Author Topic: Trying not to feel too giddy about the stache's growth spurt  (Read 24667 times)

gerardc

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Re: Trying not to feel too giddy about the stache's growth spurt
« Reply #150 on: January 15, 2018, 06:52:05 PM »
Depends on the market movements, right?  The point is to mitigate against sequence of returns risk.  Michael Kitces has written at least 3 posts about it.  Here's the most recent one.  I'm not sure if he's concluded what the actual ending effect is though, other than stating that it is beneficial.

Over at Early Retirement Now, they've concluded that doing this when CAPE is greater than 20 increases your success rate by 10%-ish.  So while not a dramatic jump, it is definitely in the statistically significant range.  Conversely, you could use it to retire earlier with a higher withdrawal rate.

From this post:
Quote
Likewise, if Iím OK with a 5% failure probability conditional on a CAPE>20, then the static stock allocation of 80% would give me an SWR of 3.47%. The glidepaths would have allowed between 3.57% and 3.63%. Only an additional 0.16%, but thatís about 5% more consumption every year!

Is that significant enough?  I'm not sure.  But I'm also not sure that looking at every result is all that meaningful (because good years to retire are going to work no matter what).  It certainly seems to help stem the tide of poor returns when I have run simulations based on the 2000 retiree.  It increased portfolio balances by 8% after 5 years compared to static AA.  (Admittedly with some pretty perfect hindsight timing.)

Kitces simulations are limited because he only considers 4% WR, 30-year retirement and constant ramp-up time.

He finds best success rate goes from something like 94.6% to 95.1%, which is just 1-2 starting years (not sure of his methodology).

I made more extensive simulations here:
https://forum.mrmoneymustache.com/welcome-to-the-forum/cfiresim-severely-overestimates-success-rates-for-mustachians/msg1634628/#msg1634628

If you look at other WR (4.5%, 5%), you'll see that a glide path actually hurts success rates as often as it helps. Given that there is so little historical data, the effect is probably insignificant, i.e. the "advantage" he finds could have been a disadvantage just by adjusting slightly some parameters.

If you condition this on CAPE, significance is even lower. So, those simulations are interesting and can yield useful results if the magnitude of the effect is large, but they should be taken with a grain of salt if not.

Kitces says this in the article: "Notably, thereís still far more research to be done to optimize the exact shape and the slope of the V-shaped equity glidepath and the bond tent."
but actually with the data we currently have, there's not much more research we can squeeze out of this, I'm afraid.

farmecologist

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Re: Trying not to feel too giddy about the stache's growth spurt
« Reply #151 on: January 16, 2018, 08:29:56 AM »
Personally I think you need a 3-5 year buffer just in case market returns are not good or negative.  You can either do this by ring fencing some cash out of the markets or you can FIRE later.

I prefer the cash idea and I am going with 3 years basic living costs in a non market account when I FIRE.  I wont touch that money unless the markets do something bad.  Then when they do I can sit back reduce WR to 0 and wait for it to recover.  Its always a lot easier to make decisions when you can look at performance over 12 months or longer rather than trying to guess what will happen next.

This is pretty much what the rising equity glide path is and it seems to be a very solid way to go if you stick to your plan.

Sounds good in theory but in practice the increased success rate with rising equity glide path is very small, maybe not even statistically significant. You lose out a lot by having a large amount sitting in cash.

Yes I'm not sure I'd have that much in cash..but some cash certainly seems like a good idea.  I am sticking to a 'diversification' strategy that includes equities/bonds/cash/stock trading.  Not without risk but much less than others here.  I'm not sure how some of the 100% equity'ers can sleep at night. 

BTW - any of you ever visit https://www.bogleheads.org/  ?   Very cool community there too...but much different than here. 

When a bunch of MMM'ers start debating that our money is growing too fast...we know something must be up. :-)


Eric

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Re: Trying not to feel too giddy about the stache's growth spurt
« Reply #152 on: January 16, 2018, 10:58:56 AM »
If you condition this on CAPE, significance is even lower. So, those simulations are interesting and can yield useful results if the magnitude of the effect is large, but they should be taken with a grain of salt if not.

I would think that in times of high valuation, it's *more* important to guard against poor early returns than in times of low valuation, simply because it's a much more likely scenario.  Why would the significance be lower in times of higher valuations?

tooqk4u22

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Re: Trying not to feel too giddy about the stache's growth spurt
« Reply #153 on: January 16, 2018, 12:44:19 PM »
Some indicators make me think it's about to drop, but some now point towards a couple more years of continued growth at this rate being at least possible.

My primary concern about the stock market is that it is vulnerable to downturns in the economy, and I think our economy is made significantly more fragile by the current Congress's plan of increased deficit spending (new debt-backed tax cuts) while interest rates are already at historic lows.   This situation severely limits our ability to respond to economic downturns with fiscal stimulus, which potentially means the next downturn could grow unchecked for much longer than normal.

Normally, we slowly raise interest rates and taxes when the economy is prosperous, then cut them and start deficit spending when the business cycle busts.  This is the heart of Keynesian economics, that the government moderates the ups and downs to keep us growing steadily overall.  That plan has seemingly gone right out the window these days, because we're instead trying to pump up the business cycle with depressed interest rates and deficit spending to fund tax cuts for people who don't contribute to the economy, but DO contribute to inflated stock prices.  This has the net impact of pushing up stock prices while not increasing wage growth, which is exactly the kind of situation that leads to massive bubbles which then burst catastrophically.

Not to be a doomsayer, but it certainly looks like a recipe for a prolonged recession and a more severe stock market downturn than average.

While I agree with you entirely about the risk....you are completely wrong about current deficit spending. We haven't had a surplus since dotcom era when growth was high and there was a tax windfall from stock options/IPOs, and nevermind that the following years spending was based on artificially high revenue.  Plus the prior administration had deficits that far exceeded any current and past levels...sure some is attributed to war (still spending on that now to a lesser extent) and some attributed to stimulus coming off great recession...but a lot was for entitlements which is just the inverse of tax cuts.   Both sides love their deficits. 

Anyway, interest rate risk is the 100% greatest risk to the markets.  Good news is that our low rates are down right high compared to the rest of the world and our debt is so high (because of said deficits) that powers that be will have to keep rates low because we can't afford to pay the interest as it is let alone if it goes up - think about it interest on US Debt was $458million in 2017....just a 1% in avg rate would be another $200million in interest that would go right to the deficit. 

We might have a tax problem, we might have spending problem but we definitely have a debt problem and probably an interest rate problem.

Its ok, because I just look at todays markets and assume my portfolio will be whacked by 25% at some time....I am still investing per my AA which is more conservative than a lot of others here and has cost me money during the run up but what can I say...its my AA that I chose and am comfortable with. 


spokey doke

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Re: Trying not to feel too giddy about the stache's growth spurt
« Reply #154 on: January 17, 2018, 05:30:10 PM »
So much for giddiness of this so-called 'melt-up'...I didn't even clear 10k on today's gains...sigh...

Retire-Canada

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Re: Trying not to feel too giddy about the stache's growth spurt
« Reply #155 on: January 17, 2018, 05:32:01 PM »
So much for giddiness of this so-called 'melt-up'...I didn't even clear 10k on today's gains...sigh...

Yup. Worthless. What's the point? :(