The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Calvin on July 09, 2021, 08:06:10 AM
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Vanguard posted a research paper recently about the 4% rule as it's related to early retirees with closer to a 50 year retirement horizon.
I found it very informative and interesting.
First, it discusses the underlying assumptions underlying the original 4% rule (historical returns, horizon of 30 years, "dollar plus inflation" withdrawal).
Based on their analysis, an initial 4% withdrawal can be reasonable with a high success percentage over a 50 year horizon with the following adjustments:
- Minimizing investment fees (obviously)
- Diversifying globally (domestic & international)
- Dynamic Spending rule (not "dollar plus inflation")
I was surprised about the impact of using dynamic spending and it was interesting to see something that doesn't simply rely on historical returns.
The only quibble with it is that it uses a 50% stock / 50% bond allocation. It would be interesting to see the analysis with other allocations too.
Here are the links to the overview and paper:
https://investornews.vanguard/fueling-the-fire-movement-updating-the-4-rule-for-early-retirees/ (https://investornews.vanguard/fueling-the-fire-movement-updating-the-4-rule-for-early-retirees/)
https://personal.vanguard.com/pdf/ISGFIRE.pdf (https://personal.vanguard.com/pdf/ISGFIRE.pdf)
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Interesting read. Predicted 4.02% future returns are a bummer, though.
I'd be interested in them adding in the effect of receiving SS payments at age 67, and thus being able (theoretically) to reduce withdrawals on investments. Even a small amount of SS could have a big effect, particularly for people with smaller staches who are living on smaller yearly withdrawals.
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I'd be interested in them adding in the effect of receiving SS payments at age 67, and thus being able (theoretically) to reduce withdrawals on investments. Even a small amount of SS could have a big effect, particularly for people with smaller staches who are living on smaller yearly withdrawals.
Right, but then the original study didn't take SS into account either, I believe. And this paper focuses on a 50 years early retirement. That certainly impacts SS - if someone retires at, say, 40 or 45, their SS will be very small.
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Interesting read. Predicted 4.02% future returns are a bummer, though.
I'd be interested in them adding in the effect of receiving SS payments at age 67, and thus being able (theoretically) to reduce withdrawals on investments. Even a small amount of SS could have a big effect, particularly for people with smaller staches who are living on smaller yearly withdrawals.
You can estimate this yourself using a very straightforward calculator that includes all of Vanguard's variables and allows you to account for SS/other future income: https://engaging-data.com/will-money-last-retire-early/
ETA: Actually, I guess Vanguard also considered the impact of all-domestic investments vs. a combination of domestic and international investments, which the calculator doesn't do (but it does have other variables Vanguard didn't include).
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This paper led me to this gem.
https://annuitystraighttalk.com/FreeDownload/VanguardStudy.pdf
I use the VPW method (https://www.bogleheads.org/wiki/Variable_percentage_withdrawal) but it does mean making an educated guess of your lifespan. It can also mean too-high and too-low withdrawals, depending on market performance. Using a +5/-2.5% method would mean smoother withdrawals.
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I'd be interested in them adding in the effect of receiving SS payments at age 67, and thus being able (theoretically) to reduce withdrawals on investments. Even a small amount of SS could have a big effect, particularly for people with smaller staches who are living on smaller yearly withdrawals.
Right, but then the original study didn't take SS into account either, I believe. And this paper focuses on a 50 years early retirement. That certainly impacts SS - if someone retires at, say, 40 or 45, their SS will be very small.
It's natural that a lot of people would think that but it's not necessarily the case. Anyone who retired that early by working a W2 job likely had wages high enough that they'll have significant lifetime SS earnings. How big of a stash one needs to retire plays a big role in this though. We were originally shooting for 1 million and bailed early at about 800k. By the time we got there I had ~18 years of working history since the age of 16 though I wasn't really making adult money until graduating college. In that time I managed to earn about $1.6 million in today's dollars, but some of that is the increase in the Average Wage Index over the years. I think my current expected payout at 67 is $2,100 a month (in today's dollars).
Even if someone was self employed for all that time it would be hard to keep profits low enough not to pay a robust amount of SS taxes over the years, unless one was intentionally underreporting their income.
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I'd be interested in them adding in the effect of receiving SS payments at age 67, and thus being able (theoretically) to reduce withdrawals on investments. Even a small amount of SS could have a big effect, particularly for people with smaller staches who are living on smaller yearly withdrawals.
Right, but then the original study didn't take SS into account either, I believe. And this paper focuses on a 50 years early retirement. That certainly impacts SS - if someone retires at, say, 40 or 45, their SS will be very small.
It's natural that a lot of people would think that but it's not necessarily the case. Anyone who retired that early by working a W2 job likely had wages high enough that they'll have significant lifetime SS earnings. How big of a stash one needs to retire plays a big role in this though. We were originally shooting for 1 million and bailed early at about 800k. By the time we got there I had ~18 years of working history since the age of 16 though I wasn't really making adult money until graduating college. In that time I managed to earn about $1.6 million in today's dollars, but some of that is the increase in the Average Wage Index over the years. I think my current expected payout at 67 is $2,100 a month (in today's dollars).
Even if someone was self employed for all that time it would be hard to keep profits low enough not to pay a robust amount of SS taxes over the years, unless one was intentionally underreporting their income.
There's a calculator for this too -- and yeah, people generally assume the SS difference between early retirement and regular retirement is a lot bigger than it will actually be in reality. https://ssa.tools/calculator.html
Looking at my own data, if I work another 7 years at my current salary (retiring at 40), I should expect to receive $1923 a month in SS. If I work another 32 years (retiring at 65), I should expect to receive $3374 a month. The difference is nothing to sneeze at, but I don't think $1923 is terribly small, either, and certainly is worth including when calculating my likelihood of success.
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SS is one reason we always considered the 4% SWR close enough. My own SS will be paltry due to my convoluted career path, but even that will pad out things until my younger, higher earning spouse is eligible.
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This paper led me to this gem.
https://annuitystraighttalk.com/FreeDownload/VanguardStudy.pdf
Thanks! That looks interesting. I'll make sure to read it. I haven't spent too much time learning about spending strategies yet. Now that I'm closer to my FIRE (or semi-FIRE) date, I'll have to do some more reading up on it.
Yesterday I also saw another Vanguard paper on this that I plan to read soon:
From assets to income: A goals-based approach to retirement spending
https://personal.vanguard.com/pdf/goals-based-retirement-spending.pdf
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It looks like the dynamic rule would most likely reduce your real spending power over time, possibly by as much as 35%. I don't know that that makes a whole lot of sense. I could reduce or put off spending for a few years while the market is down, but things I don't mind cutting long-term have already been cut. Am I misunderstanding this?
(edit to correct math)
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It looks like the dynamic rule would most likely reduce your real spending power over time, possibly by as much as 35%. I don't know that that makes a whole lot of sense. I could reduce or put off spending for a few years while the market is down, but things I don't mind cutting long-term have already been cut. Am I misunderstanding this?
(edit to correct math)
Well, somewhat.
In Figure 2 of the shorter paper, which I linked, the "Real annual spending as a percentage of initial spending" is 100% for both the inflation and the floor/ceiling methods.
Figure 3 in the long paper, which Calvin linked, shows the "Real Annual Spending Multipliers." The 4%+inflation annual spending is higher (1 vs .89).
Tradeoff: Longevity success (55% vs 86%) vs higher withdrawals (11% less per median).
There's obviously more research that can be done here. Is there a better sweet spot than +5/-2.5? Can the ceiling be adjusted during the 35 years since it'll produce a higher ending balance than the inflation method?
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All comes down to the first few years an all sp500(vti they're the same there is no STD deviation difference due to market cap) equity allocation with some bonds to smooth the ride may be one of the worst historical performers for retirement or growth. I've moved into an 80/20 post re allocation between scv and ltts. Which allows for 6% swr worst case when run thru Monte Carlos and portfolio charts.
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It looks like the dynamic rule would most likely reduce your real spending power over time, possibly by as much as 35%. I don't know that that makes a whole lot of sense. I could reduce or put off spending for a few years while the market is down, but things I don't mind cutting long-term have already been cut. Am I misunderstanding this?
(edit to correct math)
Well, somewhat.
In Figure 2 of the shorter paper, which I linked, the "Real annual spending as a percentage of initial spending" is 100% for both the inflation and the floor/ceiling methods.
Figure 3 in the long paper, which Calvin linked, shows the "Real Annual Spending Multipliers." The 4%+inflation annual spending is higher (1 vs .89).
Tradeoff: Longevity success (55% vs 86%) vs higher withdrawals (11% less per median).
There's obviously more research that can be done here. Is there a better sweet spot than +5/-2.5? Can the ceiling be adjusted during the 35 years since it'll produce a higher ending balance than the inflation method?
It says the average is 0.89. The 5th percentile was 0.65. I'm interpreting that as I'd eventually have to reduce my long-term spending 11% on average and quite possibly more than 35%. That doesn't make sense because if you have that much of your long-term spending you're ok with cutting out, why were you spending it in the first place? Am I missing something?
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All comes down to the first few years an all sp500(vti they're the same there is no STD deviation difference due to market cap) equity allocation with some bonds to smooth the ride may be one of the worst historical performers for retirement or growth. I've moved into an 80/20 post re allocation between scv and ltts. Which allows for 6% swr worst case when run thru Monte Carlos and portfolio charts.
You're telling me that you're the first person to notice a trick to give a 6% SWR?
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It looks like the dynamic rule would most likely reduce your real spending power over time, possibly by as much as 35%. I don't know that that makes a whole lot of sense. I could reduce or put off spending for a few years while the market is down, but things I don't mind cutting long-term have already been cut. Am I misunderstanding this?
(edit to correct math)
Well, somewhat.
In Figure 2 of the shorter paper, which I linked, the "Real annual spending as a percentage of initial spending" is 100% for both the inflation and the floor/ceiling methods.
Figure 3 in the long paper, which Calvin linked, shows the "Real Annual Spending Multipliers." The 4%+inflation annual spending is higher (1 vs .89).
Tradeoff: Longevity success (55% vs 86%) vs higher withdrawals (11% less per median).
There's obviously more research that can be done here. Is there a better sweet spot than +5/-2.5? Can the ceiling be adjusted during the 35 years since it'll produce a higher ending balance than the inflation method?
It says the average is 0.89. The 5th percentile was 0.65. I'm interpreting that as I'd eventually have to reduce my long-term spending 11% on average and quite possibly more than 35%. That doesn't make sense because if you have that much of your long-term spending you're ok with cutting out, why were you spending it in the first place? Am I missing something?
Yeah, sorry, average, though the dynamic median is actually higher per the graph.
The spending cuts could be discretionary funds. On good years, you'd be booking cruises. On bad years, you'd be eating rice and beans. It beats a 45% chance of running out of money.
It's all academic until a 70/30 allocation is run. Who uses a 50/50 anymore?
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I feel like these kinds of papers are really interesting and good for discussion. But I also feel like I can develop a lot of the same intuition by running lots of cFIREsim scenarios of my retirement. I presume some others here have nerded out in the same way. It was helpful to me to see the difference that things like a changing asset allocation or SS or spending flexibility have on a portfolio success. It makes me feel confident in the 4% rule-of-thumb in a way that just reading some blogs and papers don’t. I like feeling like I understand how the variables impact the outcomes.
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I'd be interested in them adding in the effect of receiving SS payments at age 67, and thus being able (theoretically) to reduce withdrawals on investments. Even a small amount of SS could have a big effect, particularly for people with smaller staches who are living on smaller yearly withdrawals.
Right, but then the original study didn't take SS into account either, I believe. And this paper focuses on a 50 years early retirement. That certainly impacts SS - if someone retires at, say, 40 or 45, their SS will be very small.
It's natural that a lot of people would think that but it's not necessarily the case. Anyone who retired that early by working a W2 job likely had wages high enough that they'll have significant lifetime SS earnings. How big of a stash one needs to retire plays a big role in this though. We were originally shooting for 1 million and bailed early at about 800k. By the time we got there I had ~18 years of working history since the age of 16 though I wasn't really making adult money until graduating college. In that time I managed to earn about $1.6 million in today's dollars, but some of that is the increase in the Average Wage Index over the years. I think my current expected payout at 67 is $2,100 a month (in today's dollars).
Even if someone was self employed for all that time it would be hard to keep profits low enough not to pay a robust amount of SS taxes over the years, unless one was intentionally underreporting their income.
There's a calculator for this too -- and yeah, people generally assume the SS difference between early retirement and regular retirement is a lot bigger than it will actually be in reality. https://ssa.tools/calculator.html
Looking at my own data, if I work another 7 years at my current salary (retiring at 40), I should expect to receive $1923 a month in SS. If I work another 32 years (retiring at 65), I should expect to receive $3374 a month. The difference is nothing to sneeze at, but I don't think $1923 is terribly small, either, and certainly is worth including when calculating my likelihood of success.
Wow, if I work 3 more years vs 13 more years, the difference in early withdrawal SS benefits are only $600/mo and late are $1200/mo. That's not much at all for another decade of working!
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It looks like the dynamic rule would most likely reduce your real spending power over time, possibly by as much as 35%. I don't know that that makes a whole lot of sense. I could reduce or put off spending for a few years while the market is down, but things I don't mind cutting long-term have already been cut. Am I misunderstanding this?
(edit to correct math)
Well, somewhat.
In Figure 2 of the shorter paper, which I linked, the "Real annual spending as a percentage of initial spending" is 100% for both the inflation and the floor/ceiling methods.
Figure 3 in the long paper, which Calvin linked, shows the "Real Annual Spending Multipliers." The 4%+inflation annual spending is higher (1 vs .89).
Tradeoff: Longevity success (55% vs 86%) vs higher withdrawals (11% less per median).
There's obviously more research that can be done here. Is there a better sweet spot than +5/-2.5? Can the ceiling be adjusted during the 35 years since it'll produce a higher ending balance than the inflation method?
It says the average is 0.89. The 5th percentile was 0.65. I'm interpreting that as I'd eventually have to reduce my long-term spending 11% on average and quite possibly more than 35%. That doesn't make sense because if you have that much of your long-term spending you're ok with cutting out, why were you spending it in the first place? Am I missing something?
Yeah, sorry, average, though the dynamic median is actually higher per the graph.
The spending cuts could be discretionary funds. On good years, you'd be booking cruises. On bad years, you'd be eating rice and beans. It beats a 45% chance of running out of money.
It's one thing to cut back a few years, but this is talking about rice and beans for probably the rest of your life. If you're only going down 1.5% a year, you're going to be doing that for a long time to get down to 65%.
I guess the disconnect is that this is geared to people who are using 4% based on a budget with a lot of fluff they don't really care that much about. If you have that much in your budget that you don't really care about, it makes sense just to cut that out now and use a model based on less flexibility but lower spending to base the numbers off of.
It's all academic until a 70/30 allocation is run. Who uses a 50/50 anymore?
I didn't notice that. That seems to make the info a bit useless.
I feel like these kinds of papers are really interesting and good for discussion. But I also feel like I can develop a lot of the same intuition by running lots of cFIREsim scenarios of my retirement. I presume some others here have nerded out in the same way. It was helpful to me to see the difference that things like a changing asset allocation or SS or spending flexibility have on a portfolio success. It makes me feel confident in the 4% rule-of-thumb in a way that just reading some blogs and papers don’t. I like feeling like I understand how the variables impact the outcomes.
Yes, but it's nice to also have someone else back up academically what you get from cfiresim scenarios.
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All comes down to the first few years an all sp500(vti they're the same there is no STD deviation difference due to market cap) equity allocation with some bonds to smooth the ride may be one of the worst historical performers for retirement or growth. I've moved into an 80/20 post re allocation between scv and ltts. Which allows for 6% swr worst case when run thru Monte Carlos and portfolio charts.
You're telling me that you're the first person to notice a trick to give a 6% SWR?
Nope retire Canada talked about it a few years ago and people really didn't listen then either. Im not planning to use that. But in general large growth is about the worst long term asset class historically.
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I feel like these kinds of papers are really interesting and good for discussion. But I also feel like I can develop a lot of the same intuition by running lots of cFIREsim scenarios of my retirement. I presume some others here have nerded out in the same way. It was helpful to me to see the difference that things like a changing asset allocation or SS or spending flexibility have on a portfolio success. It makes me feel confident in the 4% rule-of-thumb in a way that just reading some blogs and papers don’t. I like feeling like I understand how the variables impact the outcomes.
^Yay!
We all have our ways of coming to terms with the variables and the inextinguishable but hopefully manageable uncertainties of the future. Mine are different in detail but I feel pretty safe too. OP, thanks for posting that paper!
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All comes down to the first few years an all sp500(vti they're the same there is no STD deviation difference due to market cap) equity allocation with some bonds to smooth the ride may be one of the worst historical performers for retirement or growth. I've moved into an 80/20 post re allocation between scv and ltts. Which allows for 6% swr worst case when run thru Monte Carlos and portfolio charts.
You're telling me that you're the first person to notice a trick to give a 6% SWR?
Nope retire Canada talked about it a few years ago and people really didn't listen then either. Im not planning to use that. But in general large growth is about the worst long term asset class historically.
https://paulmerriman.com/resiliency-how-fast-do-different-asset-classes-recover/
Scv is more resilient and makes higher returns. Both better for growth and for withdrawal.
https://www.google.com/url?sa=t&source=web&rct=j&url=https://paulmerriman.com/wp-content/uploads/2018/06/Asset-Class-Comparisons.pdf&ved=2ahUKEwizpO7q_9jxAhXQZs0KHXpjCcwQFjADegQIIhAC&usg=AOvVaw0Bj-BBY4GRlbyBBpmmk9y7
Also historically lcb is the worst performing asset class most of the time.
I'd recommend looking at Tyler's site portfolio charts. Or portfolio visualizer as both are better than cfiresim as it only uses the sp500.
Paul also plans to launch some calculators soon with all of his data.
The future may not be like the past but that's what we're all betting on with the 4% swr. So why not add some diversity.
Where LTTs come in was a podcast from choosefi where they talked to Frank. He discussed the why of bonds. And how he arrived at LTTs making the most sense to smooth the ride.
https://www.choosefi.com/the-role-of-bonds-in-a-portfolio/
None of this was a leap for me as I was already considering possibly all VTSAX and no bonds. But when I can get 5 years of withdraws locked in an asset that has almost an exact negative 1 correlation to the rest of my portfolio and get much higher expected returns it's hard to not dig a little deeper.
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There's a calculator for this too -- and yeah, people generally assume the SS difference between early retirement and regular retirement is a lot bigger than it will actually be in reality. https://ssa.tools/calculator.html
Looking at my own data, if I work another 7 years at my current salary (retiring at 40), I should expect to receive $1923 a month in SS. If I work another 32 years (retiring at 65), I should expect to receive $3374 a month. The difference is nothing to sneeze at, but I don't think $1923 is terribly small, either, and certainly is worth including when calculating my likelihood of success.
Thanks for sharing! This was interesting.
I checked it out and it is surprising how much the impact of future earnings tapers off after a point. It's nice that you can still get a decent sized benefit with a relatively short working history.
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All comes down to the first few years an all sp500(vti they're the same there is no STD deviation difference due to market cap) equity allocation with some bonds to smooth the ride may be one of the worst historical performers for retirement or growth. I've moved into an 80/20 post re allocation between scv and ltts. Which allows for 6% swr worst case when run thru Monte Carlos and portfolio charts.
You're telling me that you're the first person to notice a trick to give a 6% SWR?
Nope retire Canada talked about it a few years ago and people really didn't listen then either. Im not planning to use that. But in general large growth is about the worst long term asset class historically.
https://paulmerriman.com/resiliency-how-fast-do-different-asset-classes-recover/
Scv is more resilient and makes higher returns. Both better for growth and for withdrawal.
https://www.google.com/url?sa=t&source=web&rct=j&url=https://paulmerriman.com/wp-content/uploads/2018/06/Asset-Class-Comparisons.pdf&ved=2ahUKEwizpO7q_9jxAhXQZs0KHXpjCcwQFjADegQIIhAC&usg=AOvVaw0Bj-BBY4GRlbyBBpmmk9y7
Also historically lcb is the worst performing asset class most of the time.
I'd recommend looking at Tyler's site portfolio charts. Or portfolio visualizer as both are better than cfiresim as it only uses the sp500.
Paul also plans to launch some calculators soon with all of his data.
The future may not be like the past but that's what we're all betting on with the 4% swr. So why not add some diversity.
Where LTTs come in was a podcast from choosefi where they talked to Frank. He discussed the why of bonds. And how he arrived at LTTs making the most sense to smooth the ride.
https://www.choosefi.com/the-role-of-bonds-in-a-portfolio/
None of this was a leap for me as I was already considering possibly all VTSAX and no bonds. But when I can get 5 years of withdraws locked in an asset that has almost an exact negative 1 correlation to the rest of my portfolio and get much higher expected returns it's hard to not dig a little deeper.
LTT = Long Term Treasury bonds?
(sorry - not patient with podcasts - did read through article; just seeking confirmation)
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All comes down to the first few years an all sp500(vti they're the same there is no STD deviation difference due to market cap) equity allocation with some bonds to smooth the ride may be one of the worst historical performers for retirement or growth. I've moved into an 80/20 post re allocation between scv and ltts. Which allows for 6% swr worst case when run thru Monte Carlos and portfolio charts.
You're telling me that you're the first person to notice a trick to give a 6% SWR?
Nope retire Canada talked about it a few years ago and people really didn't listen then either. Im not planning to use that. But in general large growth is about the worst long term asset class historically.
https://paulmerriman.com/resiliency-how-fast-do-different-asset-classes-recover/
Scv is more resilient and makes higher returns. Both better for growth and for withdrawal.
https://www.google.com/url?sa=t&source=web&rct=j&url=https://paulmerriman.com/wp-content/uploads/2018/06/Asset-Class-Comparisons.pdf&ved=2ahUKEwizpO7q_9jxAhXQZs0KHXpjCcwQFjADegQIIhAC&usg=AOvVaw0Bj-BBY4GRlbyBBpmmk9y7
Also historically lcb is the worst performing asset class most of the time.
I'd recommend looking at Tyler's site portfolio charts. Or portfolio visualizer as both are better than cfiresim as it only uses the sp500.
Paul also plans to launch some calculators soon with all of his data.
The future may not be like the past but that's what we're all betting on with the 4% swr. So why not add some diversity.
Where LTTs come in was a podcast from choosefi where they talked to Frank. He discussed the why of bonds. And how he arrived at LTTs making the most sense to smooth the ride.
https://www.choosefi.com/the-role-of-bonds-in-a-portfolio/
None of this was a leap for me as I was already considering possibly all VTSAX and no bonds. But when I can get 5 years of withdraws locked in an asset that has almost an exact negative 1 correlation to the rest of my portfolio and get much higher expected returns it's hard to not dig a little deeper.
LTT = Long Term Treasury bonds?
(sorry - not patient with podcasts - did read through article; just seeking confirmation)
Yeah he recommends 2 different indexes at the end of the article.
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It looks like the dynamic rule would most likely reduce your real spending power over time, possibly by as much as 35%. I don't know that that makes a whole lot of sense. I could reduce or put off spending for a few years while the market is down, but things I don't mind cutting long-term have already been cut. Am I misunderstanding this?
(edit to correct math)
Well, somewhat.
In Figure 2 of the shorter paper, which I linked, the "Real annual spending as a percentage of initial spending" is 100% for both the inflation and the floor/ceiling methods.
Figure 3 in the long paper, which Calvin linked, shows the "Real Annual Spending Multipliers." The 4%+inflation annual spending is higher (1 vs .89).
Tradeoff: Longevity success (55% vs 86%) vs higher withdrawals (11% less per median).
There's obviously more research that can be done here. Is there a better sweet spot than +5/-2.5? Can the ceiling be adjusted during the 35 years since it'll produce a higher ending balance than the inflation method?
It says the average is 0.89. The 5th percentile was 0.65. I'm interpreting that as I'd eventually have to reduce my long-term spending 11% on average and quite possibly more than 35%. That doesn't make sense because if you have that much of your long-term spending you're ok with cutting out, why were you spending it in the first place? Am I missing something?
Yeah, sorry, average, though the dynamic median is actually higher per the graph.
The spending cuts could be discretionary funds. On good years, you'd be booking cruises. On bad years, you'd be eating rice and beans. It beats a 45% chance of running out of money.
It's one thing to cut back a few years, but this is talking about rice and beans for probably the rest of your life. If you're only going down 1.5% a year, you're going to be doing that for a long time to get down to 65%.
I guess the disconnect is that this is geared to people who are using 4% based on a budget with a lot of fluff they don't really care that much about. If you have that much in your budget that you don't really care about, it makes sense just to cut that out now and use a model based on less flexibility but lower spending to base the numbers off of.
It's all academic until a 70/30 allocation is run. Who uses a 50/50 anymore?
I didn't notice that. That seems to make the info a bit useless.
I feel like these kinds of papers are really interesting and good for discussion. But I also feel like I can develop a lot of the same intuition by running lots of cFIREsim scenarios of my retirement. I presume some others here have nerded out in the same way. It was helpful to me to see the difference that things like a changing asset allocation or SS or spending flexibility have on a portfolio success. It makes me feel confident in the 4% rule-of-thumb in a way that just reading some blogs and papers don’t. I like feeling like I understand how the variables impact the outcomes.
Yes, but it's nice to also have someone else back up academically what you get from cfiresim scenarios.
Agreed
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https://paulmerriman.com/resiliency-how-fast-do-different-asset-classes-recover/
Scv is more resilient and makes higher returns. Both better for growth and for withdrawal.
https://www.google.com/url?sa=t&source=web&rct=j&url=https://paulmerriman.com/wp-content/uploads/2018/06/Asset-Class-Comparisons.pdf&ved=2ahUKEwizpO7q_9jxAhXQZs0KHXpjCcwQFjADegQIIhAC&usg=AOvVaw0Bj-BBY4GRlbyBBpmmk9y7
Also historically lcb is the worst performing asset class most of the time.
I'd recommend looking at Tyler's site portfolio charts. Or portfolio visualizer as both are better than cfiresim as it only uses the sp500.
Paul also plans to launch some calculators soon with all of his data.
The future may not be like the past but that's what we're all betting on with the 4% swr. So why not add some diversity.
Where LTTs come in was a podcast from choosefi where they talked to Frank. He discussed the why of bonds. And how he arrived at LTTs making the most sense to smooth the ride.
https://www.choosefi.com/the-role-of-bonds-in-a-portfolio/
None of this was a leap for me as I was already considering possibly all VTSAX and no bonds. But when I can get 5 years of withdraws locked in an asset that has almost an exact negative 1 correlation to the rest of my portfolio and get much higher expected returns it's hard to not dig a little deeper.
LTT = Long Term Treasury bonds?
(sorry - not patient with podcasts - did read through article; just seeking confirmation)
Yeah he recommends 2 different indexes at the end of the article.
His implication is that the market has been very inefficient with Small Cap and Long-Term Treasuries (please define acronyms in the future). Does he have any idea why that inefficiency supposedly exists or why he thinks this information won't be efficiently incorporated into the market in the future?
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https://paulmerriman.com/resiliency-how-fast-do-different-asset-classes-recover/
Scv is more resilient and makes higher returns. Both better for growth and for withdrawal.
https://www.google.com/url?sa=t&source=web&rct=j&url=https://paulmerriman.com/wp-content/uploads/2018/06/Asset-Class-Comparisons.pdf&ved=2ahUKEwizpO7q_9jxAhXQZs0KHXpjCcwQFjADegQIIhAC&usg=AOvVaw0Bj-BBY4GRlbyBBpmmk9y7
Also historically lcb is the worst performing asset class most of the time.
I'd recommend looking at Tyler's site portfolio charts. Or portfolio visualizer as both are better than cfiresim as it only uses the sp500.
Paul also plans to launch some calculators soon with all of his data.
The future may not be like the past but that's what we're all betting on with the 4% swr. So why not add some diversity.
Where LTTs come in was a podcast from choosefi where they talked to Frank. He discussed the why of bonds. And how he arrived at LTTs making the most sense to smooth the ride.
https://www.choosefi.com/the-role-of-bonds-in-a-portfolio/
None of this was a leap for me as I was already considering possibly all VTSAX and no bonds. But when I can get 5 years of withdraws locked in an asset that has almost an exact negative 1 correlation to the rest of my portfolio and get much higher expected returns it's hard to not dig a little deeper.
LTT = Long Term Treasury bonds?
(sorry - not patient with podcasts - did read through article; just seeking confirmation)
Yeah he recommends 2 different indexes at the end of the article.
His implication is that the market has been very inefficient with Small Cap and Long-Term Treasuries (please define acronyms in the future). Does he have any idea why that inefficiency supposedly exists or why he thinks this information won't be efficiently incorporated into the market in the future?
It's bc it's undervalued companies to book they are out of favor companies that have good balance sheets. What's your definition of efficient. Only the sp500 returns are considered efficient? That doesn't make sense. This asset class has existed and been recreated over the same time frame as sp500.
So why do you think history won't repeat itself in this specific asset class is a better question. But you think the sp500 will repeat?
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Fwiw, I think the market could simultaneously:
1. be efficient in the sense of accurately pricing the relative value of particular companies of a certain type (eg Small Cap Value),
2. be efficient in the sense of accurately pricing the relative value of different asset classes (eg Small Cap Value, Long Term Treasuries, S&P 500) compared to ordinary investors' desires for the characteristics that those have, and
3. deliver different long term returns in different asset classes (eg, SCV could outperform S&P 500).
This could happen if one class's specific mix of flaws and benefits is closer to investors' desires than another, assuming investors' desires are stable over time. For example, if most investors prefer a government guarantee of a fixed return (LTT), and only a few are willing to accept a non-guaranteed investment with higher return potential (S&P 500), an efficient reflection of those priorities might be that average returns over time would be higher for S&P 500 than LTT. Similarly, if SCV is more volatile than S&P 500, SCV might sustainably have higher returns.
I assume in real life that there are trends and relative prices change, but still the average return of different assets can be differ over time even in a market that is "efficient", because return is not the only criteria that investors have.
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Fwiw, I think the market could simultaneously:
1. be efficient in the sense of accurately pricing the relative value of particular companies of a certain type (eg Small Cap Value Long Term Treasuries, S&P 500),
2. be efficient in the sense of accurately pricing the relative value of different asset classes compared to ordinary investors' desires for the characteristics that those have, and
3. deliver different long term returns in different asset classes (eg, SCV could outperform S&P 500).
This could happen if one class's specific mix of flaws and benefits is closer to investors' desires than another, assuming investors' desires are stable over time. For example, if most investors prefer a government guarantee of a fixed return (LTT), and only a few are willing to accept a non-guaranteed investment with higher return potential (S&P 500), an efficient reflection of those priorities might be that average returns over time would be higher for S&P 500 than LTT. Similarly, if SCV is more volatile than S&P 500, SCV might sustainably have higher returns.
I assume in real life that there are trends and relative prices change, but still the average return of different assets can be differ over time even in a market that is "efficient", because return is not the only criteria that investors have.
I'd agree this is written with basically the point I was trying to make. Just much more well stated.
LTTs are a drag on the portfolio. But they allow you to have a stable account balance to stem a pullback. Honestly will likely go all scv once it has its first big drop over 30%
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There's a calculator for this too -- and yeah, people generally assume the SS difference between early retirement and regular retirement is a lot bigger than it will actually be in reality. https://ssa.tools/calculator.html
Looking at my own data, if I work another 7 years at my current salary (retiring at 40), I should expect to receive $1923 a month in SS. If I work another 32 years (retiring at 65), I should expect to receive $3374 a month. The difference is nothing to sneeze at, but I don't think $1923 is terribly small, either, and certainly is worth including when calculating my likelihood of success.
Thanks for sharing! This was interesting.
I checked it out and it is surprising how much the impact of future earnings tapers off after a point. It's nice that you can still get a decent sized benefit with a relatively short working history.
Yep, the first S.S. dollars are the 90% bend point earnings. After those are filled you have the 32% dollars and then finally the 15%. Continuing to work just to further fill up the 15% and even the 32% buckets doesn't make as much of a difference as it does compared to your earlier working years filling up the 90%. If you're thinking, "A % of what though?" - The 90, 32, and 15 percent levels refer to the percentage of AIME (average indexed monthly earnings) that you receive in retirement when eligible for S.S. This is the inflation-adjusted amount you earned each month for earnings that were subject to S.S. taxes (i.e. if you were a high earner this will exclude $ that were over the earnings limit) across your highest 35 years of earning.
In 2021 the 90% bend point goes up to $966. Meaning if you had lifetime inflation-adjusted adjusted earnings of at least $405,720 ($966*420 [the number of months in 35 years]) subject to Social Security tax, you're maxing out the 90% bend point. Note that this doesn't require you to work for 35 years or anywhere near that actually. The 32% bend point results in a 2021 lifetime amount of $2,115,120 ([$6002-$966]*420) beyond the $405,720 of the 90% bend point. Someone that maxed out only the 90% and 32% buckets but never earned enough dollars to trickle into the 15% category would receive a pretty healthy S.S. check. They would have an AIME of exactly $6002 in 2021 dollars, resulting in a monthly payment of $2480.92 (90% of $966=$869.40 + 32% of $6002-$966=$1611.52) if they started S.S. payments at their FRA. That's 30k/year without even touching the top bend point! That amount absolutely can factor into retirement and overall financial planning, especially for those than spend less than 50k per person per year.
https://www.covisum.com/knowledge-base/what-are-social-security-bend-points
These bend points change every year (i.e. the dollar amounts the percentages correspond to) but so far the %s in the formula have been steady.
I think people worried about lower S.S. checks during retirement as a result of working careers far shorter than the full 35 years that go into the S.S. calculation is something that is blown out of proportion. By design you're getting the most bang for your buck earlier on.
Edited a 10% typo to 90%.
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Fwiw, I think the market could simultaneously:
1. be efficient in the sense of accurately pricing the relative value of particular companies of a certain type (eg Small Cap Value Long Term Treasuries, S&P 500),
2. be efficient in the sense of accurately pricing the relative value of different asset classes compared to ordinary investors' desires for the characteristics that those have, and
3. deliver different long term returns in different asset classes (eg, SCV could outperform S&P 500).
This could happen if one class's specific mix of flaws and benefits is closer to investors' desires than another, assuming investors' desires are stable over time. For example, if most investors prefer a government guarantee of a fixed return (LTT), and only a few are willing to accept a non-guaranteed investment with higher return potential (S&P 500), an efficient reflection of those priorities might be that average returns over time would be higher for S&P 500 than LTT. Similarly, if SCV is more volatile than S&P 500, SCV might sustainably have higher returns.
I assume in real life that there are trends and relative prices change, but still the average return of different assets can be differ over time even in a market that is "efficient", because return is not the only criteria that investors have.
I'd agree this is written with basically the point I was trying to make. Just much more well stated.
LTTs are a drag on the portfolio. But they allow you to have a stable account balance to stem a pullback. Honestly will likely go all scv once it has its first big drop over 30%
What about gold instead of LTTs with negative real rates. Here is your portfolio versus 75/25 XBI/Gold:
(https://i.postimg.cc/KvCN3Ryf/2021-07-12-16-13-38-Backtest-Portfolio-Asset-Allocation.png)
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Fwiw, I think the market could simultaneously:
1. be efficient in the sense of accurately pricing the relative value of particular companies of a certain type (eg Small Cap Value Long Term Treasuries, S&P 500),
2. be efficient in the sense of accurately pricing the relative value of different asset classes compared to ordinary investors' desires for the characteristics that those have, and
3. deliver different long term returns in different asset classes (eg, SCV could outperform S&P 500).
This could happen if one class's specific mix of flaws and benefits is closer to investors' desires than another, assuming investors' desires are stable over time. For example, if most investors prefer a government guarantee of a fixed return (LTT), and only a few are willing to accept a non-guaranteed investment with higher return potential (S&P 500), an efficient reflection of those priorities might be that average returns over time would be higher for S&P 500 than LTT. Similarly, if SCV is more volatile than S&P 500, SCV might sustainably have higher returns.
I assume in real life that there are trends and relative prices change, but still the average return of different assets can be differ over time even in a market that is "efficient", because return is not the only criteria that investors have.
I'd agree this is written with basically the point I was trying to make. Just much more well stated.
LTTs are a drag on the portfolio. But they allow you to have a stable account balance to stem a pullback. Honestly will likely go all scv once it has its first big drop over 30%
What about gold instead of LTTs with negative real rates. Here is your portfolio versus 75/25 XBI/Gold:
(https://i.postimg.cc/KvCN3Ryf/2021-07-12-16-13-38-Backtest-Portfolio-Asset-Allocation.png)
There isn't near the historical data on your proposal. Your snapshot is back to 2007. Scv data goes back to 1928.
Also the point of LTT is to perform opposite when scv goes down not the interest rate returns. My really plan is likely to start with them and never rebalance anymore into them or decrease them by 2% a year til it's all small cap value
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Fwiw, I think the market could simultaneously:
1. be efficient in the sense of accurately pricing the relative value of particular companies of a certain type (eg Small Cap Value Long Term Treasuries, S&P 500),
2. be efficient in the sense of accurately pricing the relative value of different asset classes compared to ordinary investors' desires for the characteristics that those have, and
3. deliver different long term returns in different asset classes (eg, SCV could outperform S&P 500).
This could happen if one class's specific mix of flaws and benefits is closer to investors' desires than another, assuming investors' desires are stable over time. For example, if most investors prefer a government guarantee of a fixed return (LTT), and only a few are willing to accept a non-guaranteed investment with higher return potential (S&P 500), an efficient reflection of those priorities might be that average returns over time would be higher for S&P 500 than LTT. Similarly, if SCV is more volatile than S&P 500, SCV might sustainably have higher returns.
I assume in real life that there are trends and relative prices change, but still the average return of different assets can be differ over time even in a market that is "efficient", because return is not the only criteria that investors have.
I'd agree this is written with basically the point I was trying to make. Just much more well stated.
LTTs are a drag on the portfolio. But they allow you to have a stable account balance to stem a pullback. Honestly will likely go all scv once it has its first big drop over 30%
What about gold instead of LTTs with negative real rates. Here is your portfolio versus 75/25 XBI/Gold:
(https://i.postimg.cc/KvCN3Ryf/2021-07-12-16-13-38-Backtest-Portfolio-Asset-Allocation.png)
There isn't near the historical data on your proposal. Your snapshot is back to 2007. Scv data goes back to 1928.
Also the point of LTT is to perform opposite when scv goes down not the interest rate returns. My really plan is likely to start with them and never rebalance anymore into them or decrease them by 2% a year til it's all small cap value
Why do you think scv will outperform the broader market? I can see historically small companies going public to raise funds by selling equity. Since the 80s debt boom it's been more profitable for small business to sell bonds or get a revolving debt. Businesses are now only brought public so owners can cash out. I am not sure past performance is indicative of future performance in the case of scv.
Xbi is a equal weighted fund of small cap biotechnology companies. The majority of the fund is invested in absolute garbage, but when a company develops something revolutionary the gains are 20x the investment. The bet is that innovation continues and outweighs the garbage. I like it because it is poorly correlated to the overall market.
TLT has a negative correlation but has been in a bull market since 1982. Rising rates or inflation will crush TLT. Also remember the recent taper tantrum when tlt and spy were positively correlated. That is why I bring up gold. If tlt is paying negative real rates then why not hold gold instead? Backtest gold versus tlt for your smoothing then ask yourself which asset is likely to behave similarly in the future.
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Also the point of LTT is to perform opposite when scv goes down not the interest rate returns. My really plan is likely to start with them and never rebalance anymore into them or decrease them by 2% a year til it's all small cap value
What do you prefer to use for scv exposure?
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Also the point of LTT is to perform opposite when scv goes down not the interest rate returns. My really plan is likely to start with them and never rebalance anymore into them or decrease them by 2% a year til it's all small cap value
What do you prefer to use for scv exposure?
I use Paul's best in class ETF recommendation. That's avuv for small cap value currently.
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Fwiw, I think the market could simultaneously:
1. be efficient in the sense of accurately pricing the relative value of particular companies of a certain type (eg Small Cap Value Long Term Treasuries, S&P 500),
2. be efficient in the sense of accurately pricing the relative value of different asset classes compared to ordinary investors' desires for the characteristics that those have, and
3. deliver different long term returns in different asset classes (eg, SCV could outperform S&P 500).
This could happen if one class's specific mix of flaws and benefits is closer to investors' desires than another, assuming investors' desires are stable over time. For example, if most investors prefer a government guarantee of a fixed return (LTT), and only a few are willing to accept a non-guaranteed investment with higher return potential (S&P 500), an efficient reflection of those priorities might be that average returns over time would be higher for S&P 500 than LTT. Similarly, if SCV is more volatile than S&P 500, SCV might sustainably have higher returns.
I assume in real life that there are trends and relative prices change, but still the average return of different assets can be differ over time even in a market that is "efficient", because return is not the only criteria that investors have.
I'd agree this is written with basically the point I was trying to make. Just much more well stated.
LTTs are a drag on the portfolio. But they allow you to have a stable account balance to stem a pullback. Honestly will likely go all scv once it has its first big drop over 30%
What about gold instead of LTTs with negative real rates. Here is your portfolio versus 75/25 XBI/Gold:
(https://i.postimg.cc/KvCN3Ryf/2021-07-12-16-13-38-Backtest-Portfolio-Asset-Allocation.png)
There isn't near the historical data on your proposal. Your snapshot is back to 2007. Scv data goes back to 1928.
Also the point of LTT is to perform opposite when scv goes down not the interest rate returns. My really plan is likely to start with them and never rebalance anymore into them or decrease them by 2% a year til it's all small cap value
Why do you think scv will outperform the broader market? I can see historically small companies going public to raise funds by selling equity. Since the 80s debt boom it's been more profitable for small business to sell bonds or get a revolving debt. Businesses are now only brought public so owners can cash out. I am not sure past performance is indicative of future performance in the case of scv.
Xbi is a equal weighted fund of small cap biotechnology companies. The majority of the fund is invested in absolute garbage, but when a company develops something revolutionary the gains are 20x the investment. The bet is that innovation continues and outweighs the garbage. I like it because it is poorly correlated to the overall market.
TLT has a negative correlation but has been in a bull market since 1982. Rising rates or inflation will crush TLT. Also remember the recent taper tantrum when tlt and spy were positively correlated. That is why I bring up gold. If tlt is paying negative real rates then why not hold gold instead? Backtest gold versus tlt for your smoothing then ask yourself which asset is likely to behave similarly in the future.
Why do you think the broader market will continue to perform as it has in the past and if so are you prepared for a lost decade like the 2000s again. I think most sectors with long term performance can be trusted to continue the way they have. I'm seeing first hand the difficulty of a company to continue making continuous returns as it grows. My company is employee owned and our returns are starting to settle into a groove almost 10% below our avg since being dumfounded. They are more stable and consistent but lower overall. And at the same time weve grown to midcap size. As recently as the 2000s scv outperformed sp500. I believe long term market returns will be similar across most market sectors with long histories.
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Why do you think the broader market will continue to perform as it has in the past and if so are you prepared for a lost decade like the 2000s again. I think most sectors with long term performance can be trusted to continue the way they have. I'm seeing first hand the difficulty of a company to continue making continuous returns as it grows. My company is employee owned and our returns are starting to settle into a groove almost 10% below our avg since being dumfounded. They are more stable and consistent but lower overall. And at the same time weve grown to midcap size. As recently as the 2000s scv outperformed sp500. I believe long term market returns will be similar across most market sectors with long histories.
Here is my asset allocation versus the 80/20 SCV/LTT:
(https://i.postimg.cc/7hvnQJjC/portfolio-2.png)
SWR of 10.72% versus 10.46% for SCV/LTT. I considered SCV and LTTs when making the portfolio because they backtest so well, but I don't think LTTs are going to provide the insurance they once did and I believe low interest rates also hurt SCV going forward. There is no reason to take great small businesses public if you can access loans cheaper than the company's ROI. There is also the problem that SCV is difficult to access with an ETF because the cap weighting skews toward mid-caps. AVUV has an average cap weighting of 2.71B and the top 10 holdings are all nationwide household name brands.
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As recently as the 2000s scv outperformed sp500. I believe long term market returns will be similar across most market sectors with long histories.
SCB did better than LCB in 2020, 2016, 2013, 2012, and 2010. SCV is beating LCB year-to-date (2021).
https://www.callan.com/research/2020-classic-periodic-table/#
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As recently as the 2000s scv outperformed sp500. I believe long term market returns will be similar across most market sectors with long histories.
SCB did better than LCB in 2020, 2016, 2013, 2012, and 2010. SCV is beating LCB year-to-date (2021).
https://www.callan.com/research/2020-classic-periodic-table/#
I'm saying for a full decade in response to the statement that things have changed since the 80s. In any given year any one of them can win. But I have 5 plus decades of retirement. I'll bet on the one thats most likely to win that.
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Stocks, bonds, and real estate are all in the same boat because their values have been propped up by decades of falling interest rates. If rates rose by just 3%, to levels last seen in 2008, the discount math says all these assets will fall by large double digit percentages. Stated another way, I expect the correlations between asset performances to be higher in the future than they were in the past, because their valuations are all tied more to interest rates than ever before.
Even gold is propped up by the lack of return available on other assets. There was a time in living memory when one could FIRE just on the coupons from long-term treasuries. If that time ever returned, people would raid their safes.
If rates stay locked in a low disinflationary spiral, Japan-style, then all assets might do OK. If rates rise even a little bit in the 2020s, all asset classes will be demolished and we'll probably have a second financial crisis.
Policy makers know they have to keep a lid on the velocity of money (inflation) or face severe consequences. Thanks to demographics, ex-US dollar demand, and higher taxes/tariffs, I think they are and will continue to engineer a soft landing, as Japan did with its lost decades. If inflation rises, the Fed could first of all taper it's $120,000,000,000 per month in asset purchases. Then, if that somehow doesn't work, they could start selling assets from their multi-trillion dollar balance sheet. Raising rates will be a last resort, and I'd not be surprised if we're hanging out around 2% ten years from now.
So if the future looks like either bubbles in all assets or lost decades, and if there are no longer any negative-correlated asset classes, how do retirees maintain a 40 or 50 year portfolio with a 4% WR?
One answer is to aggressively ride the bubbles up and reduce one's WR to the 3% range. Another is to use inherently negative-correlation tools: options. I will pursue both objectives via a 90+% stock portfolio protected by put options or, more likely, the collar strategy. Only by hedging can we obtain 100% certainty about surviving SORR events. A fat treasury allocation with negative real yields and massive convexity risk does not contribute to portfolio safety any more.
Market participants can see the Fed has their back against the wall, and so they are inflating asset bubbles in stocks, bonds, and real estate. After the tech bubble and housing bubble 1.0, there has been increasing pressure on the Fed to do something about asset bubbles, because when these pop it can affect the Fed's maximum employment objective. So the Fed faces two risks to its mandate: asset bubbles if rates are left too low for too long, and asset price collapses if rates rise too much.
The path between these risks is to constantly threaten and talk about small, mostly symbolic quarter point rate increases to slow the development of the bubbles (note the Fed's recent emphasis on more communication). Rates may rise a small amount between now and the next recession, but not by 2% or anything dramatic like that. Fears about these minor increases will trigger several corrections before the next recession, and these taper tantrums will be opportunities to buy stock and cash out one's hedges. Raising and lowering one's hedges is the new rebalancing.
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Stocks, bonds, and real estate are all in the same boat because their values have been propped up by decades of falling interest rates. If rates rose by just 3%, to levels last seen in 2008, the discount math says all these assets will fall by large double digit percentages. Stated another way, I expect the correlations between asset performances to be higher in the future than they were in the past, because their valuations are all tied more to interest rates than ever before.
Even gold is propped up by the lack of return available on other assets. There was a time in living memory when one could FIRE just on the coupons from long-term treasuries. If that time ever returned, people would raid their safes.
If rates stay locked in a low disinflationary spiral, Japan-style, then all assets might do OK. If rates rise even a little bit in the 2020s, all asset classes will be demolished and we'll probably have a second financial crisis.
Policy makers know they have to keep a lid on the velocity of money (inflation) or face severe consequences. Thanks to demographics, ex-US dollar demand, and higher taxes/tariffs, I think they are and will continue to engineer a soft landing, as Japan did with its lost decades. If inflation rises, the Fed could first of all taper it's $120,000,000,000 per month in asset purchases. Then, if that somehow doesn't work, they could start selling assets from their multi-trillion dollar balance sheet. Raising rates will be a last resort, and I'd not be surprised if we're hanging out around 2% ten years from now.
So if the future looks like either bubbles in all assets or lost decades, and if there are no longer any negative-correlated asset classes, how do retirees maintain a 40 or 50 year portfolio with a 4% WR?
One answer is to aggressively ride the bubbles up and reduce one's WR to the 3% range. Another is to use inherently negative-correlation tools: options. I will pursue both objectives via a 90+% stock portfolio protected by put options or, more likely, the collar strategy. Only by hedging can we obtain 100% certainty about surviving SORR events. A fat treasury allocation with negative real yields and massive convexity risk does not contribute to portfolio safety any more.
Market participants can see the Fed has their back against the wall, and so they are inflating asset bubbles in stocks, bonds, and real estate. After the tech bubble and housing bubble 1.0, there has been increasing pressure on the Fed to do something about asset bubbles, because when these pop it can affect the Fed's maximum employment objective. So the Fed faces two risks to its mandate: asset bubbles if rates are left too low for too long, and asset price collapses if rates rise too much.
The path between these risks is to constantly threaten and talk about small, mostly symbolic quarter point rate increases to slow the development of the bubbles (note the Fed's recent emphasis on more communication). Rates may rise a small amount between now and the next recession, but not by 2% or anything dramatic like that. Fears about these minor increases will trigger several corrections before the next recession, and these taper tantrums will be opportunities to buy stock and cash out one's hedges. Raising and lowering one's hedges is the new rebalancing.
This is the most logical sounding overview I've heard yet.
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As recently as the 2000s scv outperformed sp500. I believe long term market returns will be similar across most market sectors with long histories.
SCB did better than LCB in 2020, 2016, 2013, 2012, and 2010. SCV is beating LCB year-to-date (2021).
https://www.callan.com/research/2020-classic-periodic-table/#
I'm saying for a full decade in response to the statement that things have changed since the 80s. In any given year any one of them can win. But I have 5 plus decades of retirement. I'll bet on the one thats most likely to win that.
can you comment on the periods of stagnation for SCV? over the last 10-15 years the SP500 has out performed SCV but historically SCV is way better. this link from boggle heads has a good chart
https://www.bogleheads.org/forum/viewtopic.php?t=343977
Your journal may be a better place to move the SCV vs the rest debate?
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As recently as the 2000s scv outperformed sp500. I believe long term market returns will be similar across most market sectors with long histories.
SCB did better than LCB in 2020, 2016, 2013, 2012, and 2010. SCV is beating LCB year-to-date (2021).
https://www.callan.com/research/2020-classic-periodic-table/#
I'm saying for a full decade in response to the statement that things have changed since the 80s. In any given year any one of them can win. But I have 5 plus decades of retirement. I'll bet on the one thats most likely to win that.
can you comment on the periods of stagnation for SCV? over the last 10-15 years the SP500 has out performed SCV but historically SCV is way better. this link from boggle heads has a good chart
https://www.bogleheads.org/forum/viewtopic.php?t=343977
Your journal may be a better place to move the SCV vs the rest debate?
That's the trade off you will have 10-20 year periods of flat to down performance compared to the sp500. Then you'll have 5-10 years of extreme outperformance. A better question would always be to invert your question and explain the severe underperformance of the sp500 compared to scv. Any 10 year period it wins is an anomaly historically and it just won one. While I'm not a market timer. The timing is pretty right to make a switch and if you hit one escalator up you never historically fall behind the sp500 again.
I find it interesting that everyone here talks about how history matters and that's why I trust the sp500 but when presented with other just as long history we scoff at it. I mean I did years ago. I even scoffed at my most notorious agenda that led to my banning.
Honestly I don't really care if I change anyone's mind but it's something I'd strongly encourage people to look at. Even if the returns at only 1% better we all know that's millions over our lifetime.
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As recently as the 2000s scv outperformed sp500. I believe long term market returns will be similar across most market sectors with long histories.
SCB did better than LCB in 2020, 2016, 2013, 2012, and 2010. SCV is beating LCB year-to-date (2021).
https://www.callan.com/research/2020-classic-periodic-table/#
I'm saying for a full decade in response to the statement that things have changed since the 80s. In any given year any one of them can win. But I have 5 plus decades of retirement. I'll bet on the one thats most likely to win that.
can you comment on the periods of stagnation for SCV? over the last 10-15 years the SP500 has out performed SCV but historically SCV is way better. this link from boggle heads has a good chart
https://www.bogleheads.org/forum/viewtopic.php?t=343977
Your journal may be a better place to move the SCV vs the rest debate?
That's the trade off you will have 10-20 year periods of flat to down performance compared to the sp500. Then you'll have 5-10 years of extreme outperformance. A better question would always be to invert your question and explain the severe underperformance of the sp500 compared to scv. Any 10 year period it wins is an anomaly historically and it just won one. While I'm not a market timer. The timing is pretty right to make a switch and if you hit one escalator up you never historically fall behind the sp500 again.
I find it interesting that everyone here talks about how history matters and that's why I trust the sp500 but when presented with other just as long history we scoff at it. I mean I did years ago. I even scoffed at my most notorious agenda that led to my banning.
Honestly I don't really care if I change anyone's mind but it's something I'd strongly encourage people to look at. Even if the returns at only 1% better we all know that's millions over our lifetime.
Boarder42
Are you suggesting as >50% SCV tilt or as I do a constant 20% tilt, unrebalanced until it gets way out of hand, as in >50%?
Or something else?
FWIW, I'm currently doing a capital gains harvest on my taxable VISAX, while I have the "capital gains tax at 0%" space.
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As recently as the 2000s scv outperformed sp500. I believe long term market returns will be similar across most market sectors with long histories.
SCB did better than LCB in 2020, 2016, 2013, 2012, and 2010. SCV is beating LCB year-to-date (2021).
https://www.callan.com/research/2020-classic-periodic-table/#
I'm saying for a full decade in response to the statement that things have changed since the 80s. In any given year any one of them can win. But I have 5 plus decades of retirement. I'll bet on the one thats most likely to win that.
can you comment on the periods of stagnation for SCV? over the last 10-15 years the SP500 has out performed SCV but historically SCV is way better. this link from boggle heads has a good chart
https://www.bogleheads.org/forum/viewtopic.php?t=343977
Your journal may be a better place to move the SCV vs the rest debate?
That's the trade off you will have 10-20 year periods of flat to down performance compared to the sp500. Then you'll have 5-10 years of extreme outperformance. A better question would always be to invert your question and explain the severe underperformance of the sp500 compared to scv. Any 10 year period it wins is an anomaly historically and it just won one. While I'm not a market timer. The timing is pretty right to make a switch and if you hit one escalator up you never historically fall behind the sp500 again.
I find it interesting that everyone here talks about how history matters and that's why I trust the sp500 but when presented with other just as long history we scoff at it. I mean I did years ago. I even scoffed at my most notorious agenda that led to my banning.
Honestly I don't really care if I change anyone's mind but it's something I'd strongly encourage people to look at. Even if the returns at only 1% better we all know that's millions over our lifetime.
Boarder42
Are you suggesting as >50% SCV tilt or as I do a constant 20% tilt, unrebalanced until it gets way out of hand, as in >50%?
Or something else?
FWIW, I'm currently doing a capital gains harvest on my taxable VISAX, while I have the "capital gains tax at 0%" space.
Personally. My equity allocation is 100% scv. But the more scv you add historically the safer you are in Fi. It's much more related to speed of recovery and then once you've hit a ramp compared to sp500 you're never looking back. At least based on historic returns.
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Personally. My equity allocation is 100% scv. But the more scv you add historically the safer you are in Fi. It's much more related to speed of recovery and then once you've hit a ramp compared to sp500 you're never looking back. At least based on historic returns.
I actually don't see anything wrong with your approach. I would note that the historic correlation between long term treasuries and stocks was historically not nearly as negative as it has been in the 21st century, and in fact was often positive. But there are good reasons to expect the correlation between LTT and SCV is more negative than between LTT and the stock market as a whole. Still, there is a chance that you are overly reliant on back testing, so I would recommend you use 50% US SCV, 30% Int SCV, 20% LTT instead of a pure US approach if that is what you have been using. It even looks like it would not have hurt at all to date. There could certainly be a case where US SCV and LTT both do much worse at the same time than the record so far, and international stocks would give you a third chance.
Also see https://forum.mrmoneymustache.com/investor-alley/portfolio-design-idiots-v-gurus
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Personally. My equity allocation is 100% scv. But the more scv you add historically the safer you are in Fi. It's much more related to speed of recovery and then once you've hit a ramp compared to sp500 you're never looking back. At least based on historic returns.
I actually don't see anything wrong with your approach. I would note that the historic correlation between long term treasuries and stocks was historically not nearly as negative as it has been in the 21st century, and in fact was often positive. But there are good reasons to expect the correlation between LTT and SCV is more negative than between LTT and the stock market as a whole. Still, there is a chance that you are overly reliant on back testing, so I would recommend you use 50% US SCV, 30% Int SCV, 20% LTT instead of a pure US approach if that is what you have been using. It even looks like it would not have hurt at all to date. There could certainly be a case where US SCV and LTT both do much worse at the same time than the record so far, and international stocks would give you a third chance.
Also see https://forum.mrmoneymustache.com/investor-alley/portfolio-design-idiots-v-gurus
It's similar to what I actually have. But with more emerging market tilt. But only figured one surprise was enough for the VTSAX and forget it crowd
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Personally. My equity allocation is 100% scv. But the more scv you add historically the safer you are in Fi. It's much more related to speed of recovery and then once you've hit a ramp compared to sp500 you're never looking back. At least based on historic returns.
I actually don't see anything wrong with your approach. I would note that the historic correlation between long term treasuries and stocks was historically not nearly as negative as it has been in the 21st century, and in fact was often positive. But there are good reasons to expect the correlation between LTT and SCV is more negative than between LTT and the stock market as a whole. Still, there is a chance that you are overly reliant on back testing, so I would recommend you use 50% US SCV, 30% Int SCV, 20% LTT instead of a pure US approach if that is what you have been using. It even looks like it would not have hurt at all to date. There could certainly be a case where US SCV and LTT both do much worse at the same time than the record so far, and international stocks would give you a third chance.
Also see https://forum.mrmoneymustache.com/investor-alley/portfolio-design-idiots-v-gurus
It's similar to what I actually have. But with more emerging market tilt. But only figured one surprise was enough for the VTSAX and forget it crowd
Nice! I am a bit like that, but trying to be a bit more of an idiot too.
I have a constant range of asset allocation ranges I recommend. I rarely suggest big changes, but always guide existing portfolios towards those ranges. 60-90% stocks, 10-40% bonds, 20-50% of stocks international, not more than 50% of total in US stocks, own a real asset.
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Personally. My equity allocation is 100% scv. But the more scv you add historically the safer you are in Fi. It's much more related to speed of recovery and then once you've hit a ramp compared to sp500 you're never looking back. At least based on historic returns.
I actually don't see anything wrong with your approach. I would note that the historic correlation between long term treasuries and stocks was historically not nearly as negative as it has been in the 21st century, and in fact was often positive. But there are good reasons to expect the correlation between LTT and SCV is more negative than between LTT and the stock market as a whole. Still, there is a chance that you are overly reliant on back testing, so I would recommend you use 50% US SCV, 30% Int SCV, 20% LTT instead of a pure US approach if that is what you have been using. It even looks like it would not have hurt at all to date. There could certainly be a case where US SCV and LTT both do much worse at the same time than the record so far, and international stocks would give you a third chance.
Also see https://forum.mrmoneymustache.com/investor-alley/portfolio-design-idiots-v-gurus
It's similar to what I actually have. But with more emerging market tilt. But only figured one surprise was enough for the VTSAX and forget it crowd
Nice! I am a bit like that, but trying to be a bit more of an idiot too.
I have a constant range of asset allocation ranges I recommend. I rarely suggest big changes, but always guide existing portfolios towards those ranges. 60-90% stocks, 10-40% bonds, 20-50% of stocks international, not more than 50% of total in US stocks, own a real asset.
I read the linked thread and have gone down a number of articles on various portfolios and I think one of the things keeping me from diverting from the simple TDF or VT/VTI/BND and diversifying into some of these other portfolios or tilting so hard into things like SCV is that we are still squarely in accumulation phase. Also the simplicity of these lazy portfolios is incredibly appealing after realizing the truth of that statement of "there are some better portfolios but many many more bad ones".
I think for me once we start really planning for withdrawals I will need to find the diversified portfolio that works best, but for now it's just overwhelming seeing the variety of good portfolios discussed [occasionally] here and elsewhere.
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I read the linked thread and have gone down a number of articles on various portfolios and I think one of the things keeping me from diverting from the simple TDF or VT/VTI/BND and diversifying into some of these other portfolios or tilting so hard into things like SCV is that we are still squarely in accumulation phase. Also the simplicity of these lazy portfolios is incredibly appealing after realizing the truth of that statement of "there are some better portfolios but many many more bad ones".
I think for me once we start really planning for withdrawals I will need to find the diversified portfolio that works best, but for now it's just overwhelming seeing the variety of good portfolios discussed [occasionally] here and elsewhere.
My general point of the thread was to demonstrate that carefully designed portfolios don't seem to do better than undesigned portfolios and are actually mostly worse, so in general keep costs low, diversify, and don't sweat it. That said, there did seem to be some benefits to portfolios with more slices, so I would say that if a person is not comfortable with at least three slices, then a Vanguard Target Retirement or LifeStrategy 60/40 or 80/20 fund would be the best choice.
Beyond that a few points:
+ "60-90% stocks, 10-40% bonds, 20-50% of stocks international, not more than 50% of total in US stocks, own a real asset" is entirely compatible with a three fund portfolio (and ideally a house or something). In fact I designed it to account for every reasonable portfolio I could think of, including a Bogle-approved 48% VTI, 12% VEA, 40% VBTLX. And also Buffet 90/10 with an international twist (VT + cash).
+ "still squarely in accumulation phase" I would agree that diversification is not as important as a high stock allocation and regular blind contributions in this phase (also mine). Really, if you are just getting started, a checking account and a regular paycheck are all the diversification you need.
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I read the linked thread and have gone down a number of articles on various portfolios and I think one of the things keeping me from diverting from the simple TDF or VT/VTI/BND and diversifying into some of these other portfolios or tilting so hard into things like SCV is that we are still squarely in accumulation phase. Also the simplicity of these lazy portfolios is incredibly appealing after realizing the truth of that statement of "there are some better portfolios but many many more bad ones".
I think for me once we start really planning for withdrawals I will need to find the diversified portfolio that works best, but for now it's just overwhelming seeing the variety of good portfolios discussed [occasionally] here and elsewhere.
My general point of the thread was to demonstrate that carefully designed portfolios don't seem to do better than undesigned portfolios and are actually mostly worse, so in general keep costs low, diversify, and don't sweat it. That said, there did seem to be some benefits to portfolios with more slices, so I would say that if a person is not comfortable with at least three slices, then a Vanguard Target Retirement or LifeStrategy 60/40 or 80/20 fund would be the best choice.
Beyond that a few points:
+ "60-90% stocks, 10-40% bonds, 20-50% of stocks international, not more than 50% of total in US stocks, own a real asset" is entirely compatible with a three fund portfolio (and ideally a house or something). In fact I designed it to account for every reasonable portfolio I could think of, including a Bogle-approved 48% VTI, 12% VEA, 40% VBTLX. And also Buffet 90/10 with an international twist (VT + cash).
+ "still squarely in accumulation phase" I would agree that diversification is not as important as a high stock allocation and regular blind contributions in this phase (also mine). Really, if you are just getting started, a checking account and a regular paycheck are all the diversification you need.
Thank you for the reassurance. It feels like we were getting started so long ago and still have so long to go, but we have a good chunk saved and are maybe halfway to something at $750k invested and $250k in equity in our house. The investments we have generally follow those guidelines (minus the bonds, I'll get to that later) surprisingly as long as you count the equity as part of the equation. Of the invested assets in stocks we are about 2/3 US 1/3 international. Naivety sometimes happens to work in your favor.
Re bonds, for a while with a pension in the future I did not think I needed what bonds offered. However I've been coming around to the idea that pensions should just be treated as income like SS and manage the portfolio separately to include bonds.
That's been kind of the target of my research into these portfolios but I just keep coming out with a headache lol. That and trying to find the optimal slices. It just seems that there are so many options, if I'm doing 3 why not 4, and then 5.... I almost need a personality portfolio quiz.........
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A small point, but to me, SS and pensions are not an allocation or asset, but a subtraction from spending. I'm overly conservative, ignoring both of these, and my way to deal with a potential 50% drop in the market is to do two things. I double the amount needed to sustain my spending in retirement and as mentioned, I ignore SS and my small pension. For any SS consideration, realize that in about 2034, the trust fund goes to zero and payments will be only what's coming in, which will be something like 75%, so a 25% drop for those taking payments. I also do set my AA at 50/50. I also tend to favor large cap and for international, only developed.
I did say I was very conservative, right? At 52 times spending in investments right now, both DW and I are working full time. Why? Because DW won't let me retire yet.
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A small point, but to me, SS and pensions are not an allocation or asset, but a subtraction from spending. I'm overly conservative, ignoring both of these, and my way to deal with a potential 50% drop in the market is to do two things. I double the amount needed to sustain my spending in retirement and as mentioned, I ignore SS and my small pension. For any SS consideration, realize that in about 2034, the trust fund goes to zero and payments will be only what's coming in, which will be something like 75%, so a 25% drop for those taking payments. I also do set my AA at 50/50. I also tend to favor large cap and for international, only developed.
I did say I was very conservative, right? At 52 times spending in investments right now, both DW and I are working full time. Why? Because DW won't let me retire yet.
Thank you for muddying the waters . In all serious thank you for the affirmation that I'm not alone in treating pension as income and not the bond portion. Part of me likes the conservative approach, but I think our risk tolerance would stay a bit lower in bond percentages. Maybe as we age a bit, currently in 30s, the thought of a big drop becomes less palatable.
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Stocks, bonds, and real estate are all in the same boat because their values have been propped up by decades of falling interest rates. If rates rose by just 3%, to levels last seen in 2008, the discount math says all these assets will fall by large double digit percentages. Stated another way, I expect the correlations between asset performances to be higher in the future than they were in the past, because their valuations are all tied more to interest rates than ever before.
Even gold is propped up by the lack of return available on other assets. There was a time in living memory when one could FIRE just on the coupons from long-term treasuries. If that time ever returned, people would raid their safes.
If rates stay locked in a low disinflationary spiral, Japan-style, then all assets might do OK. If rates rise even a little bit in the 2020s, all asset classes will be demolished and we'll probably have a second financial crisis.
Policy makers know they have to keep a lid on the velocity of money (inflation) or face severe consequences. Thanks to demographics, ex-US dollar demand, and higher taxes/tariffs, I think they are and will continue to engineer a soft landing, as Japan did with its lost decades. If inflation rises, the Fed could first of all taper it's $120,000,000,000 per month in asset purchases. Then, if that somehow doesn't work, they could start selling assets from their multi-trillion dollar balance sheet. Raising rates will be a last resort, and I'd not be surprised if we're hanging out around 2% ten years from now.
So if the future looks like either bubbles in all assets or lost decades, and if there are no longer any negative-correlated asset classes, how do retirees maintain a 40 or 50 year portfolio with a 4% WR?
One answer is to aggressively ride the bubbles up and reduce one's WR to the 3% range. Another is to use inherently negative-correlation tools: options. I will pursue both objectives via a 90+% stock portfolio protected by put options or, more likely, the collar strategy. Only by hedging can we obtain 100% certainty about surviving SORR events. A fat treasury allocation with negative real yields and massive convexity risk does not contribute to portfolio safety any more.
Market participants can see the Fed has their back against the wall, and so they are inflating asset bubbles in stocks, bonds, and real estate. After the tech bubble and housing bubble 1.0, there has been increasing pressure on the Fed to do something about asset bubbles, because when these pop it can affect the Fed's maximum employment objective. So the Fed faces two risks to its mandate: asset bubbles if rates are left too low for too long, and asset price collapses if rates rise too much.
The path between these risks is to constantly threaten and talk about small, mostly symbolic quarter point rate increases to slow the development of the bubbles (note the Fed's recent emphasis on more communication). Rates may rise a small amount between now and the next recession, but not by 2% or anything dramatic like that. Fears about these minor increases will trigger several corrections before the next recession, and these taper tantrums will be opportunities to buy stock and cash out one's hedges. Raising and lowering one's hedges is the new rebalancing.
This might be the single best post I've ever read on this forum