John Bogle scared me!

[Exflyboy]

Quick preface.. I retired 6 weeks ago with $1.25M stash roughly 80% invested in stock funds. Always looking for a way that the numbers don't work... Not really believing the 4% SWR etc etc. (thats why my Wife is still working and we currently have rentals).

Last night I am reading the AARP mag and there is a short piece by John Bogle (Vanguard founder) on page 47. He says....

"There is a gap between illusion and reality. Its only a matter of time until reality takes over. Many investment advisers and pension funds are assuming 8% returns in the future, and they are not going to get it. How do you get 8%% when the Treasury benchmark is yielding less than 3%? Its not going to happen.
The illusion that we will have high returns in the future is for those who believe that past is prologue. I (Bogle) have done a lot of talking and writing about reversion to the mean in the financial markets..... etc etc"

OK.. What the heck am I missing? Is Bogle saying the stock market will never return 8% as we go forward from here?.. Does that threaten our precious 4% SWR (based on a 50:50 stock:bond portfolio?)

This doesn't add up and I think somehow his comments have been taken out of context.

Did anyone read the AARP article and can comment?

Frank

[steveo]

I think that Bogle is stating that assuming an 8% return is being too optimistic. Does this threaten a 4% SWR ? My take is that relying on a 4% SWR is being too optimistic.

In saying that I think you need back-up plans such as:-

1. Having a certain number of years spending in cash or bonds. This way if the stock market tanks you can use cash to buy more stocks and live off cash - i.e. not liquidate your stock indexes.
2. Having other assets such as your house that you can downsize from.
3. Having the ability to spend less.
4. Being able to go back to work.
5. Getting some inheritance.

The op example of having a pretty good stash predominantly in stock funds to me is probably okay so long as you can spend less when the market doesn't go up like you expect it too.

I'm sort of changing my FI end point and making it a lower target however I will rely on all of the options listed excluding option 3 above in order to make my money last longer. I may though not retire and keep working so that I can utilise option 3 at some point as well.

[soccerluvof4]

+1^ thats exactly how I see it. Gotta have some diversification in your earnings strategy. For years Steve Jobs would always have cautious  guidelines and beat the earnings expected. Some say deliberate. In these times today I think everyone is CTA and we should be doing the same through whatever each individual is comfortable doing in being diversified.

[$200k]

More quotes

… In my new book, which is called The Clash of the Cultures, I have a chapter on future retirement planning, and it says our retirement system is … headed for a train wreck unless we do something about it.

I start off, simply put, with Social Security, which has to be changed in gradual, small ways to become solvent again. … Then you go to corporate defined benefit plans. They are assuming — and state and local government defined benefit plans even worse — they are all assuming that the market return in their portfolio will be 8 percent a year.

There is no way under the sun that they’re going to earn 8 percent. It’s just impossible. No matter what they do, they’re stuck in a bind given the kind of markets we expect in stocks and bonds. … The best they can really hope for is a 5 percent return unless some wonderful, attractive scenario for the future unfolds, which is really unimaginable. If anything, it’s going to be worse.

So if you think about them compounding their returns at 4 percent instead of the 8 percent that they build into the plan, they’re going to have to start putting a lot of money into those plans. They’re going to be bankrupt.

April 23, 2013: http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/john-bogle-the-train-wreck-awaiting-american-retirement/

[Eric]

Quick preface.. I retired 6 weeks ago with $1.25M stash roughly 80% invested in stock funds. Always looking for a way that the numbers don't work... Not really believing the 4% SWR etc etc. (thats why my Wife is still working and we currently have rentals).

Last night I am reading the AARP mag and there is a short piece by John Bogle (Vanguard founder) on page 47. He says....

"There is a gap between illusion and reality. Its only a matter of time until reality takes over. Many investment advisers and pension funds are assuming 8% returns in the future, and they are not going to get it. How do you get 8%% when the Treasury benchmark is yielding less than 3%? Its not going to happen.
The illusion that we will have high returns in the future is for those who believe that past is prologue. I (Bogle) have done a lot of talking and writing about reversion to the mean in the financial markets..... etc etc"

OK.. What the heck am I missing? Is Bogle saying the stock market will never return 8% as we go forward from here?.. Does that threaten our precious 4% SWR (based on a 50:50 stock:bond portfolio?)

This doesn't add up and I think somehow his comments have been taken out of context.

Did anyone read the AARP article and can comment?

Frank

The returns expected by pension fund managers don't affect you unless you're drawing a (potentially) underfunded pension.  This has nothing to do with a SWR, only with funding future pension funding amounts.

My advice would be to read and understand where the 4% SWR comes from, which is the Trinity Study.  They use past returns, variability, and sequencing as a model for future returns.  You'll need to draw your own conclusions as to whether you think that past returns can properly model future returns.  There's a lot of educated debate on both sides of that argument, but pretty much everyone agrees that the best way to combat possible lower returns is with flexibility and safety margins.

[Exflyboy]

Right.. Bogle makes the excellent point that a fair chunk of any gain is made from skimming fees.. they will also make losses worse by skimming the same percentage even in negative return years!!

What I thought was that the 7 to 8% we were looking for included a 1 to 2% increase  for inflation.. Thus 4% + 2% = 6%..

Seems like this is not the case and 4% is the max you can withdraw and be at roughly 96% sucsess.

We as MMM"s also have flexibility on our side and hopefully are building a moat between our SWR and actual returns, with extra income on the side, rental income some cash t weather the down years.

Frank

[livetogive]

I started out as a Bogle-head (still am I guess) but I find the above article kinda funny.

Half of his schtick is the unpredictability of markets; yet he seems to be predicting returns less than 8%.  I also don't see the correlation between the risk free rate and the stock market in his statement.  Without some sort of proof or support for this claim I think you could also say "With 3% Treasury benchmarks you'd be an idiot not to plan for 25% market returns" and be equally right.

re: reversion to the mean, if that's the case then the stock market returns will likely be higher bc the risk free rate will be expected to rise, unless you expect something crazy like a small to negative risk premium for a market portfolio (beta = 1). 

I love the man, love what he's done for the industry, and am a huge Vanguard promoter.  I just love to call out bs when I see it.  Also OP, 80% invested in the stock market is pretty aggressive for someone retired IMO, but as long as you're comfortable with it then it'll probably do fine.

[jfer_rose]

OK, I admit that this is an area that I am only beginning to learn about, but Jeremy Grantham, another expert in the markets is saying some of the same things.

I think that some of Grantham's concerns have to do with the policies of the Federal Reserve with regard to interest rates. Something about not expecting high growth in the market so long as interest rates are kept low? Grantham also talks about reversion to the mean.

On the bright side-- from what these experts do say, common Mustachian investment strategies are exactly where we should be (low fee index funds and the like). And as Mustachians we are in MUCH better positions to weather any storms compared to the general public.

Editing to say-- I'm not convinced that there is anything to be afraid of, but if there is the strategies we talk about here will be even more important.

[Exflyboy]

  Also OP, 80% invested in the stock market is pretty aggressive for someone retired IMO, but as long as you're comfortable with it then it'll probably do fine.

it is aggressive but for right now I have my Wife working ($30k plus excellent medical) plus I get rental income of around $15k, plus about a $30k in cash... so $45k which we are going to make sure we can live on for the next few years is close to what 4% of the $1.25M is.

So bottom line, even though I am "retired" I am not drawing from the stash so am comfortable with more risk at this point. When the Wife starts getting serious about retiring I will probably rebalance assuming the market is up.

Thats the plan and I'd be very happy to hear suggestions..:)

Frank

[foobar]

Bogle is just an old crank who doesn't understand  the value in modern low profit companies:) He might also be right:). Humans try and predict the future by using the past. It is really hard.  Are dividends lower because of the companies being overpriced or are they down because companies don't want to spend money? Are P/E ratios up because companies are over valued or because modern companies are incentivities to get rid of low P/E portions of business (see a company like IBM dumping hardware to be a software company. Or drug companies that abandon certain drugs even though they are still proftitable when generics come out)? Reality is it is a combo.

Have the Obama years been good for stocks at a pace(18.4%) that is unsustainable? Well you could argue that we did that pace for 20 years (1980-1999) and that after 8 years of no growth  more growth to get back to the mean is expected.  Or you could say after 5 years of high growth it is time to retrench. I can assure that in retrospect the decision will have been obvious.

I started out as a Bogle-head (still am I guess) but I find the above article kinda funny.

Half of his schtick is the unpredictability of markets; yet he seems to be predicting returns less than 8%.  I also don't see the correlation between the risk free rate and the stock market in his statement.  Without some sort of proof or support for this claim I think you could also say "With 3% Treasury benchmarks you'd be an idiot not to plan for 25% market returns" and be equally right.

re: reversion to the mean, if that's the case then the stock market returns will likely be higher bc the risk free rate will be expected to rise, unless you expect something crazy like a small to negative risk premium for a market portfolio (beta = 1). 

I love the man, love what he's done for the industry, and am a huge Vanguard promoter.  I just love to call out bs when I see it.  Also OP, 80% invested in the stock market is pretty aggressive for someone retired IMO, but as long as you're comfortable with it then it'll probably do fine.

[beltim]

It seems to me that earnings growth alone is a stupid value to value investments. And that's what Bogles argument is - that investment returns are based off of earnings growth plus inflation plus dividends. It sounds reasonable until you get to some very obvious scenarios. For example: say someone offers to sell you a company with guaranteed constant profits, with no dividends, and  without any earnings growth ever. What is an appropriate valuation of this company?  Using Bogles formula, the value of the company is 0.  This is clearly nonsense, which means his formula must be wrong

[TreeTired]

If you are "only" making 5%,  why wouldn't you still be safe withdrawing 4% annually?  Or for that matter even if your return was only 4%.   Or if you are not planning on living forever and you have enough "stache"  you could safely withdraw 5% with a 4% return. 

As stated, the real problem is building a pension system (public or private) with an assumed 8% annual return.   That allows you to shortchange the system on contributions and divert funds elsewhere (sound familiar?)

[grantmeaname]

Right.. Bogle makes the excellent point that a fair chunk of any gain is made from skimming fees.. they will also make losses worse by skimming the same percentage even in negative return years!!

What I thought was that the 7 to 8% we were looking for included a 1 to 2% increase  for inflation.. Thus 4% + 2% = 6%..

Seems like this is not the case and 4% is the max you can withdraw and be at roughly 96% sucsess.

We as MMM"s also have flexibility on our side and hopefully are building a moat between our SWR and actual returns, with extra income on the side, rental income some cash t weather the down years.

Frank

In addition to inflation and fees, which you rightly mention, don't forget to consider that pension funds have a much more conservative and much less diversified asset allocation than a well-prepared early retiree.

[Trip]

It seems to me that earnings growth alone is a stupid value to value investments. And that's what Bogles argument is - that investment returns are based off of earnings growth plus inflation plus dividends. It sounds reasonable until you get to some very obvious scenarios. For example: say someone offers to sell you a company with guaranteed constant profits, with no dividends, and  without any earnings growth ever. What is an appropriate valuation of this company?  Using Bogles formula, the value of the company is 0.  This is clearly nonsense, which means his formula must be wrong

After reading Security Analysis by: Benjamin Graham and David Dodd, you might change your mind.  (There are others that would give the same information). 

But to save you some time here is a thought experiment.  What if under your same constraints, for one reason or another, nobody will ever pay you for your share if you try to sell.  There may be plenty of retained earnings there that you technically own a share of.  However, if they never pay dividends and nobody will pay you for your share, then you never get any money.  Therefore, making the value of the company to you equal to 0.

It has been said in many places in the value investing circle, that if a company does not pay dividends and never plans to pay dividends, then it is not worth anything to you as an investor.  Speculators are a different story as they are thinking about what somebody else will pay them for that share.

[grantmeaname]

Not if the assets have any liquidation value, or if management can ever possibly change. You've got a totally contrived and unrealistic example that says nothing about the real world.

[dragoncar]

It seems to me that earnings growth alone is a stupid value to value investments. And that's what Bogles argument is - that investment returns are based off of earnings growth plus inflation plus dividends. It sounds reasonable until you get to some very obvious scenarios. For example: say someone offers to sell you a company with guaranteed constant profits, with no dividends, and  without any earnings growth ever. What is an appropriate valuation of this company?  Using Bogles formula, the value of the company is 0.  This is clearly nonsense, which means his formula must be wrong

After reading Security Analysis by: Benjamin Graham and David Dodd, you might change your mind.  (There are others that would give the same information). 

But to save you some time here is a thought experiment.  What if under your same constraints, for one reason or another, nobody will ever pay you for your share if you try to sell.  There may be plenty of retained earnings there that you technically own a share of.  However, if they never pay dividends and nobody will pay you for your share, then you never get any money.  Therefore, making the value of the company to you equal to 0.

It has been said in many places in the value investing circle, that if a company does not pay dividends and never plans to pay dividends, then it is not worth anything to you as an investor.  Speculators are a different story as they are thinking about what somebody else will pay them for that share.

There's always liquidation value

[beltim]

It seems to me that earnings growth alone is a stupid value to value investments. And that's what Bogles argument is - that investment returns are based off of earnings growth plus inflation plus dividends. It sounds reasonable until you get to some very obvious scenarios. For example: say someone offers to sell you a company with guaranteed constant profits, with no dividends, and  without any earnings growth ever. What is an appropriate valuation of this company?  Using Bogles formula, the value of the company is 0.  This is clearly nonsense, which means his formula must be wrong

After reading Security Analysis by: Benjamin Graham and David Dodd, you might change your mind.  (There are others that would give the same information). 

It's possible that I would change my mind after rereading that, but it seems unlikely to do so on a second reading.  Especially since Graham values a company with unchanging earnings at 8.5 times the earnings.  You may want to re-read Security Analysis.

[Trip]

It's possible that I would change my mind after rereading that, but it seems unlikely to do so on a second reading.  Especially since Graham values a company with unchanging earnings at 8.5 times the earnings.  You may want to re-read Security Analysis.

That is assuming dividends at some point or liquidation

There's always liquidation value

In the real world yes.  But by the assumptions given here.  i.e. that there are guaranteed constant profits, then there would be no need to ever liquidate.  I never commented on the validity of the assumptions, I merely operated within them

[beltim]

It's possible that I would change my mind after rereading that, but it seems unlikely to do so on a second reading.  Especially since Graham values a company with unchanging earnings at 8.5 times the earnings.  You may want to re-read Security Analysis.

That is assuming dividends at some point or liquidation

There's always liquidation value

In the real world yes.  But by the assumptions given here.  i.e. that there are guaranteed constant profits, then there would be no need to ever liquidate.  I never commented on the validity of the assumptions, I merely operated within them

I guarantee that I could get an investment group together to do a leveraged buyout of a company trading at twice its annual profits.  There are plenty of mechanisms to unlock that value without dividends or liquidation, unless you're including acquisitions in liquidation.

The larger—and my original—point is that using only earnings growth rates is a terrible way to value a company or basket of companies.

[Trip]

It's possible that I would change my mind after rereading that, but it seems unlikely to do so on a second reading.  Especially since Graham values a company with unchanging earnings at 8.5 times the earnings.  You may want to re-read Security Analysis.

That is assuming dividends at some point or liquidation

There's always liquidation value

In the real world yes.  But by the assumptions given here.  i.e. that there are guaranteed constant profits, then there would be no need to ever liquidate.  I never commented on the validity of the assumptions, I merely operated within them

I guarantee that I could get an investment group together to do a leveraged buyout of a company trading at twice its annual profits.  There are plenty of mechanisms to unlock that value without dividends or liquidation, unless you're including acquisitions in liquidation.

The larger—and my original—point is that using only earnings growth rates is a terrible way to value a company or basket of companies.

I was including acquisition in liquidation, but I admit that depending on the company a leveraged buyout would likely work.  However, this really depends on whether or not there is a large of enough chunk of shareholders willing to sell so that you will be able to garner seats on the board doesn't it?  Again, this works many times, but there are also times that it doesn't. 

I saw the words "some very obvious scenarios" in your post and set off to prove that your scenario was not quite so obvious.  Not very productive I suppose.  (Unless the off chance occurs that someone who doesn't already look at multiple angles of these things decides to read)

I agree with your original premise and apologize for being overly critical of the anecdote provided.

Modified:  "not quite some obvious" -> "not quite so obvious"

[beltim]

I agree with your original premise and apologize for being overly critical of the anecdote provided.

Modified:  "not quite some obvious" -> "not quite so obvious"

No worries.  I was excited to see that you had engaged my point, but was disappointed that we got sidetracked into my example.  I'm kind of surprised that no one else has addressed it.  Earnings growth is great and all, but you can make a ton of money on companies that don't grow earnings, whether you're a full or a partial owner.

[arebelspy]

Earnings growth is great and all, but you can make a ton of money on companies that don't grow earnings, whether you're a full or a partial owner.

Hell, you can make a lot of money on companies that go bankrupt.  Buy, and hold, and never sell, and experience a 100% loss on the share value (they go to 0), and you can still come out fine.

http://www.joshuakennon.com/eastman-kodak-example/

It's a great case study to learn from, and see the fallacy of the "what if it goes bankrupt."

To your point, there's a lot of things to evaluate when looking at a company, earnings growth being just one.

[Shor]

Earnings growth is great and all, but you can make a ton of money on companies that don't grow earnings, whether you're a full or a partial owner.

Hell, you can make a lot of money on companies that go bankrupt.  Buy, and hold, and never sell, and experience a 100% loss on the share value (they go to 0), and you can still come out fine.

http://www.joshuakennon.com/eastman-kodak-example/

It's a great case study to learn from, and see the fallacy of the "what if it goes bankrupt."

To your point, there's a lot of things to evaluate when looking at a company, earnings growth being just one.

That was an awesome read, thank you for that.

One odd thing that always strikes me with those 'go back X years and invest $Y into stock Z" is that it is typically picking out a blue chip stock, and then going back in history to when they were a just one out of hundreds of generally healthy looking companies. Then tracking growths in business, dividends, and spin offs all of which add to the final value. The problem I have is that you could just as easily 30 years ago have picked up a company that gives no dividend, or was already on its way out of the market, and your investment suffers, hilariously..

Like the article said, if you don't have an interest in reviewing quarterly earnings and keeping up with the company then it really was just gambling / speculating.
I also agree with the article completely that indices are the way to go to minimize singular risks.
We all want to pretend being the next Warren Buffet, but one reason he's so good, is because everyone else is just that bad at what he does (analyzing a company).

[grantmeaname]

you could just as easily 30 years ago have picked up a company that gives no dividend, or was already on its way out of the market, and your investment suffers, hilariously..

Yeah, if you bought Google in 2002 I bet you'd be feeling pretty dumb today with your lack of dividends!

Like the article said, if you don't have an interest in reviewing quarterly earnings and keeping up with the company then it really was just gambling / speculating.

And if you do review quarterly earnings and keep up with the company it's still really just gambling/speculating.

[Bateaux]

I think you are much safer using 2 or 3 percent withdrawal rate.  As time goes on you may make wiggle room to increase the amout.  I'm not counting on Social Security being there.  If it is I'm grabbing as much as I can at 62.

[Eric]

I think you are much safer using 2 or 3 percent withdrawal rate.  As time goes on you may make wiggle room to increase the amout.  I'm not counting on Social Security being there.  If it is I'm grabbing as much as I can at 62.

And you're much safer than that using a 0 or 1% withdrawal rate.  Also, if you keep working.

[Bateaux]

Yep it's al about comfort zone.  Certainly trading hours for dollars is a losing proposition.   I'd like to have at least 100 after tax dollars daily guaranteed. I'd want that to index up with inflation.   For that my next egg must continue to grow even once I'm drawing from it.

[arebelspy]

Yep it's al about comfort zone.  Certainly trading hours for dollars is a losing proposition.   I'd like to have at least 100 after tax dollars daily guaranteed. I'd want that to index up with inflation.   For that my next egg must continue to grow even once I'm drawing from it.

Agreed. And that's what it's done the vast majority of the time historically with a 4% SWR.

[ShortInSeattle]

Here is another viewpoint on expected returns moving forward. And of course no one us a crystal ball...

http://www.rickferri.com/blog/investments/portfolio-solutions-30-year-market-forecast/

[Redfive20]

This is the one I read often. This is his recent weekly market comments, Hhttp://www.hussmanfunds.com/wmc/wmc140217.htm. He is considered as a perm bear in the recent cycle of stock market. He was well known to avoid most of 2008-2009 crash, but miss the most rebound afterwards. I am not using any of his service. I just enjoy reading his weekly market comments.