### Author Topic: Stop worrying about the 4% rule  (Read 523654 times)

#### sol

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##### Re: Stop worrying about the 4% rule
« Reply #1700 on: April 03, 2019, 11:19:51 PM »
I guess each company can design their MC simulations using whatever rules they want.  But I always assumed they just took the average rate of return  and the standard deviation and randomly calculated a return for each year in the simulation time frame.

Monte Carlo simulations are, by definition, reshuffled resamplings of existing data pools.  They are not randomly generated data based on statistical descriptions.

If you see someone talk about Markov Chain Monte Carlo simulations, then your interpretation is much closer to what they're doing.  Markov Chains sample defined probability distributions, rather than data pools.  Despite often seeing them billed as an "advancement" on Monte Carlo sims they're really a much simplified version, designed to answer a different sort of question.  You commonly see Markov Chains MC sims used when the ordering of the results is less interesting than just generating an answer space, for example in purely theoretical math problems where people really have no clue what's going on behind the scenes.

I'm a physical scientist, and I spent many years learning about and then implementing various types of models about the physical world.  I rarely used Monte Carlo simulations because they're numerically inefficient if your goal is to find the right answer, rather than understand why the answers look a certain way, and I never once had to implement a Markov Chain MC simulation as part of my professional modeling career.  In my world, if you already know the probability distribution required to set up a Markov Chain, then you either already have an answer you believe in or you're using circular logic to pretend the answer you want is the correct one.

For government work, subsampling your parameter space never flies.  You churn through them all and publish the giant matrices, or if you can't get the computer time for that then you find a way to reparameterize your problem into something you CAN solve completely.  We usually considered Monte Carlo sims a toy for people who like to poke around interesting problems, rather than a tool for setting policy.  I'm sure I just offended an academic somewhere.

In the context of Vanguard's market simulations, Monte Carlo is a gimmick used to fabricate false credence.  The entire data pool of stock market history is less than 100k days long and all they're doing is shuffling those days (or months or years) into a few thousand other possible orders to see what they look like.  But market histories are a well linearized problem, so it's not like it matters all that much whether your hypothetical history goes 4%, 8%, 10% or 10%, 8%, 4%.  Over the entire history of the market, the answer is not going to be off by a million percent at the end.  As we've previously discussed in this thread, there are much larger uncertainties about the future of our stock market than can possibly be captured by just shuffling the historical monthly returns to see how they might have added up differently.  Their Monte Carlo simulations don't account for the 2057 robot uprising, or the 2083 asteroid impact that wipes out Earth and leaves only Mars to shoulder the burden of paying your dividends.

#### lowroller4111

• Posts: 25
##### Re: Stop worrying about the 4% rule
« Reply #1701 on: April 04, 2019, 04:01:19 PM »
The Monte Carlo simulations in tools such as PV are taken from historical data re-arranged in many permutations and combinations.  Obviously "generated" data would be quite crazy as you could essentially generate anything you wish outside the parameters of reality - imagine the stock market dropping 80% and then have a 2nd year after that when it dropped 70% - that would really have little value as it's never happened in history!

Using history as a base is quite sufficient for the vast majority as we've had some pretty horrible things that have happened to the markets in the past.  While nothing can be 100% excluded we can be sure that something happening that is worse than the worst event in history would be so severe that I doubt you would be worry about your portfolio then, you would have to worry about your life.  Perhaps something like worldwide nuclear war.
« Last Edit: April 04, 2019, 04:04:52 PM by lowroller4111 »

#### pecunia

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##### Re: Stop worrying about the 4% rule
« Reply #1702 on: April 05, 2019, 01:03:06 PM »

- SNIP -

.  While nothing can be 100% excluded we can be sure that something happening that is worse than the worst event in history would be so severe that I doubt you would be worry about your portfolio then, you would have to worry about your life.  Perhaps something like worldwide nuclear war.

You don't need the entire world.  The fallout can get the rest of us and lead to slow lingering deaths.  The bright side is that we won't be worrying about global warming any more.

#### maizeman

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##### Re: Stop worrying about the 4% rule
« Reply #1703 on: April 08, 2019, 08:39:32 AM »
It's actually an interesting mental puzzle. How much worse could we get than the worst events in modern history and still bounce back to a civilization where having money matters within a single person's lifetime? Put another way: what is the closest our current civilization come to collapsing with the past 150 or so years?

If the answer is "pretty darn close" then we don't have to worry about events worse than what is in the historical record. If you think things could have gotten much much worse than anything we've seen and modern civilization would still managing to hold things together, then you do have to worry about historical data being too optimistic about the future.

#### nereo

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##### Re: Stop worrying about the 4% rule
« Reply #1704 on: April 08, 2019, 08:57:36 AM »
It's actually an interesting mental puzzle. How much worse could we get than the worst events in modern history and still bounce back to a civilization where having money matters within a single person's lifetime? Put another way: what is the closest our current civilization come to collapsing with the past 150 or so years?

If the answer is "pretty darn close" then we don't have to worry about events worse than what is in the historical record. If you think things could have gotten much much worse than anything we've seen and modern civilization would still managing to hold things together, then you do have to worry about historical data being too optimistic about the future.

Interesting thought puzzle indeed.  For me, I see any situation that is substantially worse than those we've experienced in the last century (e.g. the Great Depression, WWII) as being 'beyond where any realistic amount of money can save you," ergo no WR would be considered 'safe' - not even a sub 1% level.  In other words, if we got much worse than those periods its unlikely that money (or ownership of stocks or bonds) would be useful for buying goods and services.  Individuals would have to worry about things like forced-conscription (in the event of massive war) or self-protection of tangible assets (in the case of a breakdown of governmental services like Police).

say this as a child of WWII refugees that lost everything they had (including property) not because it no longer held value, but because they could no longer retain possession of their possessions.

tl;dr - Stop worrying about the 4% Rule - if things get worse than we've had in the last 150 years monetary assets won't matter much anyway.

#### sol

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##### Re: Stop worrying about the 4% rule
« Reply #1705 on: April 08, 2019, 09:53:22 AM »
For me, I see any situation that is substantially worse than those we've experienced in the last century (e.g. the Great Depression, WWII) as being 'beyond where any realistic amount of money can save you," ergo no WR would be considered 'safe' - not even a sub 1% level.

I was thinking the exact opposite, that things could have gotten much much worse.

I think the US benefited for several decades after WW2 by being the only industrialized nation with a fully intact manufacturing base.  Everyone else got bombed.  The economies of places like German and France got rebuilt eventually, but their market returns were much worse than US returns for basically an entire human lifespan.

And Russia's economy remained intact, but has spent pretty much the entirety of history since WW2 underperforming the US economy, because it was woefully mismanaged.  They adopted an entire economic system that incentivized corruption and graft, they mismanaged their resources and their technological progress, and they ran themselves into the ground.  Even though they technically won the war, their economy didn't grow the way ours did.  So it's not like the stellar US market returns were ever a sure thing.  These concerns are essentially political, though, not mathematical.

International SWRs from other individual national stock market exchanges are uniformly lower than America's.  Virtually all of those countries are still around and technically functional, and there are people living there who have retained possession of their assets, but would be bankrupt if they were only invested locally and tried to use 4%.  Despite 4% being far too conservative for basically all of US history, the same has not been true for investors in Australia, or Poland, or South Africa.

The threats to the 4% SWR plan are not really about "catastrophic events", they're about multi-decadal trends in economic output.  Even the Great Depression was a speed bump, in the rise of the American stock market.  The market histories in places like Venezuela or North Korea aren't terrible because they lost a war or had a currency crisis, they're terrible because those economies were poorly managed and failed to increase their economic output and worker engagement in economic turnover.  Economic growth requires that you not only make lots of stuff (food, widgets, art), but also that you have lots of people who get paid to make the things that people want to buy AND lots of people who eagerly spend the money they have made to buy those things from each other.
« Last Edit: April 08, 2019, 10:00:45 AM by sol »

#### DavidAnnArbor

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##### Re: Stop worrying about the 4% rule
« Reply #1706 on: April 10, 2019, 08:26:40 PM »

The threats to the 4% SWR plan are not really about "catastrophic events", they're about multi-decadal trends in economic output.

Sadly, the European Union has followed a very strict regime of budgetary austerity that stifles growth and makes their stock market weak, with a common currency that doesn't allow for weaker nations to export their way out of a recession.

#### Bernard

• Posts: 16
##### Re: Stop worrying about the 4% rule
« Reply #1707 on: May 03, 2019, 05:09:17 PM »
Ramsey keeps saying 12% but never gives out the name of this super fund... let me guess, it does not exist?  If it is performing so great and consistently then why not share the name?

At 12% you double your money every 6 years, if one could do this consistently it would be the holy grail of investing, apparently Ramsey claims to have found it...

I'm new here, so "Hi!" to ya'll!

For years I've listened to Suze, and for years I've been listening to Dave while slaving away on my desk. I read too many FIRE blogs to remember, and I find truth in many sources, as well as nonsense, MMM as well.

Now . . . Dave Ramsey told his listeners the requirements for his funds. Returns above the DOW was one of them, a positive, decades-long track record another one. They were easy to identify for me when I decided to get slowly but steadily out of individual stocks and invest in MFs.

I'm banking with ETrade, simply because I'm with them forever and also because I can now buy all of my Vanguard ETFs . . . FREE!
I own VTI, VOO, and VGT, and that's where the majority of my MF money now is. But I also own what you could call Ramsey funds, and they are:

TRBCX
PRGFX
FSPTX

Fire up your comparison tool, and you'll see that any of those outperforms VTI. Especially TRBCX with a 10-year return of 18.91% stands out.

#### MDM

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##### Re: Stop worrying about the 4% rule
« Reply #1708 on: May 03, 2019, 06:25:10 PM »
Fire up your comparison tool, and you'll see that any of those outperforms VTI.
The defensible tense is "outperformed."

Would that we could know a fund that "will outperform"....

#### sol

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##### Re: Stop worrying about the 4% rule
« Reply #1709 on: May 03, 2019, 08:51:02 PM »
Fire up your comparison tool, and you'll see that any of those outperforms VTI.

Dig a little deeper, and you often find that these funds that have outperformed VTI have not outperformed a comparable index.  If you like TRBCX, you should be comparing to another blue chip growth fund, not the market as a whole.  VWUSX, for example, offers you comparable performance in the same sector at half the cost, with fewer fees and restrictions.

Sometimes international small cap outperforms VTI.  Sometimes healthcare or utilities.  Sometimes bonds!  That does not mean any of them are "better" than VTI and the sooner you learn why the sooner you will be able to retire.

Also, Dave Ramsey is a charlatan when it comes to investing.  He's taking a cut to refer his listeners to high-load funds sold on commission.  He makes money off of the funds he recommends, every time a listener takes his advice.  It's the very worst of conflict of interest and it undermines everything he does on his show.

#### nereo

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##### Re: Stop worrying about the 4% rule
« Reply #1710 on: May 04, 2019, 08:07:49 AM »
Oh what the hell... time to repost this again

What does it mean?  There's no pattern which asset classes have done 'the best' (or the worst) in the past, and no one can say for certain which ones will do the best in the future