Author Topic: Market Fear/ SWR - Irrational Fear?  (Read 22524 times)

arebelspy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #50 on: February 03, 2013, 10:15:27 AM »
I know I wrote a wall of text, but would you be willing to share some of your thoughts on why you disagree with the other points?

Certainly.  I didn't want to argue for the sake of arguing, because you made some good points, but if it will help you or others think though your positions more (even if it reaffirms what you're already thinking), I'd be glad to do so.  :)

- If one of us was ready to retire tomorrow because we had saved up a stash of $X in Vanguard assets (90% in stocks, 10% in bonds), what would you do if the markets tanked and your stash was now worth 0.5 X or 0.75X? For most, wouldn't it mean working for however many more years to get back to X? I doubt anyone would go forward with their ER the next day if their portfolio was suddenly and drastically reduced like this. And if that's the case, then I think no one is ready to ER if they would change their opinion about being ready based on the market fluctuations in any given day, week, or month.

While there are some scenarios where one might retire right after a market tank (a pension kicking in at retirement, for example, or most of their income covered by rental income, so they can ignore the portion of their portfolio that took a hit from the market until it has time to recover),  I will grant you that most people wouldn't ER after the market took a large dive.  But what I don't agree with is that no one is ready to ER, because one can prepare for and deal with such a scenario.  It's called: riding it out.  If I was ready to ER on a 80/20 portfolio and the market took a dive, would I ER the next day?  Probably not, but only because I have an awesome opportunity to buy stocks cheap, so the income for the next 6 months, plowed into stocks would lower my cost-basis.  Would I then ER 6 months later even if the market was only back up to .8X?  Sure.  Do I need to get back up to the full $X?  No.  Would I be more careful with my spending early on?  Of course.  But I'd only be staying on because I was already in that position to take advantage of it.  On the flip side, if I ER'd and 6 months later the market took a dive, would I be looking for a job?  Heck no!  I'd stay the course and ride it out.

So sure, one might not immediately ER right after a market dive, but nor do they have to go back to work if it does dive after ER, so saying no one is ready to ER in that situation is, IMO, silly.

- We all know bad sequencing is pretty much the primary factor that makes for bad outcomes. So the pressure to get through the early years is probably the hardest and the most uncertain. But fortunately that's when we're still able to exert large amounts of control (take larger investment risks, continue to work on the side every now and again, etc.). So by utilizing the safety margins, we can do easy things to make the stash continue to increase, or at least not decrease, until the window grows smaller for our retirement.

Agreed.  And by doing those things you can insulate your portfolio in "down" years. So keeping that in mind, why worry so much about a market crash, since you can do things to help mitigate the impact in that scenario?

- Inflation has an increasing (compounding) effect over time. The converse is also true -- it has a decreased effect in shorter periods of time. Assuming life spans don't radically change, inflation will be meaningless to us at age 100. It will probably be meaningless even at age 80-90, assuming we can live that long. It will be of some very small importance around age 70, and it keeps increasing in importance as we back up in age (becoming quite important at early ER ages). Again, by pushing off inflationary pressures (preserving your stash) until later years, you are effectively mitigating its impact.

Hedging against inflation is always good, but unless you know exactly when it will hit worst (i.e. you can predict the future), saying that pushing it off in the early years is more important is meaningless.  If inflation is 2% for your fist 5 years, and you match inflation (getting a 0% real return), then it's 15% and you get that same 2% nominal return (-13% real return) you pushed off inflation in your early years, yes, but then got hurt real bad for the next few.  Inflation, whenever it hits, has the potential to ravage your buying power.  That's why you need to hedge against it, not just in early years, nor saying it doesn't matter in later years, but be wary of it in any situation.  This does not mean fear it, but rather understand it and protect against it.  A market crash will always come back, barring collapse of society or government, or something catastrophic like that.  This is due to inflation.  The market is backed by businesses selling things.  As those goods increase in price due to inflation, the worth of those companies increase, and stocks increase.  It's not perfectly tied together, and they can even move out of sync, but over the long haul, they track together and are correlated.  So if the market crashes 40%, 50%, whatever, it will come back as those companies continue doing what they're doing, inflation hits, those companies are worth more.   You can wait out a market crash.  You can't "wait out" inflation, your buying power doesn't just come back (barring some deflationary scenario, which is fairly unlikely).  That's why inflation is always relevant, not just at certain points in your life.

- We've probably all known people who were ready to retire (at a "normal" age of 65) around 2007 - 2009, but had their plans derailed for several years by the market crash. This makes no sense. It is foolhardy to be so heavily leveraged in growth stocks that your stash could be destroyed early, right as you retire, and you have to rely on a resurgence in the market to get back to whole (if it's possible at all).

Go to the early-retirement.org forums, there are literally dozens of people who ER'd right before the crash in 2000 and are doing fine a decade later, and people who ER'd right before the 08 crash and are doing fine 5 years later (the majority of which have even more than they started with).  This is due to flexibility in spending, mostly, IMO.  Look at raddr's Y2K retiree.  He's screwed.  But he (being a theoretical simulation) kept the same 4% SWR, increased with inflation.  Most wouldn't facing the same scenario (and indeed, didn't), and are doing just fine.

- For those saying how dangerous inflation is, I think you have to equally acknowledge how dangerous it is to risk your portfolio in the early years through market risk. At least with inflation you can gauge it, follow it, and adjust accordingly. You can't do that with market risk (at least I don't have that crystal ball). Inflation right now is pretty much non-existent, so I can adapt accordingly.

The opposite for me.  If one isn't protecting against inflation (probably via owning some sort of inflation hedge), it's so dangerous.  Market risk, as I noted above, can be adjusted to because of your item number two, safety margins, flexibility, etc. and the fact that you can (at least partially) wait it out, so even if you aren't "protected against" volatility (because you hold a large portion of your portfolio in equities) you can deal with a crash.

Both are separate issues, and both are something an early retiree needs to be aware of. Both are dangerous.  But I find them like the snake in the jungle versus the tiger.  The snake's bite is guaranteed death, and is slow and painful.  The tiger bite is big and scary, but not guaranteed to kill you, you can deal with it after it happens (tourniquet, etc.).  People are more scared of the tiger fangs though, because it looks scary.

Inflation is the snake.  It's silent, no one talks too much about it, and it will kill you.  But people are scared of the big fangs of a market crash.  Be aware of both.

Since you are invested heavily in real estate, wouldn't you say you have effectively hedged yourself against inflation and market downturns, and you won't be heavily leveraged in riskier market assets that could wipe out your cash flow and net worth?

Yes, that is one advantage of real estate, and one reason I plan to always have at least some aspect of my portfolio containing at least a small inflation hedge like real estate or precious metals.

Let me close this long reply with the reminder that there are no "right" answers, and, as I said earlier, they are great questions worth thinking about and having each person reach their own conclusions.

Best of luck!
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DoubleDown

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #51 on: February 04, 2013, 01:34:21 PM »
I think everyone has provided some really helpful ideas and opinions on this topic (thanks in particular tooq and arebelspy for addressing my points at length). We really are, I think, closer in opinion than might otherwise be evident.

I'll add that one reason I'm also a little more optimistic about handling inflation is being able to control some of the big ticket costs like interest on a home or a car that tend to take up large chunks out of a standard budget. We can keep housing costs very stable by either owning our homes outright or locking in low, long-term interest rates. And by buying cheap, used cars with cash. So even if interest rates go up to 15% again one day, or rents quadruple in the next 40 years, it won't matter -- you can still pay your same housing payment as you do today (taxes and insurance will rise, but those are a much smaller part of the overall cost).

One thing I wouldn't want to have to do is downgrade my lifestyle or other spending as a result of down markets or not hedging enough against inflation. Yes, it's a great tool to have in the arsenal, just one I'd hope to exercise as a later or last resort. And one I'd have much more trouble getting my wife on board with!

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #52 on: February 04, 2013, 01:45:49 PM »
I'll add that one reason I'm also a little more optimistic about handling inflation is being able to control some of the big ticket costs like interest on a home or a car that tend to take up large chunks out of a standard budget. We can keep housing costs very stable by either owning our homes outright or locking in low, long-term interest rates. And by buying cheap, used cars with cash. So even if interest rates go up to 15% again one day, or rents quadruple in the next 40 years, it won't matter -- you can still pay your same housing payment as you do today (taxes and insurance will rise, but those are a much smaller part of the overall cost).

While I don't think this will tame the inflation beast your point(strategy?) is a fair one particularly because housing accounts for I think 28% of the official inflation figures - so in some regard this is the portion of expected inflation that might be negated with this strategy.

arebelspy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #53 on: February 04, 2013, 05:42:38 PM »
I've always had trouble with that logic of "I'm doing X with my budget, which makes me more inflation proof".

People will say stuff like "well I have a paid for home, so my expenses are so low, so inflation doesn't worry me" or "I don't plan on ever having a car, so cars going up in price doesn't worry me."

Okay, fine, but if you have a SWR to support a certain purchasing power, and you don't meet inflation, you lose.  Regardless of if you don't have a car or house or what have you - whatever goods you ARE buying will go up in price, and you hit retirement fail.

Sure, you could have had a car, and then needed to replace it after 15 years (at a higher, inflated number), but presumably you would have had a larger stache to be able to do so.  In any case, a larger stache needs to meet inflation to buy those big ticket items, or a smaller stache needs to meet inflation to pay for your expenses (that has no big ticket items), but either way you have to worry about inflation.

Either way, your expenses will increase due to inflation, so you have to match or beat inflation.  Regardless of whatever you tweaked your budget to be. 

YMMV (and yes, locking in a low mortgage is one - very rare - exception to the above, IMO).

But yes, I'm sure we're all (mostly) in agreement.  It just little nits that are fun to discuss.  :)
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dragoncar

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #54 on: February 05, 2013, 10:51:43 AM »

People will say stuff like "well I have a paid for home, so my expenses are so low, so inflation doesn't worry me" or "I don't plan on ever having a car, so cars going up in price doesn't worry me."


If you are worried about inflation, I'd say it's better to have a mortgage.  Lets say you lock in a 30 year mortgage at 4% (whatever) with 20% down.  Inflation rises to 10%.  In other words, the nominal value of your home increases by 10%.  Well then your return on equity is 50%.

Of course, another way to look at it is that a 30 year mortgage locks in your payments.  So over time, your payments begin to look real cheap as inflation increases housing costs for everyone else.

As a connoisseur of "two buck chuck," I'll note that costs go up in a stepwise fashion.  Trader Joe's kept the price (in California) at $2 for 11 years, and recently increased it to $2.50.  For any individual product, maybe you could defer that cost increase.  But on average, your basket of goods is going to increase in price.  If you retired in 2012, your 2013 wine expense is now 25% higher!  This counteracts the fact that McDonalds may keep their McDoubles at $1 for another year (as an example).

DoubleDown

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #55 on: February 05, 2013, 02:08:41 PM »
It won't grow the way it needs to in order to be large enough to sustain when inflation eventually rears its ugly head.

Go play with FIRECalc, and put in some scenarios with a "safe" Asset Allocation over 40 years.

To balance what might seem like outrageous optimism, I have tested out scenarios in firecalc in the past, and always end up with Zero failure scenarios even with a only a 20% equities allocation, standard 3% inflation, 50 year outlook, and an outrageously luxurious (at least to me) budget. Probably just proves I'm a scaredy-pants for not already being ER, particularly with a wife who wants to keep working!

Ozstache

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #56 on: February 05, 2013, 05:26:24 PM »
It won't grow the way it needs to in order to be large enough to sustain when inflation eventually rears its ugly head.

Go play with FIRECalc, and put in some scenarios with a "safe" Asset Allocation over 40 years.

To balance what might seem like outrageous optimism, I have tested out scenarios in firecalc in the past, and always end up with Zero failure scenarios even with a only a 20% equities allocation, standard 3% inflation, 50 year outlook, and an outrageously luxurious (at least to me) budget. Probably just proves I'm a scaredy-pants for not already being ER, particularly with a wife who wants to keep working!
My situation exactly. We need to grow some ..... methinks!

DoubleDown

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #57 on: February 06, 2013, 01:42:22 PM »

My situation exactly. We need to grow some ..... methinks!

Yes you are right! I've followed your own ER situation as you've described it in the past, and I can definitely relate. I sure hope you're able to make the jump soon, as you've planned. I'll be cheering for you from my desk at work -- ha. Or hopefully from my patio drinking a beer. Come to the U.S. when you make the leap and I'll have a six-pack and a steak (or seafood if that's your thing) waiting for you!

I'm hoping to make the jump within one year. My primary hangups are:

- Want to maintain a fairly high standard of living until pensions/etc. kick in, without touching the "old man" money, that requires a fairly large "young man" stache that can last about 12 years and preserve some principal

- Wife is non-Mustachian and afraid of me quitting since I'm by far the primary income earner. Also does not want to leave our high COL area which keeps me chained to my desk a little while longer

- Have to wait until some events line up to be able to turn assets into cash flow (such as selling or converting some RE, waiting for leases to expire)

- Have kids that are still pretty young and want to have a good safety net, college funds for them, braces if needed, etc.

Ozstache

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #58 on: February 06, 2013, 02:17:24 PM »
Yes you are right! I've followed your own ER situation as you've described it in the past, and I can definitely relate. I sure hope you're able to make the jump soon, as you've planned. I'll be cheering for you from my desk at work -- ha. Or hopefully from my patio drinking a beer. Come to the U.S. when you make the leap and I'll have a six-pack and a steak (or seafood if that's your thing) waiting for you!

I'm hoping to make the jump within one year. My primary hangups are:

- Want to maintain a fairly high standard of living until pensions/etc. kick in, without touching the "old man" money, that requires a fairly large "young man" stache that can last about 12 years and preserve some principal

- Wife is non-Mustachian and afraid of me quitting since I'm by far the primary income earner. Also does not want to leave our high COL area which keeps me chained to my desk a little while longer

- Have to wait until some events line up to be able to turn assets into cash flow (such as selling or converting some RE, waiting for leases to expire)

- Have kids that are still pretty young and want to have a good safety net, college funds for them, braces if needed, etc.
If I get my sorry ass over to the US, you'd better be ERed too if I come to see you!

You should feel a little better than me as your primary hangups are more significant than mine, namely:
  • I will be able to achieve a fairly high standard of living on my young man's money until my old man's money kicks in.
  • My wife is semi-Mustachian and is far more worried about how annoying I will be at home with what she thinks will be an endless stream of Mustachian tips than any loss of income.
  • I will have immediate and sufficient cash flow upon ERing
  • My two boys are now in their 20's, with the youngest having just been weaned off financial support and living away from home and the eldest paying his fair share of living expenses ie. food, utilities and car (rent is free on the proviso that he saves what he should pay, which he does).

I seriously don't know what's holding me back from making the jump to ER!

I'm about to embark upon a couple of week motorcycle trip down to Tasmania where I'll be able to think through all my wussypants thoughts and hopefully result in a solid ER strategy.
« Last Edit: February 07, 2013, 06:56:47 AM by Ozstache »

DoubleDown

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #59 on: February 07, 2013, 03:10:29 PM »

If I get my sorry ass over to the US, you'd better be ERed too if I come to see you!


Sounds like an awesome trip, enjoy!

I will definitely have to be ER when you come for those beers. I'm pretty dumb, but I'm not dumb enough to be chained to my desk while leaving my wife alone to drink beer with a kick-ass, motorcycle-riding, Tasmanian-traveling, independently wealthy Aussie with an accent. I'll make that my motivation to make the jump in time ;-)

arebelspy

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #60 on: May 19, 2013, 12:59:48 PM »
Because stirring up the 4% SWR debate is always fun...

User "timwalsh300" over on the E-R.org forums had an interesting post where he said:
Quote
I don't understand the quote about a portfolio earning 8% back then, and earning only 4% today. When the Trinity study was published in 1988, a 60/40 portfolio had a 30-year trailing real return of 3.73% according to Vanguard. In the 30 years ending in 2011 the same portfolio had a real return of 7.22%.

Whenever this comes up, someone points out that 4% withdrawal was the absolute worst case during a long period of stagnant stock prices coupled with skyrocketing inflation. I still haven't seen a good explanation as to why the future looks substantially worse than that.

Certainly puts some perspective for those worried about the 4% SWR going forward due to expecting anemic returns. 

;)
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matchewed

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #61 on: May 19, 2013, 01:17:44 PM »
I often wonder if it isn't just a side affect of the recent financial worries that spawned more concerns about the validity of the 4% SWR in the US. Fear instead of data. Don't get me wrong it won't work internationally, the data proves that. I wonder if people just aren't anticipating some sort of paradigm shift with the US's seemingly endless growth over the long run. It reminds me of the thread a few months ago about things being different this time - http://www.mrmoneymustache.com/forum/investor-alley/things-might-be-different-this-time/

Are we just shell shocked with two massive dips within about a decade? Are things truly different this time? I don't know, those are some pretty damn big questions. My take is fairly positive towards the future but my crystal ball kinda sucks at that sort of thing.

arebelspy

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foobar

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #63 on: May 19, 2013, 09:43:45 PM »
There is always a chance this time is different and we will see something that we haven't in the last 100 years (not a very long time in the big picture).  I have to imagine if the US ever has the performance of japan since 1990 (basically went from 40k to 10k over the past 20 years and the savings bonds have also had really low rates. I know real estate cratored also but I don't know how that affect rentals ) that the 4% rule will seem hopeless optimistic.  But you would have to be pretty pessimistic to worry about that. 

And there is always a chance you bought 10 houses in a city that turns into a ghost town. I have to imagine for example houses bought in detroit in 1980 in a middle class neighborhood are not bring in a lot of money as the city has shrunk from 1.3 million to 700k  and your house price has lost value after accounting for inflation. Obviously that is an extreme example but there are occasionally things that happen which make the housing markets big losers.

But at a certain point you can't worry about stuff like this. You diversify (only half half your income from rentals, split your assets between bonds/stocks/REITs and so on) and build a buffer zone (either assume a 3% rate, count on SS,....).


Another decent defense of the 4% SWR: http://investingforaliving.wordpress.com/2013/05/18/the-4-rule-lives-despite-what-the-ny-times-says/

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #64 on: May 20, 2013, 09:53:58 AM »
Because stirring up the 4% SWR debate is always fun...

User "timwalsh300" over on the E-R.org forums had an interesting post where he said:
Quote
I don't understand the quote about a portfolio earning 8% back then, and earning only 4% today. When the Trinity study was published in 1988, a 60/40 portfolio had a 30-year trailing real return of 3.73% according to Vanguard. In the 30 years ending in 2011 the same portfolio had a real return of 7.22%.

Whenever this comes up, someone points out that 4% withdrawal was the absolute worst case during a long period of stagnant stock prices coupled with skyrocketing inflation. I still haven't seen a good explanation as to why the future looks substantially worse than that.

Certainly puts some perspective for those worried about the 4% SWR going forward due to expecting anemic returns. 

;)

Because you brought it back up and I am in the camp of things are different this time (not because they weren't different at other times) but because the speed. technology, leverage, money printing, government manipulation, etc.

Here is an article from yesterday that hits on a key point for me....http://online.wsj.com/article/SB10001424127887324767004578484913679967772.html#mod=sunday_journal_primary_hs

Will it always be this way, no. Will we be saying its different this time in the future, yes.  But the sequencing matters when asking is it different this time and something is wrong in the global markets and economic drivers right now that may yield very low returns.


matchewed

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #65 on: May 20, 2013, 10:13:52 AM »
Because stirring up the 4% SWR debate is always fun...

User "timwalsh300" over on the E-R.org forums had an interesting post where he said:
Quote
I don't understand the quote about a portfolio earning 8% back then, and earning only 4% today. When the Trinity study was published in 1988, a 60/40 portfolio had a 30-year trailing real return of 3.73% according to Vanguard. In the 30 years ending in 2011 the same portfolio had a real return of 7.22%.

Whenever this comes up, someone points out that 4% withdrawal was the absolute worst case during a long period of stagnant stock prices coupled with skyrocketing inflation. I still haven't seen a good explanation as to why the future looks substantially worse than that.

Certainly puts some perspective for those worried about the 4% SWR going forward due to expecting anemic returns. 

;)

Because you brought it back up and I am in the camp of things are different this time (not because they weren't different at other times) but because the speed. technology, leverage, money printing, government manipulation, etc.

Here is an article from yesterday that hits on a key point for me....http://online.wsj.com/article/SB10001424127887324767004578484913679967772.html#mod=sunday_journal_primary_hs

Will it always be this way, no. Will we be saying its different this time in the future, yes.  But the sequencing matters when asking is it different this time and something is wrong in the global markets and economic drivers right now that may yield very low returns.


So which one was the key point for you in the article?

Is it the concern over QE?

The Shiller P/E ratio?

That bonds and stocks are sending "mixed signals" according to the author (which I'm not even sure I understand what he's saying)?

I'm far far far from an economist but I don't think that bonds and stocks need to send the same message. Does an arbitrary evaluation of a company's performance and the desire for corporate/government debt need to send the same message?

Mostly I get from the author is a) he doesn't like the Fed's current policy and b) stocks and bonds sometimes will rise and fall together and that is bad and that might happen. For a) fine not much I can argue against with an opinion (how dare you not like cookies your opinion is wrong), as for b) that seems to be a fairly random prediction based on two points in history. Unemployment is getting better in the US and companies are reporting higher profits other than the mess in Europe what economic drivers are particularly at risk? I'm not seeing screaming growth in the economy but it's not exactly just limping along.

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #66 on: May 20, 2013, 10:33:16 AM »
For me it is kind of all of those things.

The last two decades or so were driven signifcantly by massive increase in debt both corporate and public and declining interest rates....those two things simply can't happen any further because of this IMO it is different this time. QE only made this situation that much worse. 

Also regarding Shiller PE or TTM PE or forward TM PE they are all high right now and that is not accounting for a what most people agree is a low to no growth scenario for foreseeable future.  Also, most of the earnings growth over the past few years has come from cutting/efficiency/increased productivty/low rates and not much from top line revenue growth.  Similar to above, you can't cut forever and at some top line matters.  Although based on the spread to risk free return the markets are fairly valued IMO....but per my note above and largely due to QE I don't thing the US Treasury is a risk free tool right now. 

So the point of this, and the article, is that when QE stops and/or rates rise because the Fed can't control them any longer (such as when inflation starts heating up) there will be a decline in both when typically they are not correlated historically (one is rising as other is falling). 

I am not saying run for the hills or stay out of the markets, but recognize it for what it is and make informed decisions and possibly accept that SWR assumptions may need to change.




matchewed

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #67 on: May 20, 2013, 10:39:36 AM »
Are those things you mentioned relatively short term concerns? I mean when we discuss the viability of the 4%SWR we're thinking in terms of decades not a few years. What is your confidence that the risks you outlined will be valid for the next 5/10/20 years?

Don't get me wrong I think the possibility of a slower growth global economy is a perfectly reasonable idea. But I think it would take a larger global shift in spending habits and culture that I do not think is present at this time. Would it then be hinged instead of on spending habits that we've reached "peak consumption"? Are we as a global market just capped out in what we're able to purchase?

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #68 on: May 20, 2013, 10:51:04 AM »
Are those things you mentioned relatively short term concerns? I mean when we discuss the viability of the 4%SWR we're thinking in terms of decades not a few years. What is your confidence that the risks you outlined will be valid for the next 5/10/20 years?

Don't get me wrong I think the possibility of a slower growth global economy is a perfectly reasonable idea. But I think it would take a larger global shift in spending habits and culture that I do not think is present at this time. Would it then be hinged instead of on spending habits that we've reached "peak consumption"? Are we as a global market just capped out in what we're able to purchase?

I think they are valid but will become less valid as it normalizes.....hence the my comment about sequencing, which always matters, but never more so than now IMO.  So if you were retiring in the next 5 years I would say it matters a lot but if you were retiring in 15 years then it might not matter at all.

One thing people don't think about when they hear a PE ratio is the inverse of it, which is the return. A 15 P/E is 6.7% cash return and a 20 P/E is a 5% return - this in itself matters but combined with the low growth it matters far more. If there were any sign that the economy would start to recover at a 4-6% annual increase in GDP then it would be fine, but we are looking at 1-2% with maybe an really optimistic 3% growth in GDP for the forseeable future - this makes the market overvalued.

Also, I don't think we have necessarily hit peak consuption but we may have hit peak productivity, which in itself is not bad but if demand just remains flat (as it seems to be and QE has not influenced it a bit) its not good. 



grantmeaname

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #69 on: May 22, 2013, 07:57:34 AM »
One thing people don't think about when they hear a PE ratio is the inverse of it, which is the return. A 15 P/E is 6.7% cash return and a 20 P/E is a 5% return - this in itself matters but combined with the low growth it matters far more. If there were any sign that the economy would start to recover at a 4-6% annual increase in GDP then it would be fine, but we are looking at 1-2% with maybe an really optimistic 3% growth in GDP for the forseeable future - this makes the market overvalued.
That's ignoring the foreign component of domestic corporations' revenues, though, and the developing world is moving much faster than we are. For a company like coke that does much of its business in economies that are growing at 8%, 5% might be a pretty reasonable overall return.

tooqk4u22

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Re: Market Fear/ SWR - Irrational Fear?
« Reply #70 on: May 22, 2013, 12:34:47 PM »
One thing people don't think about when they hear a PE ratio is the inverse of it, which is the return. A 15 P/E is 6.7% cash return and a 20 P/E is a 5% return - this in itself matters but combined with the low growth it matters far more. If there were any sign that the economy would start to recover at a 4-6% annual increase in GDP then it would be fine, but we are looking at 1-2% with maybe an really optimistic 3% growth in GDP for the forseeable future - this makes the market overvalued.
That's ignoring the foreign component of domestic corporations' revenues, though, and the developing world is moving much faster than we are. For a company like coke that does much of its business in economies that are growing at 8%, 5% might be a pretty reasonable overall return.

I think that is a valid point about factoring in international growth and in that context a 5% return (in theory is a real return) is ok; however, the portion of the globe that is expected to grow by 8% is the minority (and is really only China) and is offset by those that are flat or negative.  Global GDP growth is forecast to be 4% or less http://www.npr.org/blogs/thetwo-way/2013/04/16/177451724/imf-lowers-2013-economic-growth-forecasts

Investing in the total pie is not the answer unless you want to have low/zero/negative real returns - investing in the S&P 500 where access to debt and equity capital is robust, economies of scale and efficiecies are great that combine and theoritically have strong management teams to deploy this capital and capitalize on the scale in countries/markets/products that will realize above average growth and/or stability.