the ideal time to leave a job you don't like and start crafting a better future for yourself if you've got a nice security blanket of money.

If you don't hate your job, but don't like your job. Oof, that's always going to be a tough position to be in, because the risk analysis is less obvious. Beware of inertia and attend to the very real risk of missing out on a better lifestyle. It's very easy to fall into the trap of "It's not that bad..."

[*What actually happened was I went on the hunt for the inevitable enormous financial opportunities that present themselves during a crisis, and I found a MASSIVE one that would have made me 8 figures rich had I nutted up and seen it through, but I blew it up instead. Long story that I won't share. No regrets.

**Not important here, see my journal if you want details]

EscapeVelocity2020

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Re: Stop worrying about the 4% rule
« Reply #2128 on: October 16, 2022, 12:02:39 PM »
In 'normal times', rooting and hoping for a market pullback to buy and laughing at people that continue to work past their 25x magic number is fair game.  I contend that 2022 is well down the road of being an 'abnormal time', and similarly rooting for the market to fall or laughing at people that have to work for a little more security on their 25x looks out of place. 

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Re: Stop worrying about the 4% rule
« Reply #2129 on: October 16, 2022, 12:21:19 PM »
In 'normal times', rooting and hoping for a market pullback to buy and laughing at people that continue to work past their 25x magic number is fair game.  I contend that 2022 is well down the road of being an 'abnormal time', and similarly rooting for the market to fall or laughing at people that have to work for a little more security on their 25x looks out of place.

What are these 'normal times'? When were they? As I've said before, I can't recall any point in history where people proclaimed: "We are in normal times!"

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Re: Stop worrying about the 4% rule
« Reply #2130 on: October 16, 2022, 12:59:52 PM »
In 'normal times', rooting and hoping for a market pullback to buy and laughing at people that continue to work past their 25x magic number is fair game.  I contend that 2022 is well down the road of being an 'abnormal time', and similarly rooting for the market to fall or laughing at people that have to work for a little more security on their 25x looks out of place.

What are these 'normal times'? When were they? As I've said before, I can't recall any point in history where people proclaimed: "We are in normal times!"

Yes, I’m not sure what’s meant by “in normal times” either. There’s a saying which is repeated so often it’s become he’s own financial meme: “…but this time it’s different!”


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Re: Stop worrying about the 4% rule
« Reply #2131 on: October 16, 2022, 01:26:06 PM »
In 'normal times', rooting and hoping for a market pullback to buy and laughing at people that continue to work past their 25x magic number is fair game.  I contend that 2022 is well down the road of being an 'abnormal time', and similarly rooting for the market to fall or laughing at people that have to work for a little more security on their 25x looks out of place.

What are these 'normal times'? When were they? As I've said before, I can't recall any point in history where people proclaimed: "We are in normal times!"

Yes, I’m not sure what’s meant by “in normal times” either. There’s a saying which is repeated so often it’s become he’s own financial meme: “…but this time it’s different!”

And that's the thing, eventually something *might* be different enough to permanently change the system. But those things are BIG deals. You know you're in the middle of a BIG deal when it's happening.

Like no one in the world has been walking around clueless that a BIG thing has been happening since early 2020, and that shit might be a little less predictable at this time.
 
Certainly this whole craziness has had me doubling down on backup plans and hedges. Not so much because of what the markets will do, but because of wanting more robust, flexible options for lifestyle change for the inevitable times that shit hits the fan in life. Whether that shit be economic, global, local, or personal.

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Re: Stop worrying about the 4% rule
« Reply #2132 on: October 16, 2022, 01:57:42 PM »

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #2133 on: October 16, 2022, 02:55:12 PM »

And that's the thing, eventually something *might* be different enough to permanently change the system. But those things are BIG deals. You know you're in the middle of a BIG deal when it's happening.

Like no one in the world has been walking around clueless that a BIG thing has been happening since early 2020, and that shit might be a little less predictable at this time.


I know people who STILL don't believe there was a covid epidemic or that covid is dangerous.

I guess some of them did figure out **something** big was happening but since they either made it up or (more likely) got it from Q-Anon & friends, I'm not sure that makes your point stronger or weaker.

But setting aside the willfully ignorant, I agree with you.    It's just that a few years ago I didn't realize how VERY MANY willfully ignorant people there are.

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Re: Stop worrying about the 4% rule
« Reply #2134 on: October 17, 2022, 07:39:08 AM »

That crazy chart shows that 2022 was a once-in-a-lifetime shit year. Stock losses greater than -20% have happened only six other times since 1926 (3 of which were during the Great Depression):

Year     Loss         Subsequent Year TR

2008    -37.0%    +26.46%
2002    -22.1%    +28.68
1974    -26.47%  +37.2%
1937    -35.03%  +31.12%
1931    -43.34%  -8.19%
1930    -24.9%    -43.34%
Source: https://www.slickcharts.com/sp500/returns

So basically, from naive historian's perspective, we should expect total returns from the S&P500 to be in the +25% to +30% range in 2023 unless another Great Depression happens.

The case for another GD would at this point probably rely on 2 of the following happening: a Chinese invasion of Taiwan, a Russian invasion of a NATO country, or another real estate crisis in the US. Hedge accordingly.

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Re: Stop worrying about the 4% rule
« Reply #2135 on: October 17, 2022, 08:20:55 AM »
... That crazy chart shows that 2022 was a once-in-a-lifetime shit year. ...

Year     Loss         Subsequent Year TR

2008    -37.0%    +26.46%
2002    -22.1%    +28.68
1974    -26.47%  +37.2%
1937    -35.03%  +31.12%
1931    -43.34%  -8.19%
1930    -24.9%    -43.34%

Just for the record, I've been alive for FOUR of those "ONCE" in a lifetime years.   1974, 2002, 2008 and 2022.

So maybe it happens a tad more often than you think... :)

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Re: Stop worrying about the 4% rule
« Reply #2136 on: October 17, 2022, 08:56:09 AM »

That crazy chart shows that 2022 was a once-in-a-lifetime shit year. Stock losses greater than -20% have happened only six other times since 1926 (3 of which were during the Great Depression):

Year     Loss         Subsequent Year TR

2008    -37.0%    +26.46%
2002    -22.1%    +28.68
1974    -26.47%  +37.2%
1937    -35.03%  +31.12%
1931    -43.34%  -8.19%
1930    -24.9%    -43.34%
Source: https://www.slickcharts.com/sp500/returns

So basically, from naive historian's perspective, we should expect total returns from the S&P500 to be in the +25% to +30% range in 2023 unless another Great Depression happens.

The case for another GD would at this point probably rely on 2 of the following happening: a Chinese invasion of Taiwan, a Russian invasion of a NATO country, or another real estate crisis in the US. Hedge accordingly.

How do those years account for the previous year's growth?

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Re: Stop worrying about the 4% rule
« Reply #2137 on: October 17, 2022, 09:00:08 AM »
... That crazy chart shows that 2022 was a once-in-a-lifetime shit year. ...

Year     Loss         Subsequent Year TR

2008    -37.0%    +26.46%
2002    -22.1%    +28.68
1974    -26.47%  +37.2%
1937    -35.03%  +31.12%
1931    -43.34%  -8.19%
1930    -24.9%    -43.34%

Just for the record, I've been alive for FOUR of those "ONCE" in a lifetime years.   1974, 2002, 2008 and 2022.

So maybe it happens a tad more often than you think... :)
Years with returns worse than -20% are not once-in-a-lifetime events, but years where both stocks and bonds fall could be. I was looking at '31, '69, and '22.

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Re: Stop worrying about the 4% rule
« Reply #2138 on: October 17, 2022, 10:48:20 AM »
Pretty short lifespans…

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Re: Stop worrying about the 4% rule
« Reply #2139 on: October 21, 2022, 12:59:50 PM »


This graph may tell you that it is very unusual for both stocks and bonds to have significant negative returns.
If you look at those other two years on the safe withdrawal rate above, you'll see those were approximately two of the times that the safe withdrawal rate went clearly below 4%.

« Last Edit: October 21, 2022, 01:02:14 PM by Must_ache »

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Re: Stop worrying about the 4% rule
« Reply #2140 on: October 21, 2022, 01:48:35 PM »
So, about the bond returns being separated from stock returns.

If I buy an individual bond, and I hold it to maturity, it will pay exactly what it is supposed to.  (Assuming the company doesn't go out of business, etc.)

So, if my bond holdings are in individual bonds, my returns should be largely independent of the stock market.  If I needed to sell a bond early, the price should go up or down based on the relative interest rates that the bond pays versus newly issued bonds offered.

That's how I understand it.

But putting lots of money into buying a single bond has its own risk.  The company could go belly up and make the bond worth much less.   Plus, it takes a lot of money at one time to buy the bond.   So, people buy into a bond fund to solve those two problems.

And that's where I think it defeats the purpose of bond results being separated from stock results.

First of all, when stock values go down and people need cash, they sell their bonds instead.  If I held an individual bond, this would have no effect on me while I choose to hold it.   But in a bond fund, the fund managers have to come up with the cash to pay it out.  So they have to sell some bonds.   The more people who need cash, the more bonds get sold.   Bonds with higher interest rates get better prices.  So either the fund loses proportionally more of its high interest bonds or it has to sell more of its lower interest bond holdings to raise the cash.  Either way, those in the bond fund lose out.

That's what I think happens when the stock market goes way down.

Do y'all think I've got it right?  If not, what did I miss?

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Re: Stop worrying about the 4% rule
« Reply #2141 on: October 21, 2022, 01:51:36 PM »
So, about the bond returns being separated from stock returns.

If I buy an individual bond, and I hold it to maturity, it will pay exactly what it is supposed to.  (Assuming the company doesn't go out of business, etc.)

So, if my bond holdings are in individual bonds, my returns should be largely independent of the stock market.  If I needed to sell a bond early, the price should go up or down based on the relative interest rates that the bond pays versus newly issued bonds offered.

That's how I understand it.

But putting lots of money into buying a single bond has its own risk.  The company could go belly up and make the bond worth much less.   Plus, it takes a lot of money at one time to buy the bond.   So, people buy into a bond fund to solve those two problems.

And that's where I think it defeats the purpose of bond results being separated from stock results.

First of all, when stock values go down and people need cash, they sell their bonds instead.  If I held an individual bond, this would have no effect on me while I choose to hold it.   But in a bond fund, the fund managers have to come up with the cash to pay it out.  So they have to sell some bonds.   The more people who need cash, the more bonds get sold.   Bonds with higher interest rates get better prices.  So either the fund loses proportionally more of its high interest bonds or it has to sell more of its lower interest bond holdings to raise the cash.  Either way, those in the bond fund lose out.

That's what I think happens when the stock market goes way down.

Do y'all think I've got it right?  If not, what did I miss?

Would treasury bonds have that risk?

SwordGuy

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Re: Stop worrying about the 4% rule
« Reply #2142 on: October 21, 2022, 04:00:58 PM »
Technically, yes, because governments do go broke.

That said, if the US government collapses pretty much everyone's plans will be in tatters.

And if the bond fund holds Treasury bonds, same problem with cash-flow forced sales.

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Re: Stop worrying about the 4% rule
« Reply #2143 on: October 21, 2022, 04:18:28 PM »
You are also doing pretty poorly if you bought a 10 year Treasury with 2% yield a year ago, even if you hold it to maturity.  You can get a bond with 4% yield now, so twice the payout.  Both bonds are still losing purchasing power to 8% inflation though.  And there’s no telling if yields will continue to go up.  In a perfect world, you buy bonds at their highest yield and longest duration, then you can also sell them before maturity above par value…

That’s why people have claimed we were in a bond bubble, the price paid for low nominal yields, even when inflation was low, made no sense!  Those bonds are even more worthless now!

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Re: Stop worrying about the 4% rule
« Reply #2144 on: October 21, 2022, 05:24:26 PM »
So, about the bond returns being separated from stock returns.

If I buy an individual bond, and I hold it to maturity, it will pay exactly what it is supposed to.  (Assuming the company doesn't go out of business, etc.)

So, if my bond holdings are in individual bonds, my returns should be largely independent of the stock market.  If I needed to sell a bond early, the price should go up or down based on the relative interest rates that the bond pays versus newly issued bonds offered.

That's how I understand it.

But putting lots of money into buying a single bond has its own risk.  The company could go belly up and make the bond worth much less.   Plus, it takes a lot of money at one time to buy the bond.   So, people buy into a bond fund to solve those two problems.

And that's where I think it defeats the purpose of bond results being separated from stock results.

First of all, when stock values go down and people need cash, they sell their bonds instead.  If I held an individual bond, this would have no effect on me while I choose to hold it.   But in a bond fund, the fund managers have to come up with the cash to pay it out.  So they have to sell some bonds.   The more people who need cash, the more bonds get sold.   Bonds with higher interest rates get better prices.  So either the fund loses proportionally more of its high interest bonds or it has to sell more of its lower interest bond holdings to raise the cash.  Either way, those in the bond fund lose out.

That's what I think happens when the stock market goes way down.

Do y'all think I've got it right?  If not, what did I miss?

When stocks go down, the same thing keeps happening that happens every day. Investors scrutinize every available scrap of information looking for the best risk-adjusted return. Some decide to sell stocks and buy bonds, while others decide to sell bonds and buy stocks. Funds for either have a certain number of shares outstanding and just keep focusing on their strategy or tracking their index, unless they are issuing new shares and buying more assets. The only people “forced” to sell are the ones who set their own stop limits. When you buy a share of a fund, you are generally buying it from another owner, not causing the fund to issue a new share and buy assets.

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Re: Stop worrying about the 4% rule
« Reply #2145 on: October 22, 2022, 06:57:09 AM »
The only people “forced” to sell are the ones who set their own stop limits. When you buy a share of a fund, you are generally buying it from another owner, not causing the fund to issue a new share and buy assets.

I don't think I communicated it clearly.

I'm not being forced to sell my bond fund SHARES.  But my bond fund is worth something, not because I own shares, but because the bond fund owns actual bonds.   When other share holders of the bond fund sell their bond holdings to live on (because stocks are so low), the bond fund managers have to sell bonds in order to make the necessary cash payments.   

So, they either have to lower the bond fund's holdings by selling the good bonds first (meaning the longer term valuation of the bond fund will drop because the remaining assets aren't as good) or they have to sell off more of the lower interest rate bonds first (at much worse prices), meaning they've lowered the value of the bond fund even more. 

Either way, the VALUE of my bond fund shares drops.

That's how I see it.

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Re: Stop worrying about the 4% rule
« Reply #2146 on: October 22, 2022, 05:39:22 PM »
The only people “forced” to sell are the ones who set their own stop limits. When you buy a share of a fund, you are generally buying it from another owner, not causing the fund to issue a new share and buy assets.

I don't think I communicated it clearly.

I'm not being forced to sell my bond fund SHARES.  But my bond fund is worth something, not because I own shares, but because the bond fund owns actual bonds.   When other share holders of the bond fund sell their bond holdings to live on (because stocks are so low), the bond fund managers have to sell bonds in order to make the necessary cash payments.   

So, they either have to lower the bond fund's holdings by selling the good bonds first (meaning the longer term valuation of the bond fund will drop because the remaining assets aren't as good) or they have to sell off more of the lower interest rate bonds first (at much worse prices), meaning they've lowered the value of the bond fund even more. 

Either way, the VALUE of my bond fund shares drops.

That's how I see it.

The people selling their shares of bond funds are selling to other investors. The fund itself is not doing a buyback. The fund’s value will go up and down with the price of the assets, and if the fund’s value ever goes below the value of the assets there will be an arbitrage opportunity that someone will jump on.

So basically the fund never has to sell assets, no matter how its shares are being traded in the open market and no matter what the assets are worth at any given time.

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Re: Stop worrying about the 4% rule
« Reply #2147 on: October 22, 2022, 07:51:31 PM »
The only people “forced” to sell are the ones who set their own stop limits. When you buy a share of a fund, you are generally buying it from another owner, not causing the fund to issue a new share and buy assets.

I don't think I communicated it clearly.

I'm not being forced to sell my bond fund SHARES.  But my bond fund is worth something, not because I own shares, but because the bond fund owns actual bonds.   When other share holders of the bond fund sell their bond holdings to live on (because stocks are so low), the bond fund managers have to sell bonds in order to make the necessary cash payments.   

So, they either have to lower the bond fund's holdings by selling the good bonds first (meaning the longer term valuation of the bond fund will drop because the remaining assets aren't as good) or they have to sell off more of the lower interest rate bonds first (at much worse prices), meaning they've lowered the value of the bond fund even more. 

Either way, the VALUE of my bond fund shares drops.

That's how I see it.

The people selling their shares of bond funds are selling to other investors. The fund itself is not doing a buyback. The fund’s value will go up and down with the price of the assets, and if the fund’s value ever goes below the value of the assets there will be an arbitrage opportunity that someone will jump on.

So basically the fund never has to sell assets, no matter how its shares are being traded in the open market and no matter what the assets are worth at any given time.

I own shares in both bond and stock funds.

**I've** never sold a darn thing to another investor.   I tell the fund I want money for shares and that's what I get.    That means the FUND is selling the bonds that provide the underlying value of my investment in order to raise funds.

And you're right, THEY are selling to other investors.  And those other investors will act as I described, which means the value of the bond fund will be affected as I described.  The only reason they wouldn't do that would be if other investors want to buy enough shares in the bond fund to cover the cash they need to provide.   I posit that in a stock market crash, the need to sell bonds goes up because stock prices are so low, more than the cash inflow from investors buying bonds.

And that affects the amount of money I get for the next set of shares that I sell.

If that's not true, please explain where it's not, and what is true in place of that.  Am I wrong about the relative cash flow in bond fund shares in a major stock downturn?

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Re: Stop worrying about the 4% rule
« Reply #2148 on: October 22, 2022, 09:52:09 PM »
If that's not true, please explain where it's not, and what is true in place of that.  Am I wrong about the relative cash flow in bond fund shares in a major stock downturn?

It's possible that in a major downturn, many people get afraid and sell their stocks and buy bonds.  That could provide enough inflows into bond funds where there are net fund inflows.  For people like you who are selling $100 of the fund, they just make an accounting entry and take $100 from the $500 that a scared investor paid into the fund, give it to you, and take the remaining $400 and buy more bonds, not selling any.

I don't know the relative magnitude of the flows.  It could depend on the overall market trend and what is happening on a weekly or daily basis.  There are companies that track fund flows, but I don't think they can do it on an individual fund basis.  The mutual fund company knows of course.

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Re: Stop worrying about the 4% rule
« Reply #2149 on: October 23, 2022, 07:50:39 AM »
If that's not true, please explain where it's not, and what is true in place of that.  Am I wrong about the relative cash flow in bond fund shares in a major stock downturn?

It's possible that in a major downturn, many people get afraid and sell their stocks and buy bonds.  That could provide enough inflows into bond funds where there are net fund inflows.  For people like you who are selling $100 of the fund, they just make an accounting entry and take $100 from the $500 that a scared investor paid into the fund, give it to you, and take the remaining $400 and buy more bonds, not selling any.

I don't know the relative magnitude of the flows.  It could depend on the overall market trend and what is happening on a weekly or daily basis.  There are companies that track fund flows, but I don't think they can do it on an individual fund basis.  The mutual fund company knows of course.

Agreed.  Then again, what are we supposed to do at least once a year?   Rebalance our portfolio!   And if stocks are down, that means rebalancers sell bonds to buy stocks.  That could lead to some big flows out of bonds.  Anytime that a bond holder sells a low interest rate bond early, they lose value off of their bond holding because the bond face value is discounted due to the low rate.  If those bonds were owned by a fund, the fund loses value.  If the person purchasing the bonds is purchasing the bonds IN THE FUND, it's a cash flow wash.  But if the entity purchasing the bonds isn't doing it as a bond fund shareholder, but instead is purchasing the entire bond to hold in their own right, it's a loss for the bond fund value.

Does that make sense?