The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: SeattleCPA on September 11, 2017, 06:57:06 AM

Last week, in another thread, MDM and I got into what MDM described as a possible "violent agreement" about the goodness of the Bogleheads investment philosophy. In the end, all ended well, I think, when we realized we were making the same point.
But that brief discussion highlighted to me how hard it is to explain in words the point I was trying to make. And that point is this: There's a lot more variability in long run stock market returns than some people realize...
I'm going to blog a bit more on this subject this week, but I thought it'd be okay to post here a chart that shows in a picture the point I tried to express in words:
(https://evergreensmallbusiness.com/wpcontent/uploads/2017/09/LongRunReturnsWhenSaving10KAnnually75percentStocks25percentBonds.png)
BTW, this chart is the standard "funnel chart" or "longrun stock market returns" chart you've seen a million times before if you noodle much with websites like www.portfoliocharts.com or www.portfoliovisualizer.com. Or if you've read books by John Bogle or Burton Malkiel.
Most of the time, when authors produce these charts, they talk about how the tail of the chart narrows over time. But something else is true, too, which is the tail never compresses to a single value.

Most of the time, when authors produce these charts, they talk about how the tail of the chart narrows over time. But something else is true, too, which is the tail never compresses to a single value.
Very true.
In addition, the tail on this type of chart is a little deceptive in how it obscures the effects of compound interest on your longterm account values. Time perception (https://portfoliocharts.com/2017/08/22/howtimeperceptioninfluencesinvestingdecisions/) is a tricky concept in investing, and this is a good example of when it helps to look at the numbers from a few different perspectives.

Agreed, Tyler. Agreed.
BTW, another MMM member sent me a private message pointing out that it'd be nice to show a histogram of the returns, thereby visually depicting just how fat the tails are.
I think that's a lot of work going the cFIREsim route (which is what I did). Though maybe I'll try to do it. (BTW it's not that much work to use cFIREsim to get the values for a single scenario like 20 years as explained here (https://evergreensmallbusiness.com/longrunstockmarketreturns/) .)
But two comments: First, I think the 20th percentile to 80th percentile runs roughly 4.4% to 7.2%... so the chance that someone would actually get 0% or 10% real return is infinitesimally small.
Nevertheless, as I think you Tyler are hinting, getting 4% or 5% annual return for 30 or 35 years rather than the 6% average makes a GIGANTIC difference in the outcome.
P.S. I think if you use the Portfolio Chart's rolling returns calculator available here, https://portfoliocharts.com/portfolio/rollingreturns/ , and then set the time frame to something like 30 years, you get a bar chart that gives you a good visual sense of the variability one can experience even if one invests for 30 years or whatever.

Related to that funnel chart, I've always enjoyed the following chart that shows the cumulative average return in 10year segments over a 30year period. It's the standard 4% WR on $1 million, with Vanguard level (low) expense fees, using the CAGR from www.moneychimp.com/features/market_cagr.htm. It's interesting to see the occurrences where poor returns toward the end still can't overcome strong performance in the first 10 years, and also just how poor the performance can be in the first 10 years and still go the distance with less than stellar returns over the rest of the period. The individual breakdowns also allow someone to look at their personal performance as their retirement moves along and map it to the most similar historical scenario to see how that panned out. One can also add theoretical returns in the future for a partially finished 30year (recent) period to see how the remaining unknown returns affect the outcome. It's fascinating to me to see how different sequences effect the ending value.

Mr Green,
I agree that's a great table.
I share this comment, though, to move our collective knowledge forward.
This quotation from the referenced page, "... The most significant pattern is this: Over the very long run, the stock market has had an inflationadjusted annualized return rate of between six and seven percent..." seems incomplete to me.
Absolutely no argument from me that the average is the average. And totally agree that's significant.
But I would also suggest that another significant pattern is the variability in the returns even over long accumulations.
I now have the blog post that talks in detail about this:
https://evergreensmallbusiness.com/longrunstockmarketreturns/
But one significant issue that gets missed (and I think is possibly missing from the table data ) is that people saving for 30 years don't actually get that 30 year period to average out to the 30year average.
If they're saving for 30 years, they get 30 years for their first contribution, 29 years for the second contribution, and so on. In the end, it's sort of like they're really on average only investing for 15 or so years. (We all already know this of course.)
What is surprising to many of usor least meis that if one recalculates the returns using an annuity, one widens the range of outcomes by about 70%.
E.g., if the old range from worst to best measured maybe 3% to 8% with a balanced portfolio, the new range measures from 1% to 10%.

This is new to me so I comment to follow.
So the difference between best and worst case would be which 30 year period you study?

Seattle, I see what you're getting at.
*The point*  Because each person starts investing at different dates with different amounts of money, their returns will be wildly different over the course of their saving timeframe. (We'll assume that everyone has the same asset allocation and identical funds to make this easier).
Sequence of return risk can bite you on the front end, as well as the rear!
https://earlyretirementnow.com/2017/05/17/theultimateguidetosafewithdrawalratespart14sequenceofreturnrisk/
The 3 groups below are buy and hold, a retiree who is drawing down their portfolio, and a saver adding to their portfolio.
(https://earlyretirementnowdotcom.files.wordpress.com/2017/05/srrtable021.png)
Again, same 3 groups.
(https://earlyretirementnowdotcom.files.wordpress.com/2017/05/srrtable05.png)
Summary, the sequence of stock market returns makes no difference if you buy and hold, while the retiree vs saver are inversely correlated with each other.
So... **Is there anything out there that can predict future returns**  Why yes, one widely used is CAPE.
https://earlyretirementnow.com/2017/08/30/theultimateguidetosafewithdrawalratespart18flexibilitycapebasedrules/
(https://earlyretirementnowdotcom.files.wordpress.com/2017/08/swrpart18chart01.png)
If you use CAPE to guide how your portfolio/investments will do over the next 10 years you can more accurately gauge your expected return (on the money you have invested at the current moment).
FYI, the next 10 years don't look so pretty.

This is new to me so I comment to follow.
So the difference between best and worst case would be which 30 year period you study?
If you use cFIREsim and say 75% stocks and 25% bonds, assume an annuity (like regular savings into an IRA or 401(k)) and then accept cFIREsim's defaults, you're looking at a worst to best case range of basically 0% to 10%...
As I discuss in the blog post referenced earlier, this range is wider than people "think" for probably two big reasons:
1. They (we) miss fact that the "funnel" has always shown a gap of 3% or so... Maybe 4%...
2. If you use an annuity (annual savings) rather than a onetime deposit, you expand the range by 70% or so if you're going 75%/25%...

Seattle, I see what you're getting at.
*The point*  Because each person starts investing at different dates with different amounts of money, their returns will be wildly different over the course of their saving timeframe. (We'll assume that everyone has the same asset allocation and identical funds to make this easier).
Sequence of return risk can bite you on the front end, as well as the rear!
https://earlyretirementnow.com/2017/05/17/theultimateguidetosafewithdrawalratespart14sequenceofreturnrisk/
The 3 groups below are buy and hold, a retiree who is drawing down their portfolio, and a saver adding to their portfolio.
(https://earlyretirementnowdotcom.files.wordpress.com/2017/05/srrtable021.png)
Again, same 3 groups.
(https://earlyretirementnowdotcom.files.wordpress.com/2017/05/srrtable05.png)
Summary, the sequence of stock market returns makes no difference if you buy and hold, while the retiree vs saver are inversely correlated with each other.
So... **Is there anything out there that can predict future returns**  Why yes, one widely used is CAPE.
https://earlyretirementnow.com/2017/08/30/theultimateguidetosafewithdrawalratespart18flexibilitycapebasedrules/
(https://earlyretirementnowdotcom.files.wordpress.com/2017/08/swrpart18chart01.png)
If you use CAPE to guide how your portfolio/investments will do over the next 10 years you can more accurately gauge your expected return (on the money you have invested at the current moment).
FYI, the next 10 years don't look so pretty.
Yes, exactly.
BTW, one of my favorite financial bloggers sent me a private message pointing to this very well written paper that covers the same ground with lots of more academic rigor than I did in my post:
http://www.norstad.org/finance/riskandtime.html
I had not read this article when I wrote my blog post... but like many of you I've been alert to Paul Samuelson saying this over the years... and then I think I always notice when Larry Swedroe references this risk.
P.S. I will note that Norstad's suggested 'new and improved chart' to show this risk we're talking about also makes the mistake of using a onetime deposit rather than an annuity.

Here's my advice for everyone.
Go 90% the riskiest stock allocation you can find.
With the 10% you have left in your portfolio you will buy 2yr treasury futures contracts. (I haven't worked out the exact math, but you want your notional treasury futures to be ~810x your stock portfolio value).
Roll your treasury contracts every quarter and buy more if you fall below ~810x of your stock value.
Now a 50% stock drop turns into just 25%.

Here's my advice for everyone.
Go 90% the riskiest stock allocation you can find.
With the 10% you have left in your portfolio you will buy 2yr treasury futures contracts. (I haven't worked out the exact math, but you want your notional treasury futures to be ~810x your stock portfolio value).
Roll your treasury contracts every quarter and buy more if you fall below ~810x of your stock value.
Now a 50% stock drop turns into just 25%.
I'm thinking a little different... I like the idea of pairing the traditional plan "a" with a backup plan "b":
https://evergreensmallbusiness.com/retirementplanbneedone/
But I acknowledge that this is really a lot about how one feels about the risk. Probably (possibly) many of us would agree that it's important to be sure one understands the risks as viscerally as one can.

PTF  on my lunch break  going to need way more time to read and understand (time may not be the only needed factor). Thanks for the great discussion. aperture

PTF  on my lunch break  going to need way more time to read and understand (time may not be the only needed factor). Thanks for the great discussion. aperture
Here's the best way I can think of for someone to understand this...
1. Go to cFIREsim.
2. Enter 0 into the Portfolio Value and Initial Yearly Spending boxes.
3. Scroll down to the Other Income area.
4. Enter the annual savings amount you'll do into the Other Income area's Amount box.
5. Enter 2017 into the Other Income area's Start Year box.
6. Enter 2046 into the Other Income area's End Year box.
7. Scroll back up to the top of the window and click the Run Simulation button. cFIREsim calculates away, draws a chart of outcomes and then gives you a series of ending values: average, median, st. dev. highest and lowest. E.g., if you calculate these values for the scenario where you save $5,500 a year for 30 years, you get these results:
Average: $454,151 $0 $0
Median: $459,246 $0 $0
St. Dev.: $137,596 $0 $0
Highest: $835,424 $0 $0
Lowest: $170,973 $0 $0
You may not need to go any further... but if you want, you can take average, median,highest or lowest value and use it to calculate the return (actually the internal rate of return) with Excel. Here's the formula you would use to calculate the internal rate of return of the best case scenario:
=RATE(30,5500,,835424)
The function returns 10% (or if you want to be precise 9.5678%)
Here's the formula you would use to calculate the internal rate of return of the worst case scenario:
=RATE(30,5500,,170973)
The function returns 0% (or if you want to be precise .244%)
Note: By changing the calculation inputs, you can probably tweak cFIREsim's numbers to get something pretty close to your actual plan.

I'm thinking a little different... I like the idea of pairing the traditional plan "a" with a backup plan "b":
https://evergreensmallbusiness.com/retirementplanbneedone/
But I acknowledge that this is really a lot about how one feels about the risk. Probably (possibly) many of us would agree that it's important to be sure one understands the risks as viscerally as one can.
It's all about risk adjusted return right?
So, if you're comfortable with 100% equity, you are reducing your risk when you add 810x equity portion in short term bonds.
I saw this post (https://evergreensmallbusiness.com/portfolioleveragemodelingwithcfiresimandfirecalc/#comment4403) and was bummed by the lazyness of it. Why would you leverage the equity without leveraging the bond portion? Look for my comment at the bottom of the article.
Basically, you need to model 100% equity with 900% short term bond. There's no good way to do this with any of the calculators, so you truncate it all the way down to 10% equity and 90% bond (https://www.portfoliovisualizer.com/backtestassetclassallocation?s=y&mode=2&startYear=1972&endYear=2017&initialAmount=1000000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&benchmark=VFINX&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&LargeCapBlend1=10&MidCapBlend3=10&SmallCapBlend2=10&ShortTreasury1=90&ShortTreasury2=90&ShortTreasury3=90). Then you multiply all the findings by 10.

It's all about risk adjusted return right?
Gosh, we may be talking about different issues here. Sorry that I didn't realize that sooner.
The issue I'm trying to highlight is those funnel charts and popular thinking at places like Bogleheads say you bear less risk if you invest for a long time... like for decades. And that's not true.
The Nobel laureates say it's not true.
The funnel charts you can see in any book that talks about long run stock investments and risks show it (even though they sort of pretend it is true... see Bogle's books and Malkiel's...)
You can pretty easily use cFIREsim to prove with historical data we still bear massive risk even if you have a really long horizon. (See my earlier set of "how to" instructions.

We started off talking about the same thing. I agree that the "long return average" is highly dependent upon when you begin and how quickly you save.
Once we were in agreement, I switched things up on you and began talking about how to reduce risk and increase return.

Average: $454,151 $0 $0
Highest: $835,424 $0 $0
Lowest: $170,973 $0 $0
I think I get your point: Some people get lucky saving up for retirement (if their accumulation years match up with good market returns  particularly their earlier years of savings). Some people get unlucky saving up for retirement. And I agree that this happens.
So what? What can the average FIREaspiring Joe do in response to this reality, since market returns and when in history Joe happened to live are both out of his control?
In my case, my retirementsavings years were from about 1993 to 2016. Back in the late 90's, I started doing a spreadsheet to predict my retirement date. Over the years, I updated it with actual account balances. No matter what I did, I really couldn't get the spreadsheet to predict a date much past age 48, and it predicted age 47 quite often. I retired at age 46 about 2 years ago and thought that my technique was effective, but your point seems to imply I just got lucky in that my actual ROI matched my predicted ROI (and I predicted market averages for everything  market returns, inflation, etc.) pretty closely.
I suspect part of your reply is for Joe to have a plan B, which I agree may be reasonable depending on what that plan B is. I visited your website but didn't see the article on that  it may not be posted yet.

We started off talking about the same thing. I agree that the "long return average" is highly dependent upon when you begin and how quickly you save.
Once we were in agreement, I switched things up on you and began talking about how to reduce risk and increase return.
Okay, maybe i'm not supposed to be laughing at this. But i am. :)
I don't want to start a donnybrook, but I think the risk reduction stuff quickly steers us off into an MPT discussion...which I'm happy to have. But you need to give me a headsup that the game has changed...

My apologies for hijacking the thread. Once I was clear on what you were saying, I was ready to move on to the topic on the top of my mind.

I think I get your point: Some people get lucky saving up for retirement (if their accumulation years match up with good market returns  particularly their earlier years of savings). Some people get unlucky saving up for retirement. And I agree that this happens.
Exactly. We are on the same page.
So what? What can the average FIREaspiring Joe do in response to this reality, since market returns and when in history Joe happened to live are both out of his control?
Well first, if you're already FIRE, you're actually past this risk I'm wringing my hands about... you've made your way through the rapids. The risks once someone is FI or FIRE is all about the safe withdrawal stuff. Or at least that's the way it seems to me.
What I think we (you, me, the others who understand this) can do is spotlight the reality that we were greatly assisted by a good patch of investment history.
And then here's the reality for people who still bear this risk (so people still working toward FI...) I think people ought to plan for variability in outcomes, maybe save a little more, maybe keep open the option of working a little longer, etc.
Finally, if this reality is totally new to someone, it seems possible that someone wants to think further about the risk baked into the portfolio. Because if this stuff is totally new, maybe someone bears more risk than they realize.
In my case, my retirementsavings years were from about 1993 to 2016. Back in the late 90's, I started doing a spreadsheet to predict my retirement date. Over the years, I updated it with actual account balances. No matter what I did, I really couldn't get the spreadsheet to predict a date much past age 48, and it predicted age 47 quite often. I retired at age 46 about 2 years ago and thought that my technique was effective, but your point seems to imply I just got lucky in that my actual ROI matched my predicted ROI (and I predicted market averages for everything  market returns, inflation, etc.) pretty closely.
I think that you did get lucky. And just to say it , I think I did too. (I started investing in the early 80s using a SEPIRA.)
But you were also tactically smart because you were continually doublechecking the math. That's probably something else someone should do...
BTW, you might find it interesting to visit www.portfoliocharts and find a heat map of the portfolio closest to what you used. When I do this, I see that I basically accidentally used a portfolio that's given me nearly the longrun average exactly... I.e., I got (and I bet you might have too) the average return or a little better. Which is kind of a coincidence that hides the variability.
I suspect part of your reply is for Joe to have a plan B, which I agree may be reasonable depending on what that plan B is. I visited your website but didn't see the article on that  it may not be posted yet.
Sorry... it starts here:
https://evergreensmallbusiness.com/retirementplanbneedone/
I tried to give some stepbystep instructions for popular online calculators here: FIRECalc (https://evergreensmallbusiness.com/firecalcretirementplanbcalculations/), cFIREsim (https://evergreensmallbusiness.com/cfiresimretirementplanbcalculations/) and PortfolioVisualizer (https://evergreensmallbusiness.com/montecarloretirementplanbcalculations/) so someone can better understand a likely range of outcomes.
And then I pulled together the tactical options I thought probably made sense to consider here:
https://evergreensmallbusiness.com/retirementplanbtips/

My apologies for hijacking the thread. Once I was clear on what you were saying, I was ready to move on to the topic on the top of my mind.
I don't think you have any reason to apologize! Aren't these threads basically communal property? :)

...
Thanks for the detailed reply.
I agree I am past this for myself, but I do have three children who are 22, 17, and 15, and I'd like to advise them as best I can. One general piece of advice I tend to give them (and I think it's in your "Plan B tips" article) is to just save more  say 20%+. In my case, I was saving over half of a good salary from 2009 to 2016, which obviously helped me a great deal. I also talk with them about asset allocation and all the other personal financial stuff.
I think another thing that could have happened with me is that as I was watching my prediction I was probably subconsciously working to make it reality. So if the market was dropping, I probably reflexively increased my savings rate to compensate. Or I worked to reduce my spending so I would hit that 4% SWR at age 47.
(My portfolio was very roughly 100% S&P500 lowcost index funds the entire time, with some NQSOs and some section 1202 smallbusiness stock thrown in at random times. I think my spreadsheet assumed 11% ROI and 3% inflation of both wages and prices. In reality I suspect that the ROI was lower, the wage increases were higher, and inflation was lower, so I did do better than average probably.)
Your last link, with your tactical tips, was what I was interested in with my original question. Thanks!

Average: $454,151 $0 $0
Median: $459,246 $0 $0
St. Dev.: $137,596 $0 $0
Highest: $835,424 $0 $0
Lowest: $170,973 $0 $0
Man, I am grateful to have come across this thread. Not many people here talk about this and only use the 67%/year return as being guaranteed.
So, I've run different scenarios on cFIREsim and yes, those lowest ending values seem pretty scary and are a possibility. But I would be curious to see the probabilities of each cases. You already mentioned the 20th percentile to 80th percentile runs roughly 4.4% to 7.2%, how did you calculate it? Are there any calculations/tables out there with ''realistic'' ROI percentage range depending on the length of the period invested, something like a normal distribution?
Finally, from what I understand, the intend of this thread is to inform people that the traditional expected 6% to 7% shouldn't be considered as a fix variable, and that, as secondcor521 mentioned, you can either get (very) lucky or get (very) unlucky. But at the end of the day, there's nothing you can really do about it. Yes you can (and should) have plan B's, but the general investment strategy popular with this community, i.e. investing as much as possible until you reach you desired ''FI'' or ''FIRE'' or ''whatever other goal ''amount without trying to time the market, will be the same, right?
I feel like I have a lot more reading to do on this (thanks for the multiple links you posted), but do some poeple diverge from this strategy in order to better control the variability?

(https://earlyretirementnowdotcom.files.wordpress.com/2017/08/swrpart18chart01.png)
If you use CAPE to guide how your portfolio/investments will do over the next 10 years you can more accurately gauge your expected return (on the money you have invested at the current moment).
FYI, the next 10 years don't look so pretty.
Any existing CAPE calculator for investments available?

But I would be curious to see the probabilities of each cases. You already mentioned the 20th percentile to 80th percentile runs roughly 4.4% to 7.2%, how did you calculate it?
This will give you a little bit more granular understanding (see especially the little table about a third of the way down the post):
https://evergreensmallbusiness.com/averageretirementsavingsreturn/
I've also got some tables of probabilities I did for the blog posts I've been doing the last few weeks. I'll see if I can put together some that's useful so people have a better understanding of the distribution of returns.
Finally, from what I understand, the intend of this thread is to inform people that the traditional expected 6% to 7% shouldn't be considered as a fix variable, and that, as secondcor521 mentioned, you can either get (very) lucky or get (very) unlucky. But at the end of the day, there's nothing you can really do about it. Yes you can (and should) have plan B's, but the general investment strategy popular with this community, i.e. investing as much as possible until you reach you desired ''FI'' or ''FIRE'' or ''whatever other goal ''amount without trying to time the market, will be the same, right?
I think that's right. An FI or FIRE strategy doesn't change. But your tactics may need to be changed. I.e., you may need to save more or be able to work less, may need to work longer or be able to work shorter, etc.
I feel like I have a lot more reading to do on this (thanks for the multiple links you posted), but do some people diverge from this strategy in order to better control the variability?
Sadly, I think most people haven't even recognized this "variability" issue. You are way ahead if you know it's not exactly a lock.

Most of the time, when authors produce these charts, they talk about how the tail of the chart narrows over time. But something else is true, too, which is the tail never compresses to a single value.
Are you talking about the tail after a predefined period, e.g. 30 years? If so, this is trivially true. If not, please provide proof. I seriously doubt that's the case.

But I would be curious to see the probabilities of each cases. You already mentioned the 20th percentile to 80th percentile runs roughly 4.4% to 7.2%, how did you calculate it?
This will give you a little bit more granular understanding (see especially the little table about a third of the way down the post):
https://evergreensmallbusiness.com/averageretirementsavingsreturn/
I've also got some tables of probabilities I did for the blog posts I've been doing the last few weeks. I'll see if I can put together some that's useful so people have a better understanding of the distribution of returns.
Thanks for the link, very helpful.
I would also love to see those tables of probabilities.
P.S. I've tried to find the thread you were talking about in your first post but couldn't: ''Last week, in another thread, MDM and I got into what MDM described as a possible "violent agreement"...'' Could you please link it here?

Nice thread. Be prepared for reactionary responses, though this is probably over the heads of most on this forum. Of note is the funnel is backwards looking and does not truely represent the actual possible range outcomes (either positive or negative...see Man in the High Tower).
The MMM community would provide a great service to individual investors if it led a discussion on this topic. Most people, I worry, believe a myth... the myth that returns will even out over time and allow the individual investor to earn the average...
My personal opinion is that there are to many fundamental disruptive forces to the global economy and capital markets to rely solely on historic financial market data to predict future returns. We all trust the system, but some elements that historically drove demand for investor capital are eroding (lower financial barriers to the creation of a global enterprise, being one). I am none the less optimistic, the world having some many fundamental wealth creation engines under construction.
I agree we can't reflexively extrapolate. But we probably would also agree history gives no indication that we can count on the sort of stability and predictably that means every individual saving for retirement, in the end, gets the same average return. Or nearly the same average return.

... I am past this for myself, but I do have three children who are 22, 17, and 15, and I'd like to advise them as best I can. One general piece of advice I tend to give them (and I think it's in your "Plan B tips" article) is to just save more  say 20%+. In my case, I was saving over half of a good salary from 2009 to 2016, which obviously helped me a great deal. I also talk with them about asset allocation and all the other personal financial stuff.
I'm the dad to two growth daughters, ages 25 and 26, so I think about this a lot too.
Agree with your thoughts above... and as a parent, I propose these three additional notions:
1. It would not be surprising if our kids don't have the investment good luck we've had, so I want to careful I'm not intentionally or unintentionally setting unrealistic expectations.
2. I want to, if at all possible, leave some meaningful financial legacy for them if I can. E.g., I'm still working (with one of my daughters in fact) but if I need to dial down my consumption in retirement a bit to increase chances there's a nice nest egg for them, I want to try and do that.
3. Our kids can adequately deal with a below average patch of financial history if they save more... which probably means a good job or income production activity (so higher earnings and a longer runway) becomes something to think about.

The MMM community would provide a great service to individual investors if it led a discussion on this topic. Most people, I worry, believe a myth... the myth that returns will even out over time and allow the individual investor to earn the average...
I'd like to see how your chart changes if you add in a constant investment metric. During the accumulation phase when you're constantly investing in the market, I suspect the lines do get closer together. They still won't touch, but it will help avoid the worst (and best) case scenarios in a given time period.
This doesn't help much during the draw down phase, but I think most people do actually know that's somewhat up to luck. Usually the accumulation phase is where people "assume the average."
Related to that funnel chart, I've always enjoyed the following chart that shows the cumulative average return in 10year segments over a 30year period. It's the standard 4% WR on $1 million, with Vanguard level (low) expense fees, using the CAGR from www.moneychimp.com/features/market_cagr.htm. It's interesting to see the occurrences where poor returns toward the end still can't overcome strong performance in the first 10 years, and also just how poor the performance can be in the first 10 years and still go the distance with less than stellar returns over the rest of the period. The individual breakdowns also allow someone to look at their personal performance as their retirement moves along and map it to the most similar historical scenario to see how that panned out. One can also add theoretical returns in the future for a partially finished 30year (recent) period to see how the remaining unknown returns affect the outcome. It's fascinating to me to see how different sequences effect the ending value.
I'm confused as to how this has a different result than the data that led to the 4% rule in the first place. It's my understanding 4% always worked for 30 years (even though you might be broke at the end of 30 years). Are you using 100% stocks?

Most of the time, when authors produce these charts, they talk about how the tail of the chart narrows over time. But something else is true, too, which is the tail never compresses to a single value.
Are you talking about the tail after a predefined period, e.g. 30 years? If so, this is trivially true. If not, please provide proof. I seriously doubt that's the case.
Gerardc,
I may not understand your comment, but I'm thinking you're asking for proof there's tons more variability in outcomes than many people commonly believe. So I'm going to address that issue... try to "provide proof"... I'm also going to break this response out into sections so people can choose a method of proof that meshes with the way they like to process information.
For People Who Know How to Use cFIREsim and Microsoft Excel:
In message response #12 above, I provide the steps for using the cFIREsim online calculator to calculate the average, worst and best case returns historically for a given retirement savings plan. I also describe how to use Microsoft Excel to quickly calculate the average annual returns for the investor who experienced the worst case scenario, the average scenario, and the best case scenario.
Going through the steps of using cFIREsim takes less than a minute (I just timed myself)... And this exercise will provide proof.
For People With Good Spatial Reasoning and Chart Reading Skills
Another pretty easy way to prove this to yourself is to look at anyanyfunnel chart you see in books or on websites talking about long return returns.
What you will see is that the worst case and best case scenario returns never converge to a single percentage. The charts always show a gap between the worst and best case. Always, always the charts show this.
The gap varies. Portfolio Charts, it looks like, shows the range of possible average 30year returns as maybe 5%ish to 8%ish for the portfolio I use.
In John Bogle's books and Burton Malkiel's books, the chart shows, roughly, the same sort of 3%ish to 4%ish gap.
That gap is what we're talking about here. What I'm saying is that gap exists. That gap is the proof.
And two things to note: First, if the average return of a portfolio is 6% but you or I earn 5% or 4%, that 1% or 2% shortfall over thirty years makes a huge difference.
Second, note that you shouldn't look just at the point on the chart that displays the range from best to worst at the 30yearmarker... some of your or my contributions to an IRA or 401(k) will get 30 years of returns... but some of the money we contribute will only be "in" the market for 2 years or 5 years or 10 years. So look at the range of outcomes at those points in the chart too.
Looking at the funnel charts you see with this mindset will provide the proof every time you see them from now on.
For People Who Just Want to Read a Quick Little Narrative
I did the very best job I could do to explain this in two posts at my blog: Unreliability of long return stock market returns (https://evergreensmallbusiness.com/longrunstockmarketreturns/) and Retirement Plan B: Why You Need One (https://evergreensmallbusiness.com/retirementplanbneedone/)...
If someone doesn't want to use cFIREsim or doesn't want to try and read the funnel charts, they might want to look at those two blog posts.
BTW, as part of the little "retirement plan b" blog post series I did, I also provides stepbystep instructions to make many of the sorts of calculations one needs to make to see this variability.

I'd like to see how your chart changes if you add in a constant investment metric. During the accumulation phase when you're constantly investing in the market, I suspect the lines do get closer together. They still won't touch, but it will help avoid the worst (and best) case scenarios in a given time period.
This doesn't help much during the draw down phase, but I think most people do actually know that's somewhat up to luck. Usually the accumulation phase is where people "assume the average."
I'm confused as to how this has a different result than the data that led to the 4% rule in the first place. It's my understanding 4% always worked for 30 years (even though you might be broke at the end of 30 years). Are you using 100% stocks?
The thing about "assuming the average" is the problem. That's what's really shaky as an assumption.
And this important point. On my funnel chart (see message #1), my lines are further apart because I'm assuming you don't get the 30year averaging out period for any money other than the contribution to an IRA or 401(k) you may at the start of a 30year accumulation.
For the second contribution in a 30year accumulation, the investor only gets 29 years for any "averaging out" or "evening out" to occur. For the third contribution, only 28 years, and so on.
Because this subject is such a paradigm shift, let me again make this point: If you redraw a funnel chart to show the range of average annual returns on a 30year accumulation with annual savings (as I did in the original post in this thread) the tail fattens up... it doesn't get thinner.

I would also love to see those tables of probabilities.
So I copied the info below from the Excel workbook I used for my blog post on using cFIREsim to make retirement plan b calculations (https://evergreensmallbusiness.com/cfiresimretirementplanbcalculations/). (That blog post, BTW, describes how to get the numbers and download the full spreadsheet with all the data.)
These numbers show what $5500 a year into an IRA grows into after 35 years using the cFIREsim defaults:
Average $614,262
Median $620,358
Min $231,314
Max $1,007,843
StDev $179,489
AvgDev $152,747
Here are the percentile ranks... I.e.,the 10th percentile is $371,485. The 50th percentile or median is $620,358.
0.1 $371,485.40
0.2 $437,550.60
0.3 $511,969.90
0.4 $548,222.20
0.5 $620,358.00
0.6 $674,830.20
0.7 $730,134.60
0.8 $800,482.00
0.9 $832,878.80
0.99 $966,887.86
I would think a pragmatic way to look at the above data is to say (a) quite a bit of variability in outcomes... and then (b) it's probably good idea to plan for a range of outcomes from maybe 30th percentile to 70th percentile... or from the 20th to 80th percentile.
BTW if someone here personally knows Bo the creator of cFIREsim and gets his explicit permission, I'm happy to attach the full Excel spreadsheet (with all the cFIREsim data and Bo's calculations)...
P.S. I've tried to find the thread you were talking about in your first post but couldn't: ''Last week, in another thread, MDM and I got into what MDM described as a possible "violent agreement"...'' Could you please link it here?
Here is link:
https://forum.mrmoneymustache.com/investoralley/brandnewhelpusmakesmartinvestmentchoices/
What started the possible "violent agreement" was a comment I made about the Bogleheads investment philosophy having some flawsincluding (in my opinion) a blindness to this issue of variability in outcomes.
Just to say this, past and current thought leaders in the Bogleheads community like Larry Swedroe and Harry Sit (aka "the finance buff (https://thefinancebuff.com/)") absolutely get this. But lots and and lots of Bogleheads, in my opinion, don't.

If you use CAPE to guide how your portfolio/investments will do over the next 10 years you can more accurately gauge your expected return (on the money you have invested at the current moment).
FYI, the next 10 years don't look so pretty.
Any existing CAPE calculator for investments available?
Research Affiliates has an asset allocation tool/function/thing that has CAPEs for various markets.

Nice thread. Be prepared for reactionary responses, though this is probably over the heads of most on this forum. Of note is the funnel is backwards looking and does not truely represent the actual possible range outcomes (either positive or negative...see Man in the High Tower).
The MMM community would provide a great service to individual investors if it led a discussion on this topic. Most people, I worry, believe a myth... the myth that returns will even out over time and allow the individual investor to earn the average...
My personal opinion is that there are to many fundamental disruptive forces to the global economy and capital markets to rely solely on historic financial market data to predict future returns. We all trust the system, but some elements that historically drove demand for investor capital are eroding (lower financial barriers to the creation of a global enterprise, being one). I am none the less optimistic, the world having some many fundamental wealth creation engines under construction.
I agree we can't reflexively extrapolate. But we probably would also agree history gives no indication that we can count on the sort of stability and predictably that means every individual saving for retirement, in the end, gets the same average return. Or nearly the same average return.
Agreed. Don't want to take it off topic, but in a prior thread I pointed out the idea that investments in personal resiliency, especially for the young (e.g. start a business, education to grow skills, spending flexibility) are the best `ROI' strategies to handle the outlier scenarios. Overthinking asset allocations has diminishing returns, so i think we totally agree.
What i hope our young forum minds absorb is the notion that some variability of outcomes should be expected. I dont agree that CAPE or other fairly simple metrics can predict the direction of variability (e.g. we are certain for lesser outcomes). That is why i bring up the disruptive forces.
Other simple factors that may push returns below the average (examples only):
* Taxes. Most assume taxes will be the same. This could be a shaky assumption if Congress eyes fat 401k balances as a source of potential revenue (at least for US MMMers). Tax law changes can impact capital gains rates (net from taxible) and net withdrawable capital (net from tax diferred) pushing realized returns down.
* Inflation. Significant inflation could impact real returns vs nominal returns in a way that challenges a MMM like plan. None of us know the probability of hyperinflation and equities are probably the best defense anyway, but still inflation impacts could lower our net returns or require increased spending, impacting stash cushion calculations. Especially true if price increases are asymmetric towards certain goods we all need, like food staples and healthcare.
So, independent of the funnel factors, other variables are also important to take into account (no response needed, dont want too derail thread). Note these could improve or reduce success chances, as taxes or inflation move both positive and negative directions. They likely have their own funnel charts of probably, though the data to make them would be spotty (e.g. avg tax rates, imoact of real vs nominal returns). Firecalc may or may not be able to somewhat incorporate them via assumptions.

Nice thread. Be prepared for reactionary responses, though this is probably over the heads of most on this forum. Of note is the funnel is backwards looking and does not truely represent the actual possible range outcomes (either positive or negative...see Man in the High Tower).
The MMM community would provide a great service to individual investors if it led a discussion on this topic. Most people, I worry, believe a myth... the myth that returns will even out over time and allow the individual investor to earn the average...
My personal opinion is that there are to many fundamental disruptive forces to the global economy and capital markets to rely solely on historic financial market data to predict future returns. We all trust the system, but some elements that historically drove demand for investor capital are eroding (lower financial barriers to the creation of a global enterprise, being one). I am none the less optimistic, the world having some many fundamental wealth creation engines under construction.
I agree we can't reflexively extrapolate. But we probably would also agree history gives no indication that we can count on the sort of stability and predictably that means every individual saving for retirement, in the end, gets the same average return. Or nearly the same average return.
Agreed. Don't want to take it off topic, but in a prior thread I pointed out the idea that investments in personal resiliency, especially for the young (e.g. start a business, education to grow skills, spending flexibility) are the best `ROI' strategies to handle the outlier scenarios. Overthinking asset allocations has diminishing returns, so i think we totally agree.
What i hope our young forum minds absorb is the notion that some variability of outcomes should be expected. I dont agree that CAPE or other fairly simple metrics can predict the direction of variability (e.g. we are certain for lesser outcomes). That is why i bring up the disruptive forces.
Agree. Totally agree. Thanks for contributing to this thread. :)

I'd like to see how your chart changes if you add in a constant investment metric. During the accumulation phase when you're constantly investing in the market, I suspect the lines do get closer together. They still won't touch, but it will help avoid the worst (and best) case scenarios in a given time period.
This doesn't help much during the draw down phase, but I think most people do actually know that's somewhat up to luck. Usually the accumulation phase is where people "assume the average."
I'm confused as to how this has a different result than the data that led to the 4% rule in the first place. It's my understanding 4% always worked for 30 years (even though you might be broke at the end of 30 years). Are you using 100% stocks?
The thing about "assuming the average" is the problem. That's what's really shaky as an assumption.
And this important point. On my funnel chart (see message #1), my lines are further apart because I'm assuming you don't get the 30year averaging out period for any money other than the contribution to an IRA or 401(k) you may at the start of a 30year accumulation.
For the second contribution in a 30year accumulation, the investor only gets 29 years for any "averaging out" or "evening out" to occur. For the third contribution, only 28 years, and so on.
Because this subject is such a paradigm shift, let me again make this point: If you redraw a funnel chart to show the range of average annual returns on a 30year accumulation with annual savings (as I did in the original post in this thread) the tail fattens up... it doesn't get thinner.
Ah, I somehow missed that your chart assumed annual contributions. That is a pretty shocking graph in that case, and my whole point was already taken into account. How do they calculate the average return for that graph?
I find that the numbers get tricky the more in depth you go. For example, average yearly return when you're adding in contributions/withdrawals can be misleading. For example in year 1 maybe you have a 50% loss, but you only have $10k in the account. If the next 28 years you have 0% returns, and in year 30 you have a 50% gain. Your average yearly return over that time is 0%, but you still end up with $442,500 with only $300,000 invested. That's a gain of 47.5% over the money you invested, but your average yearly return can still be said to be 0%.
Flip the returns around and you end up with $300,000 invested, but only $155,000 when all is said and done. A loss of around 48%, with the average return still 0%.
Obviously this is an extreme example, but it goes to show that averaging out returns each year doesn't tell the whole story when we're adding in contributions/withdrawals. When you're adding constantly, the later years have the largest effect. When you're withdrawing constantly, the early years have the largest effect. Interestingly enough these two time frames meet shortly before and after retirement. This means the 510 years before and after your retirement are the most important as far as investment returns go.

I'd like to see how your chart changes if you add in a constant investment metric. During the accumulation phase when you're constantly investing in the market, I suspect the lines do get closer together. They still won't touch, but it will help avoid the worst (and best) case scenarios in a given time period.
This doesn't help much during the draw down phase, but I think most people do actually know that's somewhat up to luck. Usually the accumulation phase is where people "assume the average."
I'm confused as to how this has a different result than the data that led to the 4% rule in the first place. It's my understanding 4% always worked for 30 years (even though you might be broke at the end of 30 years). Are you using 100% stocks?
The thing about "assuming the average" is the problem. That's what's really shaky as an assumption.
And this important point. On my funnel chart (see message #1), my lines are further apart because I'm assuming you don't get the 30year averaging out period for any money other than the contribution to an IRA or 401(k) you may at the start of a 30year accumulation.
For the second contribution in a 30year accumulation, the investor only gets 29 years for any "averaging out" or "evening out" to occur. For the third contribution, only 28 years, and so on.
Because this subject is such a paradigm shift, let me again make this point: If you redraw a funnel chart to show the range of average annual returns on a 30year accumulation with annual savings (as I did in the original post in this thread) the tail fattens up... it doesn't get thinner.
Ah, I somehow missed that your chart assumed annual contributions. That is a pretty shocking graph in that case, and my whole point was already taken into account. How do they calculate the average return for that graph?
I find that the numbers get tricky the more in depth you go. For example, average yearly return when you're adding in contributions/withdrawals can be misleading. For example in year 1 maybe you have a 50% loss, but you only have $10k in the account. If the next 28 years you have 0% returns, and in year 30 you have a 50% gain. Your average yearly return over that time is 0%, but you still end up with $442,500 with only $300,000 invested. That's a gain of 47.5% over the money you invested, but your average yearly return can still be said to be 0%.
Flip the returns around and you end up with $300,000 invested, but only $155,000 when all is said and done. A loss of around 48%, with the average return still 0%.
Obviously this is an extreme example, but it goes to show that averaging out returns each year doesn't tell the whole story when we're adding in contributions/withdrawals. When you're adding constantly, the later years have the largest effect. When you're withdrawing constantly, the early years have the largest effect. Interestingly enough these two time frames meet shortly before and after retirement. This means the 510 years before and after your retirement are the most important as far as investment returns go.
My message #12 above tells you how to use cFIREsim to make the calculations for a situation like the one you probably "personally" experienced. Seriously, try it. Going through the steps takes about a minute. If you want to fiddle with Excel to get the your internal rate of return (which takes into account all the timing issues you mention), that's another minute. Two minutes in total. Tops. And then you'll know the historically possible range of numbers for your situation.
And you're right. This is shocking. Lots of peopleme included for a long whiletake a shortcut in their analysis and say, "oh well, things will average out in the end..." But that's not really rigorous thinking.
And then this surprising reality... because we've had some really good investment returns over the last three decades or so, lots of people who are already retired now actually did end up with average or above average returns.
It's a bit like they walked through a minefield without realizing it... and now think there wasn't really a minefield.

And this important point. On my funnel chart (see message #1), my lines are further apart because I'm assuming you don't get the 30year averaging out period for any money other than the contribution to an IRA or 401(k) you may at the start of a 30year accumulation.
For the second contribution in a 30year accumulation, the investor only gets 29 years for any "averaging out" or "evening out" to occur. For the third contribution, only 28 years, and so on.
Because this subject is such a paradigm shift, let me again make this point: If you redraw a funnel chart to show the range of average annual returns on a 30year accumulation with annual savings (as I did in the original post in this thread) the tail fattens up... it doesn't get thinner.
***Edit : I haven't had the time to look in details at the last links you quoted me, feel free to not answer if the answer's in your previous post***
All the examples you have been giving up to now are great for people who haven't actually started investing yet, our young kids for example.
But I think most of us here has already began investing. Basically, what is interesting to them is a similar chart but taking into account the actual investments they have (Portfolio value isn't 0$) and the retirement date they are aiming for as of today and considering annual savings are probably going up over the years.
Is this something easily reproducible with cFIREsim? What would be the impact of already having a positive portfolio value and increasing investments on the variability?

All the examples you have been giving up to now are great for people who haven't actually started investing yet, our young kids for example.
But I think most of us here has already began investing. Basically, what is interesting to them is a similar chart but taking into account the actual investments they have (Portfolio value isn't 0$) and the retirement date they are aiming for as of today and considering annual savings are probably going up over the years.
Is this something easily reproducible with cFIREsim? What would be the impact of already having a positive portfolio value and increasing investments on the variability?
Yes. Here's how to do it...
1. Go to cFIREsim.
2. Enter your current retirement savings into the Portfolio Value and 0 Initial Yearly Spending boxes.
3. Scroll down to the Other Income area.
4. Enter the annual savings amount you're adding to your portfolio into the Other Income area's Amount box. (E.g., if you're saving $10,000 a year, enter 10000.)
5. Enter 2017 into the Other Income area's Start Year box.
6. Enter your retirement year into the Other Income area's End Year box. (E.g. if you plan on retiring in 2030, enter 2030.)
7. Scroll back up to the top of the window and click the Run Simulation button. cFIREsim calculates away, draws a chart of outcomes and then gives you a series of ending values: average, median, st. dev. highest and lowest.
E.g., if you calculate these values for the scenario where you save $5,500 a year for 30 years, you get the results shown below, but obviously you will get different results using a different set of inputs:
Average: $454,151 $0 $0
Median: $459,246 $0 $0
St. Dev.: $137,596 $0 $0
Highest: $835,424 $0 $0
Lowest: $170,973 $0 $0
Once you have your own real data that sort of looks like this, you can take average, median,highest or lowest value and use it to calculate the return (actually the internal rate of return) with Excel.
Here's the formula you would use to calculate the internal rate of return for a $5500 a year savings amount where you still have 30 years of work left and you end up with that best case scenario of $835,424:
=RATE(30,5500,,835424)
The function returns 10% (or if you want to be precise 9.5678%)
Here's the formula you would use to calculate the internal rate of return of the worst case scenario:
=RATE(30,5500,,170973)
The function returns 0% (or if you want to be precise .244%)

My message #12 above tells you how to use cFIREsim to make the calculations for a situation like the one you probably "personally" experienced. Seriously, try it. Going through the steps takes about a minute. If you want to fiddle with Excel to get the your internal rate of return (which takes into account all the timing issues you mention), that's another minute. Two minutes in total. Tops. And then you'll know the historically possible range of numbers for your situation.
And you're right. This is shocking. Lots of peopleme included for a long whiletake a shortcut in their analysis and say, "oh well, things will average out in the end..." But that's not really rigorous thinking.
And then this surprising reality... because we've had some really good investment returns over the last three decades or so, lots of people who are already retired now actually did end up with average or above average returns.
It's a bit like they walked through a minefield without realizing it... and now think there wasn't really a minefield.
So while it is somewhat surprising, one thing I notice when looking at the data as you laid out (very helpful btw) is that usually in these "worst case" scenarios, just waiting a few more years boost returns significantly. That is to say, after each dip there is an associated rise. The real world "use" of this is pretty obvious, if your investments crash right around retirement time, ride it out a bit longer. While this is sort of "market timing" and assumes you can determine where the bottom is, which you can't, it is pragmatic and obvious advice.
For example, if in your example you retired in 1981 (starting 1951) you'd have $218,000 (1.9% return per excel). If you hold out for 4 more years to 1985 you end up with $371,000 (3.8% return per excel). While there isn't a surefire way to predict exactly when the bottom will happen, waiting and contributing for another 5 years significantly helps your chances, and in this case doubles your average return.
With that being said, it is a good reminder that investment returns are largely out of your control, and luck plays a significant factor in them. All the more reason to be flexible and prepared. With early retirees the effect is even more pronounced, but so is the flexibility.

Average: $454,151 $0 $0
Median: $459,246 $0 $0
St. Dev.: $137,596 $0 $0
Highest: $835,424 $0 $0
Lowest: $170,973 $0 $0
Very worrisome numbers  though the worst case scenario is low probability and (what I didn't realize until I checked Cfiresim myself) is that these are inflation adjusted "real dollars". So, even in the worst possible case 1% probability you are still doing better to be invested in equities (over this time horizon) vs just stuffing your money in a savings account or CDs based on the rates available today. Adjusting the expense ratios to reflect my 401K (TSP) yields me about $10,000 more in the worst case scenario. I'd be sad if I had these results, but I'd know it while working and adjust by either saving more or working longer (to bulk up my pension and savings).
Just so there's no misunderstanding, I don't think any of this variability means we back away from an equityheavy portfolio. I have not, I confess, done the numbers with a bondsheavy portfolio. But surely that emphasis would only make this all look worse.
Apologies to anybody who's heard me say this too many times now... but I think the big and small big lessons here are:
1. (the BIG lesson) Run the numbers so you understand the variability in outcomes you could experience...
2. (the SMALLER lesson?) If this variability is totally out of left field for someone, that may signal person wants to revisit their asset allocation formula and perhaps dial down risk.

My message #12 above tells you how to use cFIREsim to make the calculations for a situation like the one you probably "personally" experienced. Seriously, try it. Going through the steps takes about a minute. If you want to fiddle with Excel to get the your internal rate of return (which takes into account all the timing issues you mention), that's another minute. Two minutes in total. Tops. And then you'll know the historically possible range of numbers for your situation.
And you're right. This is shocking. Lots of peopleme included for a long whiletake a shortcut in their analysis and say, "oh well, things will average out in the end..." But that's not really rigorous thinking.
And then this surprising reality... because we've had some really good investment returns over the last three decades or so, lots of people who are already retired now actually did end up with average or above average returns.
It's a bit like they walked through a minefield without realizing it... and now think there wasn't really a minefield.
So while it is somewhat surprising, one thing I notice when looking at the data as you laid out (very helpful btw) is that usually in these "worst case" scenarios, just waiting a few more years boost returns significantly. That is to say, after each dip there is an associated rise. The real world "use" of this is pretty obvious, if your investments crash right around retirement time, ride it out a bit longer. While this is sort of "market timing" and assumes you can determine where the bottom is, which you can't, it is pragmatic and obvious advice.
For example, if in your example you retired in 1981 (starting 1951) you'd have $218,000 (1.9% return per excel). If you hold out for 4 more years to 1985 you end up with $371,000 (3.8% return per excel). While there isn't a surefire way to predict exactly when the bottom will happen, waiting and contributing for another 5 years significantly helps your chances, and in this case doubles your average return.
With that being said, it is a good reminder that investment returns are largely out of your control, and luck plays a significant factor in them. All the more reason to be flexible and prepared. With early retirees the effect is even more pronounced, but so is the flexibility.
I totally agree. And that sort of actionable insight is exactly the sort of "takeaway" I would hope someone gets from our discussion of this.

Well first, if you're already FIRE, you're actually past this risk I'm wringing my hands about... you've made your way through the rapids. The risks once someone is FI or FIRE is all about the safe withdrawal stuff. Or at least that's the way it seems to me.
What I think we (you, me, the others who understand this) can do is spotlight the reality that we were greatly assisted by a good patch of investment history.
And then here's the reality for people who still bear this risk (so people still working toward FI...) I think people ought to plan for variability in outcomes, maybe save a little more, maybe keep open the option of working a little longer, etc.
Interesting discussion (seriously), but is any of this actionable? Let's say you were planning on retiring in say, 2025 and you happen to be the poor slob who gets the low end of the return sequence. Now lets say it is 2023 and you realize you're not going to meet your target number. Your choices at that point are 1) working longer, or 2) taking out less money in retirement.

When I simply put numbers in cfiresim (the way I always did) to look at %chance of FIRE, I saw such variability in outcomes.
Isn't the unreliability a given ? 19661983 was a pretty bad period for stocks.

ptf

Well first, if you're already FIRE, you're actually past this risk I'm wringing my hands about... you've made your way through the rapids. The risks once someone is FI or FIRE is all about the safe withdrawal stuff. Or at least that's the way it seems to me.
What I think we (you, me, the others who understand this) can do is spotlight the reality that we were greatly assisted by a good patch of investment history.
And then here's the reality for people who still bear this risk (so people still working toward FI...) I think people ought to plan for variability in outcomes, maybe save a little more, maybe keep open the option of working a little longer, etc.
Interesting discussion (seriously), but is any of this actionable? Let's say you were planning on retiring in say, 2025 and you happen to be the poor slob who gets the low end of the return sequence. Now lets say it is 2023 and you realize you're not going to meet your target number. Your choices at that point are 1) working longer, or 2) taking out less money in retirement.
Fair question and if I can take liberties, I'd like to rephrase the question like this, "Other than the obvious steps of deciding two years before retirement that you need to work longer or that you'll be spending less, are there other, earlier actions someone can take to react to the variability?"
Okay, I think one can answer this question more robustly by considering the variability we're discussing. For example, if someone is using the average, they should understand from the get go that there's maybe a 50% chance their plan will need to change up (or down) and maybe a lot. Or maybe another way to say the same sort of thing is there's maybe a 30% chance their plan will need to change massively. I think that's an actionable insightespecially if you have the insight early. It'll probably make someone think differently about those tradeoffs we all make when it comes to planning how much we save and for how long we work.
Another actionable insight: If this variability is "new" to someone's financial thinking and strategic planning, I wonder if someone doesn't want to maybe use a different asset allocation... maybe one with less risk and less return but possibly a narrower range of likely outcomes... or maybe one with more risk but potentially more return...

Seattle and I are already on the same page, but I thought this was a better visual to aid everyone in seeing why this matters.
Based on prior returns, if one wants to have enough to retire in 30 years you would need to save 22% of your income. It will take you 30 years to save enough based on the worst case returns in the portfoliocharts database. If you happen to start saving in the best year possible, it would only take you ~20 years. A whole 10 year spread from best to worst.
(https://i.imgur.com/seF4Cj1.png)
But, we're mustachians right? So, if you save more of your income you are less exposed to this front end sequence of return risk. Same AA, but vastly different results when you save more of your income. By saving 75% of your income, you're guaranteed to have enough in 10 years (based on the portfoliocharts data). Best case scenario you would have enough in just 45 years. This is a spread of only 56 years, which reduces your exposure to sequence of return risk.
(https://i.imgur.com/zn8g7z2.png)

When I simply put numbers in cfiresim (the way I always did) to look at %chance of FIRE, I saw such variability in outcomes.
Isn't the unreliability a given ? 19661983 was a pretty bad period for stocks.
I think it is a given. And, David, if you've always "gotten" that you are way ahead of many who mistakenly believe that one can use "time" to diversify away a bunch of the risk! (Good job!)
Some people intuitively get this. And some people don't.

I think I agree with DrF.
Two tangential comments... One, there are great resources at the www.portfoliocharts.com website. I love it! But as an author I'm always alert about not stepping over the fair use boundary and violating an author's copyrights. (I.e., Tyler's copyrights.) He can share his work. But we should be careful about showing his charts, I think.
Second comment:I know I said earlier in this thread that what I'm talking about here is sequence of returns risk. But after more thought, I realize it's not really.
Don't we think that sequence of returns risk refers to situations like this:
Guy #1 earns 4% for the first 15 years of retirement and then 8% for the second 15 years.
Guy #2 earns 8% for the first 15 years of retirement and then 4% for the second 15 years.
Both of these guys earn about a 6% IRR or actually 5.9811%. And sequence of returns risk refers to weirdness that even though they get the exact same average annual return, the first guy gets limited in what he can draw because he gets the bad returns early.
The variability in outcomes issue is that even if the average run 6%, lots of people will get 4% or 5%... lots will actually get 7% or 8%... and some outliers will for good or bad get even more extreme results.

Another actionable insight: If this variability is "new" to someone's financial thinking and strategic planning, I wonder if someone doesn't want to maybe use a different asset allocation... maybe one with less risk and less return but possibly a narrower range of likely outcomes...
Tyler would often express this point and became the reasoning behind developing portfolio charts.

Most of the time, when authors produce these charts, they talk about how the tail of the chart narrows over time. But something else is true, too, which is the tail never compresses to a single value.
Are you talking about the tail after a predefined period, e.g. 30 years? If so, this is trivially true. If not, please provide proof. I seriously doubt that's the case.
Gerardc,
I may not understand your comment, but I'm thinking you're asking for proof there's tons more variability in outcomes than many people commonly believe. So I'm going to address that issue... try to "provide proof"... I'm also going to break this response out into sections so people can choose a method of proof that meshes with the way they like to process information.
For People Who Know How to Use cFIREsim and Microsoft Excel:
In message response #12 above, I provide the steps for using the cFIREsim online calculator to calculate the average, worst and best case returns historically for a given retirement savings plan. I also describe how to use Microsoft Excel to quickly calculate the average annual returns for the investor who experienced the worst case scenario, the average scenario, and the best case scenario.
Going through the steps of using cFIREsim takes less than a minute (I just timed myself)... And this exercise will provide proof.
For People With Good Spatial Reasoning and Chart Reading Skills
Another pretty easy way to prove this to yourself is to look at anyanyfunnel chart you see in books or on websites talking about long return returns.
What you will see is that the worst case and best case scenario returns never converge to a single percentage. The charts always show a gap between the worst and best case. Always, always the charts show this.
Well, the charts stop at 30 or so years, so obviously the gap won't vanish entirely. The point is that it gets smaller and smaller as the period increases, which is the definition of convergence (assuming it can get as close to 0 as you wish).
Your argument is like saying, 2 ^ x doesn't converge to 0 as x > infinity, with the proof that "draw a chart from 0 to 10, and you'll see the curve NEVER reaches 0".
Long term market returns probably converge to a single value by the central limit theorem (http://www.investopedia.com/terms/c/central_limit_theorem.asp), i.e. after throwing a large number of random outcomes, the standard deviation of the empirical mean approaches 0. It's always a question of how long you wait. Of course, in an investing lifetime of ~50 years, the standard deviation of the mean is not necessarily small or negligible, which is trivial IMO.

One, there are great resources at the www.portfoliocharts.com website. I love it! But as an author I'm always alert about not stepping over the fair use boundary and violating an author's copyrights. (I.e., Tyler's copyrights.) He can share his work. But we should be careful about showing his charts, I think.
Thank you for being conscientious about that. For the record, I don't approve of people using Portfolio Charts images for profit but I have zero problem with anyone using them (with proper attribution) in blogs and forum discussions.
Another actionable insight: If this variability is "new" to someone's financial thinking and strategic planning, I wonder if someone doesn't want to maybe use a different asset allocation... maybe one with less risk and less return but possibly a narrower range of likely outcomes...
Tyler would often express this point and became the reasoning behind developing portfolio charts.
That's exactly right. Lots of traditional investing advice comes down to maximizing tolerable risk, while I personally prefer to think about it in terms of meeting your important life goals with minimum uncertainty. Different portfolios (paired with the right savings rate) can get you to where you need to go but with a much more pleasurable ride along the way.

Most of the time, when authors produce these charts, they talk about how the tail of the chart narrows over time. But something else is true, too, which is the tail never compresses to a single value.
Are you talking about the tail after a predefined period, e.g. 30 years? If so, this is trivially true. If not, please provide proof. I seriously doubt that's the case.
Gerardc,
I may not understand your comment, but I'm thinking you're asking for proof there's tons more variability in outcomes than many people commonly believe. So I'm going to address that issue... try to "provide proof"... I'm also going to break this response out into sections so people can choose a method of proof that meshes with the way they like to process information.
For People Who Know How to Use cFIREsim and Microsoft Excel:
In message response #12 above, I provide the steps for using the cFIREsim online calculator to calculate the average, worst and best case returns historically for a given retirement savings plan. I also describe how to use Microsoft Excel to quickly calculate the average annual returns for the investor who experienced the worst case scenario, the average scenario, and the best case scenario.
Going through the steps of using cFIREsim takes less than a minute (I just timed myself)... And this exercise will provide proof.
For People With Good Spatial Reasoning and Chart Reading Skills
Another pretty easy way to prove this to yourself is to look at anyanyfunnel chart you see in books or on websites talking about long return returns.
What you will see is that the worst case and best case scenario returns never converge to a single percentage. The charts always show a gap between the worst and best case. Always, always the charts show this.
Well, the charts stop at 30 or so years, so obviously the gap won't vanish entirely. The point is that it gets smaller and smaller as the period increases, which is the definition of convergence (assuming it can get as close to 0 as you wish).
Your argument is like saying, 2 ^ x doesn't converge to 0 as x > infinity, with the proof that "draw a chart from 0 to 10, and you'll see the curve NEVER reaches 0".
Long term market returns probably converge to a single value by the central limit theorem (http://www.investopedia.com/terms/c/central_limit_theorem.asp), i.e. after throwing a large number of random outcomes, the standard deviation of the empirical mean approaches 0. It's always a question of how long you wait. Of course, in an investing lifetime of ~50 years, the standard deviation of the mean is not necessarily small or negligible, which is trivial IMO.
Isn't there the problem that we only have historical returns data for a limited period of ~150 years (and for many asset classes a lot less), so as the period of averaging increases the number of data points gets smaller. Plus the dataset gets progressively biased to earlier time periods when conditions are less and less likely to be similar to 'now'.
Monte Carlo/sequential Gaussian simulation can address that, if you trust the assumptions are valid. But for your OP purposes 30 years does seem a totally reasonable length of savings years to test, and your conclusion is clear  don't count on getting a guaranteed CAGR of 7% real compounded growth in the market!
Does this then point to the value of adding other asset classes? IE Real estate, small businesses, forestry? One of the things I like about my little forest of pine trees is that the growth is natural regardless of the DJIA or bond prices because they are plants and plants grow. Insure for fire, naturally. Final ROI will be a function of taxes levied, log prices, residual value of the land and costs when we harvest. Still has risks of disease, drought and pests tho'...

I think I get your point: Some people get lucky saving up for retirement (if their accumulation years match up with good market returns  particularly their earlier years of savings). Some people get unlucky saving up for retirement. And I agree that this happens.
Exactly. We are on the same page.
In simple terms, I am still missing what causes the "lucky" high returns vs "unlucky" low return results in the models? Why is there so much variability?

Seattle and I are already on the same page, but I thought this was a better visual to aid everyone in seeing why this matters.
EDIT: I realized that the first chart was slightly incorrect, I've removed the previous one and inserted the new and bolded the text that changed as a result.
Based on prior returns, if one wants to have enough to retire in 30 years you would need to save 24% of your income. It will take you 30 years to save enough based on the worst case returns in the portfoliocharts database. If you happen to start saving in the best year possible, it would only take you ~19 years. A whole 11 year spread from best to worst.
(https://i.imgur.com/V5NQaoI.png)
But, we're mustachians right? So, if you save more of your income you are less exposed to this front end sequence of return risk. Same AA, but vastly different results when you save more of your income. By saving 75% of your income, you're guaranteed to have enough in 10 years (based on the portfoliocharts data). Best case scenario you would have enough in just 45 years. This is a spread of only 56 years, which reduces your exposure to sequence of return risk.
(https://i.imgur.com/zn8g7z2.png)

In simple terms, I am still missing what causes the "lucky" high returns vs "unlucky" low return results in the models? Why is there so much variability?
Root, it's easy to look back at the charts and explain this.
Let's take 2 people, Mary and Jane. Mary starts saving $12,000 per year ($1000/month) starting in January of 2004. While Jane is a few years younger and starts saving $12,000 per year ($1000/month) starting in January of 2009.
Mary hasn't done too badly. portfoliovisualizer (https://www.portfoliovisualizer.com/backtestportfolio?s=y&timePeriod=4&startYear=2004&firstMonth=1&endYear=2017&lastMonth=12&endDate=09%2F13%2F2017&initialAmount=1&annualOperation=1&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=1&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=SPY&allocation1_1=60&allocation1_2=80&allocation1_3=100&symbol2=AGG&allocation2_1=40&allocation2_2=20&allocation2_3=0)
She's had annual returns between 810.3% depending on her AA.
(https://imgur.com/gNmyk12.png)
But Jane's returns have been far better!! portfoliovisualizer (https://www.portfoliovisualizer.com/backtestportfolio?s=y&timePeriod=4&startYear=2009&firstMonth=1&endYear=2017&lastMonth=12&endDate=09%2F13%2F2017&initialAmount=1&annualOperation=1&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=1&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=SPY&allocation1_1=60&allocation1_2=80&allocation1_3=100&symbol2=AGG&allocation2_1=40&allocation2_2=20&allocation2_3=0)
Jane's returns have been between 9.613.8% depending on AA.
(https://imgur.com/xP0MjVG.png)
So, Jane got "lucky" because she started a few years after Mary. Mary may also be more unlucky if we have another recession in the next few years because she has more money invested.

The issue I'm trying to highlight is those funnel charts and popular thinking at places like Bogleheads say you bear less risk if you invest for a long time... like for decades. And that's not true.
As always, when discussing "risk" (a word we tend to use too loosely), it is important to define precisely what we mean. If risk means "exposure to an adverse possibility," we should be clear about which specific adverse possibility or possibilities we are referring to (or, alternatively, that we are broadly referring to the entire universe of conceivable adverse possibilities).
In this thread, you appear to be referring primarily to the risk that future longterm stock returns will underperform an investor's expectations or historical averages (which may have informed the investor's expectations). As maizeman nicely illustrated in this post (https://forum.mrmoneymustache.com/welcometotheforum/mrmathandpayingoffyourmortgage/msg1519191/#msg1519191), it makes little sense to focus on that risk in isolation.
Undoubtedly, investors should be aware that stock market returns are uncertain, with significant variability in outcomes even over extended time periodswhich, I believe, is the only point you were trying to make in starting this thread.
But no matter how you define risk, I don't see how the above quoted claim can be accurate. It's certainly the case that the specific "variability of outcomes" risk you're referring to goes down over time, as the funnel charts clearly illustrate.

Well, the charts stop at 30 or so years, so obviously the gap won't vanish entirely. The point is that it gets smaller and smaller as the period increases, which is the definition of convergence (assuming it can get as close to 0 as you wish).
Your argument is like saying, 2 ^ x doesn't converge to 0 as x > infinity, with the proof that "draw a chart from 0 to 10, and you'll see the curve NEVER reaches 0".
Long term market returns probably converge to a single value by the central limit theorem (http://www.investopedia.com/terms/c/central_limit_theorem.asp), i.e. after throwing a large number of random outcomes, the standard deviation of the empirical mean approaches 0. It's always a question of how long you wait. Of course, in an investing lifetime of ~50 years, the standard deviation of the mean is not necessarily small or negligible, which is trivial IMO.
Gerard, I'm not sure if we agree or disagree. And I agree the visual gap between the worst and best cases narrow if you look further into future.
However, if your understanding is that either the two cases "coverge" to a single value or as a practical matter tighten into a very tight range that means individuals get nearly the same outcome, your understanding differs from my understanding.
Two or three hopefully constructive comments:
1. Even tiny differences compounded over long periods of time result in large differences in the final "future values."
2. The history surely shows that wide variability has occurred in past.
I sort of hesitate to veer into the weeds about thisI'm far more concerned about new investors understanding this point than about experienced investors polishing their expertise, but I think a monte carlo simulation someone can play with on their own perhaps moves the discussion forward in a helpful way.
Accordingly, I constructed a simple century long monte carlo simulation with Excel that looks at a 1000 simulations of the case where someone invests $1,000 when they're born into the stock market and then lets that investment compound for a century. Just to keep things simple but reasonably accurate, I used a 10% nominal rate of return and then also a 10% standard deviation.
With those inputs, I get the following results after 100 years:
Statistic  Dollars  Returns 
Mean  $14,017,736.79  10.019% 
Median  $9,271,956.09  9.565% 
St. Dev.  $14,868,015.08  NA 
Minimum  $433,632.93  6.260% 
Maximum  $134,498,934.17  12.535% 
Three features I'd like to point out:
1. Though the mean and median nominal returns are very close to each other, after a century of compounding, even that small half a percent difference produces a really large difference in the future value.
2. Wide variability in nominal rates of returns and future values occurs even with a century of "evening out" or "averaging out".
3. Anyone looking at this data needs to really take note of the fact that these values are nominal values (so greatly, greatly inflated after a century of inflation.)
I've attached a skinnyed down version of the Excel spreadsheet. Note four things... First, the 1000 scenarios version of the spreadsheet is too big to attach so the one people can download only does a 100 scenarios. Second, someone can expand the 100 scenarios version to a 1000 scenarios version by copying the range CK16..ALM16 into the range CK17..ALM114. Third, you can press the F9 key to recalculate the spreadsheet's values and run another simulation. Fourth, the MAX function, if it gets too large, returns the #NUM error. Sorry...

I think I get your point: Some people get lucky saving up for retirement (if their accumulation years match up with good market returns  particularly their earlier years of savings). Some people get unlucky saving up for retirement. And I agree that this happens.
Exactly. We are on the same page.
In simple terms, I am still missing what causes the "lucky" high returns vs "unlucky" low return results in the models? Why is there so much variability?
The variability reflects the randomness. Or, to give an accurate but pretty unsatisfying answer, good luck bumps returns up and bad luck bumps returns down.
I don't want to be pedantic, but just because readers with a wide range of investment experience are looking at these points... This variability (this risk) is the reason we get more from stocks than we do from bonds.

Isn't there the problem that we only have historical returns data for a limited period of ~150 years (and for many asset classes a lot less), so as the period of averaging increases the number of data points gets smaller. Plus the dataset gets progressively biased to earlier time periods when conditions are less and less likely to be similar to 'now'.
Monte Carlo/sequential Gaussian simulation can address that, if you trust the assumptions are valid. But for your OP purposes 30 years does seem a totally reasonable length of savings years to test, and your conclusion is clear  don't count on getting a guaranteed CAGR of 7% real compounded growth in the market!
Does this then point to the value of adding other asset classes? IE Real estate, small businesses, forestry? One of the things I like about my little forest of pine trees is that the growth is natural regardless of the DJIA or bond prices because they are plants and plants grow. Insure for fire, naturally. Final ROI will be a function of taxes levied, log prices, residual value of the land and costs when we harvest. Still has risks of disease, drought and pests tho'...
Mr Mark,
You and I are on the same page here.
BTW, regarding doing monte carlo simulations, I attached a simple Excel spreadsheet to my last response to Gerard. People can use that, I think, to get a further understanding of how the variability doesn't change even if we stretch out the investment horizon to a century.
Regarding using additional asset classes, I think that works at least a little. (That's what I think I'm doing with the Swensen allocation.) But to me it seems like the two biggest steps we can take (and encourage others to take) are (a) get the savings thing working well and (b) plan for the some variability.

The issue I'm trying to highlight is those funnel charts and popular thinking at places like Bogleheads say you bear less risk if you invest for a long time... like for decades. And that's not true.
As always, when discussing "risk" (a word we tend to use too loosely), it is important to define precisely what we mean. If risk means "exposure to an adverse possibility," we should be clear about which specific adverse possibility or possibilities we are referring to (or, alternatively, that we are broadly referring to the entire universe of conceivable adverse possibilities).
In this thread, you appear to be referring primarily to the risk that future longterm stock returns will underperform an investor's expectations or historical averages (which may have informed the investor's expectations). As maizeman nicely illustrated in this post (https://forum.mrmoneymustache.com/welcometotheforum/mrmathandpayingoffyourmortgage/msg1519191/#msg1519191), it makes little sense to focus on that risk in isolation.
Undoubtedly, investors should be aware that stock market returns are uncertain, with significant variability in outcomes even over extended time periodswhich, I believe, is the only point you were trying to make in starting this thread.
But no matter how you define risk, I don't see how the above quoted claim can be accurate. It's certainly the case that the specific "variability of outcomes" risk you're referring to goes down over time, as the funnel charts clearly illustrate.
If I understand the meaning of your statements above, I think the statements reflect an incorrect interpretation of the charts. And I say this not to be a jerk. For a long time, I made the exact same assumption you may be making above.
FWIW, the funnel chart contributes to my past and perhaps your current misunderstanding because it graphically shows a tightening band of returns. But the band never converges to a single value of course and it doesn't even tighten into a band so narrow that what we're talking about here doesn't matter.
Look at it this way: Say the band out at year 50 is a tight range from 5% to 7% with the average return at 6%. Someone who earns 5% ends up with slightly more than $100K. Someone who earns 6% earns up with nearly $200K. And someone who earns 7% ends up with nearly $300K. Those will be big differences at retirement.
And then these points (which I apologize for making again and again)... first, the range is wider than 5% to 7% because we all use an annuity to accumulate (regular monthly or annual savings) and not a single onetime investment... second, some of the data we have for this analysis misses some really bad and some really good patches of financial history.
P.S. People can very rightly criticize the simplistic monte carlo spreadsheet I attached to my respond to Gerard's last comment, but it'll let someone experiment with how variability doesn't really change over time. Also if someone wants to improve that spreadsheet with a smarter way to make the simulation calculations, hey, you have my blessing and thanks.
P.P.S. I did look at the maizeman comments you helpfully referenced. I would say the situation I'm talking about is when one person is rolling the dice with a Scenario A reality and the another person is rolling the dice with a Scenario B reality.

If I understand the meaning of your statements above, I think the statements reflect an incorrect interpretation of the charts. And I say this not to be a jerk. For a long time, I made the exact same assumption you may be making above.
I'm not sure what assumption you think I'm making, but my point is that the following statement is simply not true:
variability doesn't really change over time
It most certainly does, which is why the funnel charts have a funnel shape with a gap that narrows along the xaxis, and which is why it was incorrect to have stated:
The issue I'm trying to highlight is those funnel charts and popular thinking at places like Bogleheads say you bear less risk if you invest for a long time... like for decades. And that's not true.
The risk of underperforming expected returns/historical average returns (the risk you seem to be focused on) is drastically reduced as you move from the short term to the long term, as are other (more significant) risks, such as the risk of capital loss.
What is true (and what I think is really the only point you've been trying to make) is that, in stock investing, variability of outcomes remains significant even over long time horizons (though not as significant as it is over short time horizons).

If I understand the meaning of your statements above, I think the statements reflect an incorrect interpretation of the charts. And I say this not to be a jerk. For a long time, I made the exact same assumption you may be making above.
I'm not sure what assumption you think I'm making, but my point is that the following statement is simply not true:
variability doesn't really change over time
It most certainly does, which is why the funnel charts have a funnel shape with a gap that narrows along the xaxis, and which is why it was incorrect to have stated:
The issue I'm trying to highlight is those funnel charts and popular thinking at places like Bogleheads say you bear less risk if you invest for a long time... like for decades. And that's not true.
The risk of underperforming expected returns/historical average returns (the risk you seem to be focused on) is drastically reduced as you move from the short term to the long term, as are other (more significant) risks, such as the risk of capital loss.
What is true (and what I think is really the only point you've been trying to make) is that, in stock investing, variability of outcomes remains significant even over long time horizons (though not as significant as it is over short time horizons).
Look, though, at those charts you reference... see how they don't converge to a single value? I.e., see how they don't ever compress down into a single thin line... There is still a gap between high and low. That gap is what we're talking about.
Losing .5% a year over a 100 years or losing 1% over 50 years makes a really enormous difference in the outcome.
Can I suggest something that takes about a minute of your time? Follow the instructions given in message #12 in the first part of this thread to use cFIREsim to calculate the range of returns that occurs for a given common investment scenario. The instructions suggest 30 years of accumulation which may be too short for you... but try that first... and then jack the accumulation time to 40 or 50 years.
You will see what I'm talking about. You may still disagree. But you'll understand what I'm pointing to in the data.
P.S. If you would be comfortable running a monte carlo simulation, you can also grab that spreadsheet I attached to a message in this thread and run a few thousand simulations.
P.P.S. Harry Sit, who blogs as the finance buff, sent me this link to a great little academic discussion of this issue we're discussing. The bar chart in the writer's "appendix a" shows the chart he thinks does a better job of visually highlighting the variability in outcomes: http://www.norstad.org/finance/riskandtime.html

The issue I'm trying to highlight is those funnel charts and popular thinking at places like Bogleheads say you bear less risk if you invest for a long time... like for decades. And that's not true.
As always, when discussing "risk" (a word we tend to use too loosely), it is important to define precisely what we mean. If risk means "exposure to an adverse possibility," we should be clear about which specific adverse possibility or possibilities we are referring to (or, alternatively, that we are broadly referring to the entire universe of conceivable adverse possibilities).
In this thread, you appear to be referring primarily to the risk that future longterm stock returns will underperform an investor's expectations or historical averages (which may have informed the investor's expectations). As maizeman nicely illustrated in this post (https://forum.mrmoneymustache.com/welcometotheforum/mrmathandpayingoffyourmortgage/msg1519191/#msg1519191), it makes little sense to focus on that risk in isolation.
Undoubtedly, investors should be aware that stock market returns are uncertain, with significant variability in outcomes even over extended time periodswhich, I believe, is the only point you were trying to make in starting this thread.
But no matter how you define risk, I don't see how the above quoted claim can be accurate. It's certainly the case that the specific "variability of outcomes" risk you're referring to goes down over time, as the funnel charts clearly illustrate.
If I understand the meaning of your statements above, I think the statements reflect an incorrect interpretation of the charts. And I say this not to be a jerk. For a long time, I made the exact same assumption you may be making above.
FWIW, the funnel chart contributes to my past and perhaps your current misunderstanding because it graphically shows a tightening band of returns. But the band never converges to a single value of course and it doesn't even tighten into a band so narrow that what we're talking about here doesn't matter.
Look at it this way: Say the band out at year 50 is a tight range from 5% to 7% with the average return at 6%. Someone who earns 5% ends up with slightly more than $100K. Someone who earns 6% earns up with nearly $200K. And someone who earns 7% ends up with nearly $300K. Those will be big differences at retirement.
And then these points (which I apologize for making again and again)... first, the range is wider than 5% to 7% because we all use an annuity to accumulate (regular monthly or annual savings) and not a single onetime investment... second, some of the data we have for this analysis misses some really bad and some really good patches of financial history.
P.S. People can very rightly criticize the simplistic monte carlo spreadsheet I attached to my respond to Gerard's last comment, but it'll let someone experiment with how variability doesn't really change over time. Also if someone wants to improve that spreadsheet with a smarter way to make the simulation calculations, hey, you have my blessing and thanks.
P.P.S. I did look at the maizeman comments you helpfully referenced. I would say the situation I'm talking about is when one person is rolling the dice with a Scenario A reality and the another person is rolling the dice with a Scenario B reality.
I think you are using the word "risk" in a different manner than they are at Bogleheads.
In academia they typically define risk as volatility (like in the Sharpe ratio), and use it to calculate risk adjusted returns and the like. I don't think that is a useful definition of risk at all. In my view, risk is the chance of the permanent loss of capital.
If our holding period is one year, there is very real chance of a 50% loss. There have been several years with losses that bad or nearly that bad. If the holding period becomes 10 years, then there have only been one or two losing periods, and then a couple percent. If the holding period is 20 years, there have been no periods with losses. That's why at Bogleheads they say the longer the holding period, the lower the risk.
You seem to be using "risk" to mean "chance of below average performance." I suppose that is a type of risk, but I don't get to choose my sequence of returns. I simply have buy and hold long enough.

I think you are using the word "risk" in a different manner than they are at Bogleheads.
I'm trying not to use the word risk. Instead I've been trying to use the phrase "variability in outcomes."
Sorry if I muddied the water by letting that word slip into my comments.
BTW, if I run a quick 20 year calculation with cFIREsim and say I start with $1,000,000, you are correct that no historical example exists of someone losing money.
But lots of people, I am pretty sure, would be surprised to calculate that the worst case scenario is someone after twenty years ends up with just over $1,000,000. The value $1,030,210 to be precise.
Here's the outputs from cFIREsim. They show the variability in outcomes I keep referring tooo.
Average: $3,980,810
Median: $3,511,622
St. Dev.: $2,116,713
Highest: $10,686,290
Lowest: $1,030,210
P.S. I won't repeat the comments I made above in Reply #51, but I don't think what we're talking about here is sequence of returns risk. I know I agreed with someone earlier in this thread when they said that. But it isn't the sequence of the returns that's the issue here. Someone who first gets 4% for 15 years and then 8% for 15 years ends up with the same outcome as someone who first gets 8% for 15 years and then 4% for 15 years. These two folks would have different withdrawal rates with those returns.

Hopefully people are investing some each year, and the investments in the bad years would grow and make up for an overall low rate of return 20 year period.

As mustachians, how can you try to use that variability to our advantage? Or what can we do to hopefully pursue that FIRE goal as soon as possible?
Invest more, more often? Review our asset allocation?

As mustachians, how can you try to use that variability to our advantage? Or what can we do to hopefully pursue that FIRE goal as soon as possible?
Invest more, more often? Review our asset allocation?
Dollar cost averaging is already a very effective method for dealing with it. So invest more more often is a good way of handling it.
I decided to emphasize more volatile and poorly correlated asset classes such as small company stocks and international stocks especially emerging markets to address this. I invest only (so far) in long term bonds, and a small amount in gold miner equity. Asset allocation and diverification can potentially be effective in dealing with it. Other options may include a glide path and reverse glide path, which are currently being discussed elsewhere on the first page. Bernstein suggests a form of market timing by switching a percentage of your assets to safe bonds (not more than 40% based on my reading) in one big chunk as soon as you have enough money to say you won the game.

As mustachians, how can you try to use that variability to our advantage? Or what can we do to hopefully pursue that FIRE goal as soon as possible?
Invest more, more often? Review our asset allocation?
When I started really writing about this variability in outcomes stuff a few months ago, I came up with the idea that in addition to that retirement plan "A" which we all have as our main plan, we should also have a retirement plan "B" for that pretty realistic scenario where the retirement plan "A" scenario falls short.
Note: The first blog post I wrote about this appears here: Retirement Plan B: Why You Need One. (https://evergreensmallbusiness.com/retirementplanbneedone/)
At the end of the little series I did, I tried to come up with a dozen tips for building a retirement plan here. The full discussion appears at another blog post here, Retirement Plan B Tips (https://evergreensmallbusiness.com/retirementplanbtips/), but let me quickly summarize the ideas I had:
1. Don't be in denial about this.
2. Use tools like cFIREsim and FIREcalc to size up the problem.
3. Assess how impactful the problem is to us personally.
4. Consider adjusting asset allocation.
5. Consider adjusting income allocation.
6. Bump savings during a bad patch of returns.
7. Avoid Rothstyle accounts.
8. Cut investment costs.
9. Work another year or two or three.
10. Shorten the number of years you plan to work.
11. Doublecheck your retirement plan "A" to make sure it's robust.
12. Don't forget about the retirement plan "C" option.
For what it's worth, I think the most important and an immediate first step people need to take is to understand this variability in outcomes occurs. That is huge. And it'll probably almost let people address the issue subconsciously.

Bernstein suggests a form of market timing by switching a percentage of your assets to safe bonds (not more than 40% based on my reading) in one big chunk as soon as you have enough money to say you won the game.
I could never make such a drastic move to my portfolio, that would mean selling hundreds of thousands of dollars of equities and putting them in bond funds. I don't think I can do that.

As mustachians, how can you try to use that variability to our advantage? Or what can we do to hopefully pursue that FIRE goal as soon as possible?
Invest more, more often? Review our asset allocation?
Dollar cost averaging is already a very effective method for dealing with it. So invest more more often is a good way of handling it.
I decided to emphasize more volatile and poorly correlated asset classes such as small company stocks and international stocks especially emerging markets to address this. I invest only (so far) in long term bonds, and a small amount in gold miner equity. Asset allocation and diverification can potentially be effective in dealing with it. Other options may include a glide path and reverse glide path, which are currently being discussed elsewhere on the first page. Bernstein suggests a form of market timing by switching a percentage of your assets to safe bonds (not more than 40% based on my reading) in one big chunk as soon as you have enough money to say you won the game.
Definitely agree that dollar cost averaging is good... Also, though it's easier theory than practice, I too try to have my portfolio constructed in a way that means I'm applying the lessons of modern portfolio theory (so uncorrelated asset classes)... These things will possibly dampen the volatility, will possibly bump return, and maybe (fingers crossed) do both... But these things don't eliminate the variability in long run stock market returns. Or the variability in the long return returns in an MPTy portfolio.
Not sure I understand enough and have thought enough about issues in the thread started by Mr. Green about reverse equity glide path to comment.
Regarding Bernstein's comment "if you've already won the game, why keep playing," that logic to me absolutely reflects deep understanding of this variability in returns we're talking about in this thread.
Regarding Bernstein's comment, I wonder if personal situation factors into that. E.g., someone in their 70s like Dr. Bernstein is (I think) probably bears less inflation risk than someone who FIREs in their 40s or 50s. That to me argues against bonds. Or another example, someone with a really big portfolio may be in a situation where even a catastrophic bear market means they aren't losing their house, they're downsizing from a 4 bedroom to a 2 bedroom or dumping the second vacation home. Someone right on the edge can't bear that risk.
I come back again and again to the very simple conclusion that we need to be smart in our investing... and then also be alert to the risk variability in outcomes possible and have some cushioning built into our plans and a willingness to show flexibility if it's needed.
This is maybe off on a tangent, but obviously when you engineers build a bridge, you don't build it in way that means it'll only "work" for an average sized vehicle... that would mean the bridge collapses anytime an oversized vehicle tries to cross. You build it so there's lots of extra capacity just in case.
We can't as individuals build portfolios that handle extreme conditions. But we can/should build portfolios that fail something less than 50% of the time.

Agree a good strategy is to have scenariobased alternative plans.
I would recommend multiple plans or strategies (one for average returns, one for 'good luck' returns and one for 'bad luck' returns because the funnel goes both directions).
The list of strategies seems a bit random and kind of mixes up the impct of sequence of returns risk with asset allocation decisions meant to reduce volatility of earnings. It may confuse some people. Volatility can be reduced somewhat. Sequence not so much. The funnel exists regardless of your asset allocation, though one can impact the curves with allocations. Most asset class returns are correlated with the overall economic situation of your 30 year time, which is an unknown.
Under the bad luck scenario it all pretty much boils down to spend less, save more (sing to tune from Hamilton...talk less, smile more), or vary your retirement date.
Final comment. Im not sure i agree with your plan B tips, like why avoid Roth's? The tax benefits seem to help regardless of your sequence of returns risk (despite your comment above, this is sequence of returns risk). Is there a source for these?
PizzaSteve, we are probably mostly on the same page here. (The list of tips may appear a little less random on the actual blog post referenced... but the list does reflect a certain "and then throw in the kitchen sink too" quality.)
Regarding my suggestion to not use a Roth, I've written a lot about why I think that choice doesn't make sense: Are RothIRAs and Roth401(k)s Really a Good Deal (https://evergreensmallbusiness.com/arerothirasandroth401ksreallyagooddeal/), Worst Case Scenarios for Roth Style Accounts (https://evergreensmallbusiness.com/worstcasescenariosforrothstyleaccounts/), and then The Only Times You Should Use a Rothstyle Account (https://evergreensmallbusiness.com/theonlytimesyoushouldusearothstyleaccount/).
I think those posts pretty thoroughly describe the situation, but as a general comment, a Rothstyle account is a bet your or my marginal rate will go up in retirement. The bad case scenarios would, it seems to me, all be situations where one's marginal rate had gone down.
As generality, I think one doesn't need to worry too much about taxes in retirement: Why You Don't Need to Worry about Taxes in Retirement. (https://evergreensmallbusiness.com/whyyoudontneedtoworryabouttaxesinretirement/)
Finally, yup, agree people can't work with "civil engineering" levels of confidence. None of us can afford that. That would be the "never retire" approach for many...

Remember that all our investment projections are based on history, not irrefutable laws of the universe, such as gravity. Looking at longer timeframes does not change this. To paraphrase Mark Twain, "(investing) History doesn't repeat itself but it often rhymes."
So, we need to:
1. Control what you can control: savings rates, investment fees, balanced asset allocation, etc.
2. Expect variability from historical assumptions. Be prepared to adjust.

What is true (and what I think is really the only point you've been trying to make) is that, in stock investing, variability of outcomes remains significant even over long time horizons (though not as significant as it is over short time horizons).
I am sorry, but I missed this important statement of yours in my earlier response.
The above makes me think we probably see the situation as very similar. Not identical... but very similar. Apologies for not reading your comments more carefully.
E.g., if one plays with that crude monte carlo simulation Excel workbook I attached to a message in this thread, the worst to best annual return spread after 5 years is, in one simulation, 4% to 22%. And if you look at the worst to best annual return spread after 100 years in that same simulation, 6% to 12%.
Note: These are nominal returns... not real returns. But I think we both agree that something like this narrowing shows up in the returns.
And what I thought we were talking about is the worst to best dollar outcomes... which in that same simulation range goes from $800 to $2700 dollars at year 5 and from $400,000 to roughly $139,000,000 at year 100.
Note: These are inflated dollars and based on an initial $1,000 investment. But the ever increasing dollar range thing is what I've been trying to communicate.
Again, sorry for not better reading your full response.

Remember that all our investment projections are based on history, not irrefutable laws of the universe, such as gravity. Looking at longer timeframes does not change this. To paraphrase Mark Twain, "(investing) History doesn't repeat itself but it often rhymes."
So, we need to:
1. Control what you can control: savings rates, investment fees, balanced asset allocation, etc.
2. Expect variability from historical assumptions. Be prepared to adjust.
+1

This is all interesting however I suppose that the other side of the equation is that if you are saving in a down period you are probably more likely to get an up period in retirement.

Actionable items for those of you advising the next generation, as this is primarily about accumulation:
1) Encourage them to take a statistics class or 8. At heart this isn't a discussion about personal finance as much as a discussion about elementary statistics
2) Encourage them, if they plan on retiring, to consider a plan that is not tied to a specific date, but instead a specific stashtoretirementexpenses ratio, unless they are getting a sweet deal (e.g. after 20 years can retire with free healthcare for life). If they are focused on a # then all of this is way less important. At that point it only really affects asset allocation choices, and in an optional way. Of course they still need to understand that variability exists as they make choices. That is, asset allocation matters, but variability in outcomes matters more if you're limited by something other than your outcome, in terms of $ amount. The higher their savings rate the less any of this matters too as our OP pointed out.
3) Flexibility and saving more money than you think you need are important. The more you have and the more flexible you are the less important small things like this are once you turn the corner from accumulator to withdrawor.
Thought related to this:
There is so much uncertainty in life that overoptimizing personal finance is honestly kind of a waste of time, except inasmuch as "Plans are nothing, planning is everything."
a) Humanity scratches and claws and breaks and reforms the rules all of the time because evolution has built us to behave that way. We're all kind of gambling that society keeps working like it has. We're taking the best bet we can by putting our money in the hands of businesses who can change and adapt and usually are the driving force behind changes anyway. That doesn't mean the system will look remotely the same in future though. Private equity could leave just the shitty companies available on the public stock market, a solid gold asteroid could calmly land in the ocean and quintuple the amount of gold in the market, UBI could get figured out and enable most mustachians to retire overnight, long run average stock returns could drop to 1% indefinitely etc. and make all of this consternation not worth much at all. The haves could take it away or the havenots could burn down the digital records of banks/stocks or effectively do so through wealthleveling. I still like our odds, but they are just odds not iron law.
b) 150 years of stock market returns with wildly differing operational definitions year to year are not really enough data for meaningful prediction, and people often greatly overstate the importance of "statistics of personal finance" in one's life anyway, using a small amount of bad data to focus on such a small part of your overall happiness in life. For me, people should burn #3 above into their brains and just not worry too much about the details of things because society can change all the time and we really can't predict personal finance meaningfully enough anyway. E.g. your personal health, climate change, technology, war, politics removing the notion of personal property/assets, a million things could happen that make your amount and ratio of stocks/bonds/real estate way less important to your actual life and happiness than you might think. If I'm advising people I'm getting them down the right path as far as personal finance then honestly moving on to helping them get the rest of their life happy.

The Only Times You Should Use a Rothstyle Account (https://evergreensmallbusiness.com/theonlytimesyoushouldusearothstyleaccount/)
You don't address the case where someone is unable to take advantage of pretax contribution/deduction, so they backdoor their way into the Roth account.
The choices for that person are "posttax brokerage account with no unique tax benefits" vs. "Roth account with taxfree growth". Contributions are the same in both cases, no penalty is being paid to get dollars into the Roth account.
That seems like a valid time in which you should use a Roth styleaccount.

The Only Times You Should Use a Rothstyle Account (https://evergreensmallbusiness.com/theonlytimesyoushouldusearothstyleaccount/)
You don't address the case where someone is unable to take advantage of pretax contribution/deduction, so they backdoor their way into the Roth account.
The choices for that person are "posttax brokerage account with no unique tax benefits" vs. "Roth account with taxfree growth". Contributions are the same in both cases, no penalty is being paid to get dollars into the Roth account.
That seems like a valid time in which you should use a Roth styleaccount.
You are right. I agree. I am talking in those posts about people comparing something like a traditional IRA and then a RothIRA... if one compares a RothIRA and a regular taxable account, that math works differently.
Good point.

...3) Flexibility and saving more money than you think you need are important....
The above, I think, pretty well summarizes what I propose should be the BIG takeaway from this discussion. Especially the importance of flexibility.
Most likely (like 2/3rds of the time) someone's long run annual return will run between 5% and 7%.. and of course even that requires some flexibility. But there's a 1/3ish chance, someone's experience might be above or below this. And that will require more flexibility. Or more cushioning in either money or earnings.

You are right. I agree. I am talking in those posts about people comparing something like a traditional IRA and then a RothIRA... if one compares a RothIRA and a regular taxable account, that math works differently.
No worries. I'm aware of your posts around here, so I was certain I wasn't telling you anything you didn't already know.
Maybe just a bit of feedback about that context not being clear in the text of the blog posts. Nor in your simple bulletlist retirement tips. Maybe "choose traditional over Roth", rather than the more absolute "avoid Roth".

This discussion has probably run its course by now... but I realize (belatedly) that this is the chart I should have included in the original message:
(https://evergreensmallbusiness.com/wpcontent/uploads/2017/10/longrunstockmarketreturnchartdollaroutcomes.png)
It shows the actual, adjusted for inflation dollar values someone gets if they experience the average, worst and best case outcome over 5 year, 10, years, 15 years, etc, all the way up to 40 years. (So a little longer than the first chart showed.)
My message would have been far more understandable had I included this the first time. (I actually blog about this and include the chart in today's post:
https://evergreensmallbusiness.com/mythlongrunstockmarketreturnchart/
And the point is, the range of outcomes widens...

This discussion has probably run its course by now... but I realize (belatedly) that this is the chart I should have included in the original message:
(https://evergreensmallbusiness.com/wpcontent/uploads/2017/10/longrunstockmarketreturnchartdollaroutcomes.png)
It shows the actual, adjusted for inflation dollar values someone gets if they experience the average, worst and best case outcome over 5 year, 10, years, 15 years, etc, all the way up to 40 years. (So a little longer than the first chart showed.)
My message would have been far more understandable had I included this the first time. (I actually blog about this and include the chart in today's post:
https://evergreensmallbusiness.com/mythlongrunstockmarketreturnchart/
And the point is, the range of outcomes widens...
Thnaks again for posting this thread. It has been really helpful for me, and I'm sure it has helped many others.

my personal plan is greatly influenced by colleagues from my work in Japan from 19881991. I had colleagues in their prime work years (30somethings to 60somethings) face roughly 0% returns in equities, bonds and real estate (crash followed by stagnant recovery). If they were not internationally diversified they were hosed unless saving to a 2% withdraw rate. 0%mortgages helped those underwater RE assets, but yuck! Other smaller countries have had similar eras.
I think this is a crucial point. It's my main reason for some international diversification.

my personal plan is greatly influenced by colleagues from my work in Japan from 19881991. I had colleagues in their prime work years (30somethings to 60somethings) face roughly 0% returns in equities, bonds and real estate (crash followed by stagnant recovery). If they were not internationally diversified they were hosed unless saving to a 2% withdraw rate. 0%mortgages helped those underwater RE assets, but yuck! Other smaller countries have had similar eras.
I think this is a crucial point. It's my main reason for some international diversification.
Agreed. And with yet another apology to everyone just terribly tired at hearing me say this: Though not in recent US financial history, in the not too distant past, there are some extended stretches of pretty poor US investor portfolio returns too.
P.S. to max9505672... thanks for compliment... but also I think this thread really reflects a group effort where both the people asking the questions and the people trying to come up with the answers help everybody think more clearly... even when we don't always totally agree in the end.

my personal plan is greatly influenced by colleagues from my work in Japan from 19881991. I had colleagues in their prime work years (30somethings to 60somethings) face roughly 0% returns in equities, bonds and real estate (crash followed by stagnant recovery). If they were not internationally diversified they were hosed unless saving to a 2% withdraw rate. 0%mortgages helped those underwater RE assets, but yuck! Other smaller countries have had similar eras.
I think this is a crucial point. It's my main reason for some international diversification.
I'm with JHCollins and others that the modern USA equity market intrinsically contains a lot of effective international diversification compared to pre1970s for example. The advantage of staying US based is there is more liquidity and (argably) better governance. I still don't see a lot of alternatives to the US dollar and US treasuries as safe havens in a crisis. In those 'risk on' situations overseas equities and currencies tend to get hit even harder than US.
I also think there is a lot of potential for overseas growth from many US companies where their brand and reputation will be a boon to business (companies like J&J, DowDupont, Amazon, etc) as in many emerging markets the local companies are no where near the sophistication of developed companies. As a foreigner it strikes me that many US midsized and small caps have hardly bothered with overseas markets because the US/NAFTA market is so huge they haven't needed to to go further afield to grow.
So I'm in the main sticking to good ol' VTSAX and VTBSX with just a light sprinkle of explicit international equities.

my personal plan is greatly influenced by colleagues from my work in Japan from 19881991. I had colleagues in their prime work years (30somethings to 60somethings) face roughly 0% returns in equities, bonds and real estate (crash followed by stagnant recovery). If they were not internationally diversified they were hosed unless saving to a 2% withdraw rate. 0%mortgages helped those underwater RE assets, but yuck! Other smaller countries have had similar eras.
I think this is a crucial point. It's my main reason for some international diversification.
I'm with JHCollins and others that the modern USA equity market intrinsically contains a lot of effective international diversification compared to pre1970s for example. The advantage of staying US based is there is more liquidity and (argably) better governance. I still don't see a lot of alternatives to the US dollar and US treasuries as safe havens in a crisis. In those 'risk on' situations overseas equities and currencies tend to get hit even harder than US.
I also think there is a lot of potential for overseas growth from many US companies where their brand and reputation will be a boon to business (companies like J&J, DowDupont, Amazon, etc) as in many emerging markets the local companies are no where near the sophistication of developed companies. As a foreigner it strikes me that many US midsized and small caps have hardly bothered with overseas markets because the US/NAFTA market is so huge they haven't needed to to go further afield to grow.
So I'm in the main sticking to good ol' VTSAX and VTBSX with just a light sprinkle of explicit international equities.
If one believes, as I do, that modern portfolio theory works, one tries to construct a portfolio that includes either uncorrelated asset classes or imperfectly correlated asset classes . Pretty clearly, that means including whenever possible other distinct asset classes like international stocks and REITs. And using riskless assets like treasuries.
This should either bump returns or dampen volatility.
BTW if someone only dampens volatility that should bump your SWR... a point explored a little bit at www.portfoliocharts.com.
P.S. I spent a bit of time looking for it and couldn't locate, but there's a great blog post where Mr Money Mustache politely debates the merits of modern portfolio theory with Jim Collins. (If someone can locate that, it's really worth reading.)

I understand. I just don't agree that international equities in general are poorly correlated with U.S. equities as much these days. Just lower upside and larger downside.
So I prefer some types of real estate and forestry and hyperlocal businesses for example.

I see no fault in the logic of keeping it all in the US market. But for the anticorrelation reason, I do keep about 12% of my port in international equities. It has been kind of a dog for the last few years, but this year it has been red hot, mostly because the dollar is sliding against the Euro. As a SWAG I'd say it will continue to be hot for a while as Europe recovers, and I'd guess we'll enter the next recession before them.
That's mostly just speculation on my part though. I'm not suggesting or recommending anyone do the same thing.

I understand. I just don't agree that international equities in general are poorly correlated with U.S. equities as much these days. Just lower upside and larger downside.
So I prefer some types of real estate and forestry and hyperlocal businesses for example.
This post replies both to Mr Mark and sort of to Telecaster...
Okay, agree there's poor correlation. But even with a (say) .9 correlation between US stocks and developed markets or a .8 correlation between US stocks and emerging markets, aren't we still getting reduction in the portfolio variance?
https://www.portfoliovisualizer.com/assetclasscorrelations
I think so. BTW, usual stipulations that correlations change over time and aren't predictable so we can't construct the perfect portfolio going forward (only looking backwards)... also that everything correlates in a worst case scenario.
So this is a bit of a "Pascal's Wager" for me... have faith in modern portfolio theory because I don't think there's any real downside. And if MPT does really work, you either bump returns, dampen volatility or both.

So this is a bit of a "Pascal's Wager" for me... have faith in modern portfolio theory because I don't think there's any real downside. And if MPT does really work, you either bump returns, dampen volatility or both.
Heh. I don't believe in Hell in the afterlife or MPT, but appreciate an apt analogy. ;)
Great discussion all around and I like the recently posted chart.

One big issue I have with people saying that US and various international markets are highly correlated is that apart from correlations always changing, correlations also vary with the interval you specify. Bernstein noted that correlations between various national markets are generally at their lowest over periods of 35 years or so, but most people look at daily or annual correlations. For example (https://www.portfoliovisualizer.com/backtestportfolio?s=y&timePeriod=2&startYear=2007&firstMonth=11&endYear=2017&lastMonth=12&endDate=09%2F21%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VTI&allocation1_1=100&symbol2=VEA&allocation2_2=100&symbol3=VWO&allocation3_3=100), over the past 10 years or so, Vanguard's US stock fund has gained considerably, while their developed markets and emerging markets funds have been down. So unless "US and international markets have been highly correlated recently" means "have moved in literally the exact opposite direction over many years" I can't really say that correlations between the US and international markets are high. It really depends on what interval you use.
Also, Bernstein (and many others) have noted that the best performing asset class of the past five years is rarely the best for the next five years, in fact it is more likely to be near the bottom than the top.
In general, diversification seems to be a good idea which can ease the problem of extreme outcomes noted in this thread.

What's interesting for this year is  the more purely US based the stock index is  the worse the return. So for example small cap index is not up much at all this year. Total Stock market is better. S&P 500 better still, next is the developed markets, and the best yet this year is the emerging markets.

One big issue I have with people saying that US and various international markets are highly correlated is that apart from correlations always changing, correlations also vary with the interval you specify. Bernstein noted that correlations between various national markets are generally at their lowest over periods of 35 years or so, but most people look at daily or annual correlations. For example (https://www.portfoliovisualizer.com/backtestportfolio?s=y&timePeriod=2&startYear=2007&firstMonth=11&endYear=2017&lastMonth=12&endDate=09%2F21%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VTI&allocation1_1=100&symbol2=VEA&allocation2_2=100&symbol3=VWO&allocation3_3=100), over the past 10 years or so, Vanguard's US stock fund has gained considerably, while their developed markets and emerging markets funds have been down. So unless "US and international markets have been highly correlated recently" means "have moved in literally the exact opposite direction over many years" I can't really say that correlations between the US and international markets are high. It really depends on what interval you use.
Also, Bernstein (and many others) have noted that the best performing asset class of the past five years is rarely the best for the next five years, in fact it is more likely to be near the bottom than the top.
In general, diversification seems to be a good idea which can ease the problem of extreme outcomes noted in this thread.
Good points and I mostly agree. But I think no matter what we're going to see ranges of outcomes.

What's interesting for this year is  the more purely US based the stock index is  the worse the return. So for example small cap index is not up much at all this year. Total Stock market is better. S&P 500 better still, next is the developed markets, and the best yet this year is the emerging markets.
That is interesting... thanks for pointing out.

I read thru most of the first page. And i would say most around here plan for windows in which they can retire. I mean we're already talking retiring early pre 40 for most so there isnt a hard stop on ending your career as there is for people who wait until normal retirement age and could more likely run into health or family health issues. the worst case is intriguing but as DrF pointed out we're mustachian so we're saving a very high amount compared to avg and variablity decreases from best to worst case dramatically in terms of total years. i would say most arent using the really market avg  inflation for their personal calcultions either. i'm pretty agressive with mine at 6% and most project at 45% ... at the end of the day though there isnt much i can do with this data other than what i'd say alot already knew... the retirement date is a flexible one ... just like you should plan to be flexible once retired.
Flexibilty is the biggest take away from the data and works the same in FIRE as when determining one's FIRE date and projections.

The ''average returns'' we talk about here, is it considering dividends ?

The ''average returns'' we talk about here, is it considering dividends ?
It's including reinvestment of all dividends (also known as total return).
This is a good resource:
https://dqydj.com/sp500returncalculator/
My investing career spans 1998 to now. S&P500 annualized total return adjusted for inflation = 4% (three bull markets, two bears).
Someone investing in the last eight years has seen 12% (one bull market).

The ''average returns'' we talk about here, is it considering dividends ?
It's including reinvestment of all dividends (also known as total return).
This is a good resource:
https://dqydj.com/sp500returncalculator/
My investing career spans 1998 to now. S&P500 annualized total return adjusted for inflation = 4% (three bull markets, two bears).
Someone investing in the last eight years has seen 12% (one bull market).
The years 1998 to present are a good demonstration of how dollar cost averaging can increase the reliability of returns. I thought 4% looked low so I checked portfolio visualizer and sure enough, investing monthly into the S&P500 increased rate of return from 6.76% to 8.26% compared to a lump sum on January 1998 (but of course dollar cost averaging also ended in less money than if you had made a lump sum of the same size, which is why, given a choice, lump sum is preferable.)
https://www.portfoliovisualizer.com/backtestassetclassallocation?s=y&mode=2&startYear=1998&endYear=2017&initialAmount=1000&annualOperation=1&annualAdjustment=1000&inflationAdjusted=true&annualPercentage=0.0&frequency=2&rebalanceType=1&benchmark=VFINX&portfolio1=Custom&portfolio2=Custom&portfolio3=Custom&TotalStockMarket1=100
One big issue I have with people saying that US and various international markets are highly correlated is that apart from correlations always changing, correlations also vary with the interval you specify. Bernstein noted that correlations between various national markets are generally at their lowest over periods of 35 years or so, but most people look at daily or annual correlations. For example (https://www.portfoliovisualizer.com/backtestportfolio?s=y&timePeriod=2&startYear=2007&firstMonth=11&endYear=2017&lastMonth=12&endDate=09%2F21%2F2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&symbol1=VTI&allocation1_1=100&symbol2=VEA&allocation2_2=100&symbol3=VWO&allocation3_3=100), over the past 10 years or so, Vanguard's US stock fund has gained considerably, while their developed markets and emerging markets funds have been down. So unless "US and international markets have been highly correlated recently" means "have moved in literally the exact opposite direction over many years" I can't really say that correlations between the US and international markets are high. It really depends on what interval you use.
Also, Bernstein (and many others) have noted that the best performing asset class of the past five years is rarely the best for the next five years, in fact it is more likely to be near the bottom than the top.
In general, diversification seems to be a good idea which can ease the problem of extreme outcomes noted in this thread.
Good points and I mostly agree. But I think no matter what we're going to see ranges of outcomes.
Sure, if I recall from portfoliocharts even the best allocations (of the ones I looked at, I'm sure cash has a narrow range of outcomes but that doesn't mean it is a good idea) have had a spread of two years or so for early retirees.

The ''average returns'' we talk about here, is it considering dividends ?
It's including reinvestment of all dividends (also known as total return).
This is a good resource:
https://dqydj.com/sp500returncalculator/
My investing career spans 1998 to now. S&P500 annualized total return adjusted for inflation = 4% (three bull markets, two bears).
Someone investing in the last eight years has seen 12% (one bull market).
yes but just b/c thats what most of the younger group has seen doesnt mean thats what we estimate as our average ROR

The ''average returns'' we talk about here, is it considering dividends ?
It's including reinvestment of all dividends (also known as total return).
This is a good resource:
https://dqydj.com/sp500returncalculator/
My investing career spans 1998 to now. S&P500 annualized total return adjusted for inflation = 4% (three bull markets, two bears).
Someone investing in the last eight years has seen 12% (one bull market).
The years 1998 to present are a good demonstration of how dollar cost averaging can increase the reliability of returns. I thought 4% looked low so I checked portfolio visualizer and sure enough, investing monthly into the S&P500 increased rate of return from 6.76% to 8.26% compared to a lump sum on January 1998 (but of course dollar cost averaging also ended in less money than if you had made a lump sum of the same size, which is why, given a choice, lump sum is preferable.)
Just to clarify in case anyone is confused, I'm quoting real returns, Radagast is quoting nominal.
August 1998 August 2017
Annualized S&P 500 Return (Dividends Reinvested)
Not adjusted for inflation: 6.374%
Adjusted for inflation (real return): 4.137%

yes but just b/c thats what most of the younger group has seen doesnt mean thats what we estimate as our average ROR
Sure. And what we estimate doesn't matter anyway. As we say around our dinner table: "You get what you get, and you don't get upset".

yes but just b/c thats what most of the younger group has seen doesnt mean thats what we estimate as our average ROR
Sure. And what we estimate doesn't matter anyway. As we say around our dinner table: "You get what you get, and you don't get upset".
correct its mostly futile. as indicated many times here and in MMM posts the returns during accumulation arent really as big a deal as the amount of money you're contributing to your future.

... as indicated many times here and in MMM posts the returns during accumulation arent really as big a deal as the amount of money you're contributing to your future.
If what you mean by this is the gap between the worst and best case lines in the chart below at, say, the 10 year or 15 year marker isn't that bad, I guess I can sort of see that... But to me, that gap still looks pretty significant.
(https://evergreensmallbusiness.com/wpcontent/uploads/2017/10/longrunstockmarketreturnchartdollaroutcomes.png)
Here's another chart that shows the range of returns using the same data:
(https://evergreensmallbusiness.com/wpcontent/uploads/2017/10/longrunstockmarketreturnchartaverageannualreturns.png)
P.S. These come from the blog post I did the week after the blog post cited near the start of this thread: myth of the long run stock market return chart (https://evergreensmallbusiness.com/mythlongrunstockmarketreturnchart/).

... as indicated many times here and in MMM posts the returns during accumulation arent really as big a deal as the amount of money you're contributing to your future.
If what you mean by this is the gap between the worst and best case lines in the chart below at, say, the 10 year or 15 year marker isn't that bad, I guess I can sort of see that... But to me, that gap still looks pretty significant.
Here's another chart that shows the range of returns using the same data:
P.S. These come from the blog post I did the week after the blog post cited near the start of this thread: myth of the long run stock market return chart (https://evergreensmallbusiness.com/mythlongrunstockmarketreturnchart/).
DrF ran a sim on the first page that showed exactly what the year range was. I mean looking at a chart is pretty and all but whats the real time difference thats all that really matters. and its at most 5 years from worst vs best... so planning for a 2 year range is all thats needed for the most part. and even then as stated knowing this is great but there is no way to effect what happens over your accumulation window. so just dump in the money and decrease your spending and retire when you get to your number and you're comfortable with the current status of your investments to support you.
this also assumes investing the same amount annually. Most investments accellerate throughout life esp. around here in 7 years my salary has gone up 120% so this would need to take into account non linear investment on an annual basis i'd be interested to see how a 20% increase in investment YoY affected the best and worse outcomes

... its at most 5 years from worst vs best... so planning for a 2 year range is all thats needed for the most part. and even then as stated knowing this is great but there is no way to effect what happens over your accumulation window. so just dump in the money and decrease your spending and retire when you get to your number and you're comfortable with the current status of your investments to support you.
I agree. And I think this is really sort of akin to discussing whether the glass is 80% full or 20% empty.
this also assumes investing the same amount annually. Most investments accellerate throughout life esp. around here in 7 years my salary has gone up 120% so this would need to take into account non linear investment on an annual basis i'd be interested to see how a 20% increase in investment YoY affected the best and worse outcomes
You could pretty easily modify the stock market monte carlo simulation worksheet I provided here (https://forum.mrmoneymustache.com/investoralley/stockmarketmontecarlosimulationspreadsheet/) to do that. Well, except for estimating the inflation rate. But if you worked in nominal dollars which maybe works okay for a shorter forecast, that might be okay.