Author Topic: Index investing, dollar cost averaging and safe withdrawal rate at scale  (Read 1560 times)

habaneroNorway

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(posted mostly for entertainment value for those who find entertainment in this...)

Don't know if its been posted before - but the worlds's largest sovereign wealth fund - The Norwegian Petroleum Fund shows the fund's value in real-time on its webpage.

https://www.nbim.no/en/

It is obviously to some extent a simplification but pretty much everything in there has live tradable prices off which to calculate the live value. Its a bit cool anyway. Its also possible to drill down into every single investment updated annualy. But it's pretty index-close ~70% in world equities, ~30% bonds and some real estate (commercial real estate in major cities in partnership with a local investor). The "real-time" value is denominated in NOK so the number has to be devided by ~8.7 at current exchange rate to get the value in USD. The fund own roughly 1.4% of all listed stocks in the world in value terms.

Norway has about 5 mio people so the market value is currently bit north of 200k USD pr capita. The withdrawal rate is capped at 3% (down from 4%) to preserve the capital for future generations. The underlying assumption about real returns going forward has been reduced - predominantly due to low bond yields. Actual withdrawal rate for 2019 is 2.7%. The fund's manager (Norway's central Banks asset management arm) assumes real returns will be lower in the coming decade.

Money has been flowing in for a couple of decades. How much varies among other factors with oil- and natural gas prices and how much the government spend.
« Last Edit: May 10, 2019, 12:12:56 PM by habaneroNorway »

habaneroNorway

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As a side note - you know you play in the majors league when you make a change to your AA to own a bit more equities vs bonds and you need to sell so much US treasuries that you - before you rebalance  in the market over an extended period - out of courtesy inform the US Treasury Department beforehand and ask if they are OK with you doing it (acoording to local hearsay and never confirmed)

gaja

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I love the oil fund. Sometimes, when my own funds don't grow fast enough, I'll go to the web page and look at the state money grow. I've tried suggesting that all the buildings we own around the world should have a free waffles and brown cheese stand, but it hasn't been received with much enthusiasm (yet).

The populists currently in government have suggested to pull $20 billion to get rid of road taxes. I really hope they don't get that approved.

Telecaster

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Norway has about 5 mio people so the market value is currently bit north of 200k USD pr capita. The withdrawal rate is capped at 3% (down from 4%) to preserve the capital for future generations. The underlying assumption about real returns going forward has been reduced - predominantly due to low bond yields. Actual withdrawal rate for 2019 is 2.7%. The fund's manager (Norway's central Banks asset management arm) assumes real returns will be lower in the coming decade.

Money has been flowing in for a couple of decades. How much varies among other factors with oil- and natural gas prices and how much the government spend.

Norwegians are smart.   There is an economic condition called "Dutch Disease" which arises from newly-found natural resource wealth.  Basically, the resource pushes up the value of the local currency, which actually damages the rest of the economy.   

https://en.wikipedia.org/wiki/Dutch_disease

But instead of giving into the temptation to spend it, the Norwegians avoided this by investing the money outside of the country.    Norway's oil resources are dwindling, but because the politicians resisted the temptation to spend it,  Norway now has a giant pot of money, that is being sustainable managed and will likely last forever.  Far beyond the time when the oil resources are gone.   

I don't know of any other country that did the smart thing when it came to managing oil resources like Norway did.   Many countries have now established similar funds, but they were founded much later and are accordingly much smaller. 

Radagast

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So that's what caused the everything bubble!

habaneroNorway

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This is also one of the main reasons why it's not obvious you are in one of the world's richest countries when going to Norway. It doesn't look like it. Not much flashyness. That partly comes from being probably the world's biggest saver and secondly - and more importanly - Norway hasn't been a rich country for very long (oil was discovered in the late 1960s and production started in 1971) so there hasn't been the building of palaces etc through the centuries as you find in say France and the UK.

There are frequent discussion on overspending and underspending (ref gajas example with road taxes). Even with the WR at 2.7%. As the fund has grown massively, partly due to weak domestic currency (all assets are in foreign currencies) a smallish percentage of a very large notional is a serious pile of money spent every year and not compounding for the future, and eventually money flowing in will dwindle as production of oil and gas goes down.

marty998

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Norway has about 5 mio people so the market value is currently bit north of 200k USD pr capita. The withdrawal rate is capped at 3% (down from 4%) to preserve the capital for future generations. The underlying assumption about real returns going forward has been reduced - predominantly due to low bond yields. Actual withdrawal rate for 2019 is 2.7%. The fund's manager (Norway's central Banks asset management arm) assumes real returns will be lower in the coming decade.

Money has been flowing in for a couple of decades. How much varies among other factors with oil- and natural gas prices and how much the government spend.

Norwegians are smart.   There is an economic condition called "Dutch Disease" which arises from newly-found natural resource wealth.  Basically, the resource pushes up the value of the local currency, which actually damages the rest of the economy.   

https://en.wikipedia.org/wiki/Dutch_disease

But instead of giving into the temptation to spend it, the Norwegians avoided this by investing the money outside of the country.    Norway's oil resources are dwindling, but because the politicians resisted the temptation to spend it,  Norway now has a giant pot of money, that is being sustainable managed and will likely last forever.  Far beyond the time when the oil resources are gone.   

I don't know of any other country that did the smart thing when it came to managing oil resources like Norway did.   Many countries have now established similar funds, but they were founded much later and are accordingly much smaller.

Australia certainly didn't bank any of its mining wealth. Not only do we not tax it enough, we blew the remaining proceeds on middle class welfare.

We pretty much have $500 billion debt to show for it after the last two booms.

habaneroNorway

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We pretty much have $500 billion debt to show for it after the last two booms.

After some pondering I think I rather take the trillion in assets working full-time for me.

Norway actually has government debt (about 100 billion I think), not because the government needs to borrow per se, but its used for liquidity management (big cash inflows quarterly when oil tax and VAT is paid vs fairly steady expenses) and it's also nice to have a risk-free yield curve for reference and the government also borrows to fund a few bank-like operations such as student loans provided, subsidized mortgages for the needy etc.

DavidAnnArbor

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Australia certainly didn't bank any of its mining wealth. Not only do we not tax it enough, we blew the remaining proceeds on middle class welfare.

We pretty much have $500 billion debt to show for it after the last two booms.

Investing in human capital as well as having strong infrastructure could make up for the $500 billion in debt because Australia could be comparatively more productive, have a higher GDP, and have great future growth potential as a result.

Linea_Norway

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That number on that website, https://www.nbim.no/en/ is difficult to read, as the number changes the whole time.
My personal funds all dropped quite a bit, especially the Asian index fund (thanks Trump) and my Norwegian fund. I bought a bunch of new stocks, taking advantage of the drop.

Not good to hear that the oil fund manager thinks 3% withdrawal rate is the way to go in the future. And if he thinks that, then why do Norwegian pension providers count with a 6% increase after inflation? They do that based on 40% bonds. I don't trust the numbers of those pension funds. I find them very optimistic.

Does the oil fund manager know things that we other people don't? If he can predict the future stock market average growth, he can do more than anyone in the world...

Our FIRE stash is based on 4% growth on average after inflation. Of course, if it is lower, we can spend less. But I really hope we will make some of the numbers close to that number. It would not be nice to be 60 and broke, and having to wait until 67 to take out our normal pension. Our pensions will be so low, that taking them out at 62 will make the monthly sum very small.

habaneroNorway

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The public component gives somewhat of a cushion - the lowest rate is currently 153.000 NOK / year (17.500 USD) taxable. This is with no contribution at all (i.e. never worked) as far as I understand the system. It never gets very high - from age 62 it peaks at roughly 200.000 NOK (23.000 USD) but its adjusted roughly with salary growth so it should maintain its purchasing power quite well. Delaying until 67 doesn't make it go up a lot. Granted, with Norwegian COL this is not a lot and taxes will eat away some of it.

The reduction from 4% to 3% WR is also to a large extent to resist politicians' instinct to overspend given how much assets are available.

marty998

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Norway actually has government debt (about 100 billion I think), not because the government needs to borrow per se, but its used for liquidity management (big cash inflows quarterly when oil tax and VAT is paid vs fairly steady expenses) and it's also nice to have a risk-free yield curve for reference and the government also borrows to fund a few bank-like operations such as student loans provided, subsidized mortgages for the needy etc.

Yes. The last time Australia had "no debt" the commercial banks and the investment community asked the government to keep a market for government bonds so the financial system could be maintained. Curiously it's quite problematic for markets if there is no risk free reference asset.

Australia certainly didn't bank any of its mining wealth. Not only do we not tax it enough, we blew the remaining proceeds on middle class welfare.

We pretty much have $500 billion debt to show for it after the last two booms.

Investing in human capital as well as having strong infrastructure could make up for the $500 billion in debt because Australia could be comparatively more productive, have a higher GDP, and have great future growth potential as a result.

Nup. It was all spent on middle class welfare and tax cuts which put the budget into structural deficit.

And now when interest rates are low, we don't have much capacity to borrow to fund the required infrastructure.

DavidAnnArbor

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If interest rates are low then it means investors are saying to the Australian government to borrow more to finance infrastructure improvements.

Linea_Norway

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Norway is not the only place with an oil fund. I just saw in a documentary that the state of Alaska also has one. They pay out a yearly dividend directly to all the citizens, young and old. Norway does not pay it out to the citizens directly (yet), but uses it do finance building roads and tunnels, etc.

marty998

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Norway is not the only place with an oil fund. I just saw in a documentary that the state of Alaska also has one. They pay out a yearly dividend directly to all the citizens, young and old. Norway does not pay it out to the citizens directly (yet), but uses it do finance building roads and tunnels, etc.

The Middle Eastern Shiekdoms have a few too. The Saudis, Oman, Bahrain, Abu Dhabi & the UAE, Kuwait.

Lots of sovereign wealth funds buying up stocks around the world. Whether they spend the money on their people is another matter...

habaneroNorway

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Some countries borrow to maintain "lifestyle", some countries "live" below their means and have a surplus to invest and watch the magic of regular saving and compounding unfold. Some countries choose to spend the surplus that might otherwise be invested.