A Low-Return Future? Are We Prepared?

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Valuethinker
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Re: A Low-Return Future? Are We Prepared?

Post by Valuethinker » Fri Aug 29, 2014 3:56 pm

Clearly_Irrational wrote:
technovelist wrote:I agree that it is pretty unlikely that one would run out of money with such a low withdrawal rate, but I don't think that is because it is "dividends + interest"; it's just low enough that you almost certainly won't run out.
I'm not sure if this is supported by academic research or not, but here is my theory:

A) In order to pay dividends or coupon payments over the long term a business has to generate sufficient profits, which means in the vast majority of cases companies pay an amount that is less than their rate of profit. (obviously there are individual exceptions, but we're talking about the aggregate for the market as a whole).
Payout ratios are less than 100% because if you reduce your distributable reserves, eventually it becomes legally impossible to pay a dividend. In practice payout ratios (for US cos) are probably less than 50%-- but buybacks muddy the picture a lot.
B) Corporate earnings tend to go up over time as they find ways to increase productivity (As a group, single companies can have all kinds of issues) Asset prices, over the long term, tend to be a stable multiple of the company's discounted earnings. (There are lots of things that create volatility, but this is the mean to which they generally revert)
It's not due to productivity increase-- only or simply at any case. Profits go up over time because companies grow. Even at constant profit margin (no productivity increase) an increase in sales will increase your profits, all things being equal. What tends to happen when companies increase productivity (usually by cutting costs) is that their competitors then duplicate it, and that pushes margins back down, and round the circle we go.

Growth in productivity in the economy as a whole tends to lead to economic growth (again all other factors being equal). That tends to lead to increases in sales.

Buried somewhere on Efficient Frontier (Wm Bernstein's site) is a paper that shows you that quoted companies have slower profits growth than real GDP. The reason being that unquoted companies (some early stage venture backed, some family owned and private like Bechtel, Cargill or Koch) grow faster than the corporate sector as a whole.

But it's about Earnings Per Share. What companies have done a lot of since the late 1980s is retire equity, thus boosting EPS. Profit margins now are near record highs, and that is precisely what US companies are doing. The reason is probably buried in executive compensation (and fear of hostile takeover).
C) The economy normally has a positive growth rate (once in a while things go backwards but it's very rare and unlikely to be sustained)
Unless you are Japan. Calling into question that comforting theory. Fingers crossed, the US is not the next Japan (Europe might be).
[Since payment rate A is going to be lower than growth rate B during any time period with economy C it's exceedingly unlikely that a portfolio could be depleted by using rate A. In order for that to happen you would need a negative economic growth rate, a failure of companies to improve their productivity or a long term decline in price to earnings multiples. All of those things are so unlikely
Careful, from where PE ratios are now they could go backwards quite easily. We can argue the toss but there have been long periods when they were lower than what they are now.

EPS growth has come from financial engineering (buybacks and borrowing) as much as it has from genuine profits growth at least in recent years.
as to be nearly impossible while still having a functioning technological civilization based on capitalism. So essentially, in the only conditions where it won't be true, I won't be worrying about the value of my portfolio anyways.
"functioning technological civilization based on capitalism"

we are getting terribly close to the Karl Marx critique of industrial capitalism (profit and economic cycles of ever increasing violence due to the problem of labour surplus). It is way too broad an assertion to make.

What we can say is profits have grown in the past, they are likely to do so in the future. Somewhat less for listed companies than for unlisted (note how the number of listed companies in the US has shrunk so dramatically since the early 1990s). And wary of the fact that EPS has been driven by share buybacks to a significant extent-- in effect financial engineering.

However we are starting in a pretty high PE. Probably driven up by share buybacks (and maybe other factors like very low interest rates). That makes the climb uphill in terms of share prices particularly steep.

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Cut-Throat
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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat » Fri Aug 29, 2014 4:00 pm

Clearly_Irrational wrote: Looking at the description one of the requirements is to choose a duration and the plan guarantees you will spend all of your money by that date.
How is that being required to know the "'Exact Date of your death" ? :confused

Firecalc also asks for a plan duration, just use the number that you'd put into Firecalc. :wink:

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Re: A Low-Return Future? Are We Prepared?

Post by Valuethinker » Fri Aug 29, 2014 4:03 pm

sciencenerd wrote:
Valuethinker wrote:
sciencenerd wrote: However, as the eternal pessimist, I also fear lower investment returns in the future, for two reasons. 1) Limits to growth and 2) the end of cheap energy. We are already seeing that the US, at least, is awash in capital that is somehow not in great demand. Why? I don't have a good answer but the two points above may have something to do with it.
.
re limits to growth. There are effluent limits to growth, that is clear. However cleaning up those effluents is possible-- a North American car now produces c. 10% of the pollutants that one in the 1970s did.

On resource limits to growth that is much less clear. Because the price of a resource rises as it gets scarce, alternative materials are found. That has been the history throughout the period since about 1750.

If you look at economic growth, then a lot of the world's most advanced economies appear to be reaching 'peak materials'-- ie they are not consuming more raw materials. Partly that's simply because we import more manufactured goods from China, but even stripping that out there seems to be a real effect. We consume more services like healthcare, dining out etc. But not more things.

On cheap energy again the problem is an effluent one. There is loads of cheap energy around (coal) and virtually infinite energy (sunlight). The problem is the one is not something we can keep on burning, and there's a cost to switch to the other. Peak anything discussions are forbidden here but I encourage you to have optimism: look at the fall in cost curves for solar cells over the last 30 years.

I think the answer re cheap capital has a lot more to do with what Keynes talked about. ie a deficiency in aggregate demand.
Thanks for the encouragement, Valuethinker. I actually lurked here for several years before recently starting to post. Reading about your's and other poster's seasoned and level headed approach has actually made me sleep better at night since I started following the Boglehead philosophy (thanks for that).

- As to your point about the deficiency in aggregate demand leading to cheap capital, I fully agree and probably should have included that point in the above analysis (it is interesting to read Stiglitz on this issue).
We will get into prohibited matters here. I can only recommend you also search out Krugman's replies to Stiglitz (in his blog). They are on the same side, Krugman thinks Stiglitz is a god, so his criticisms are interesting. But, overall, you know where I am coming from.
- Regarding the energy issue (bolded above): It is surprising how the suns's energy supply is actually far from infinite. If one extrapolates the last 100 year world exponential growth in energy consumption, then we would use all of the solar radiant energy incident on the earth surface in about 500-600 years. I find that thought pretty staggering, since it clearly demonstrates that growth WILL have limits. The good thing is that GDP growth has decoupled recently somewhat from growth in energy consumption, which might give us another few hundred years before limits are reached :).
So we build a Larry-Niven like Dyson Sphere and capture 100% of the Sun's energy ;-). Then we propel ourselves through interstellar space to a bigger sun ;-). In fact, why don't we just build an orbiting ring at 91m miles from the sun, and call it, oh... Ringworld ;-).

I am reminded of Isaac Asimov's 'The Gods Themselves'. Even a perfect energy solution will eventually lead to us blowing ourselves up ;-).

We might be reaching 'peak population'-- 9 to 12 billion people. And then, if energy growth stops growing exponentially (although it will have to stop growing in total, eventually) then we don't run out of solar power. Or maybe we discover cheap nuclear fusion ;-).

Practically though there's enough solar for our forseeable civilization in, say, 100 years. Since coal oil and gas are 'fossilized solar' and wind and wave power are basically solar, then the only non solar power sources we have are: nuclear fission, geothermal and tidal. But then sun shining in the sky (and moving the air round our planet) is enough, in and of itself. The next 40 or so years will be quite interesting however, in terms of the choices we make.
- As for other posters reiterating the inability to predict the future: There are some things we can predict. For example, we can predict that the sun eventually stops shining (not in our lifetime, of course). We also can predict that the stock market will eventually collapse without bouncing back. What we cannot predict is exactly WHEN this happens, thus limiting our ability to act on these predictions.
Agreed. It's better to assume a repeat of the past *with the caveat* that it's not likely we will see the asset returns of 1950-2000 again. Everything went right in that period (for investors in developed western markets and particularly USA). The PE on the market now is too high relative to historic.

My gut says if 2% inflation then long bonds yield maybe 1% real (3% nominal), stocks give you 6-7% nominal, you have done alright.

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Re: A Low-Return Future? Are We Prepared?

Post by nisiprius » Fri Aug 29, 2014 8:08 pm

Valuethinker wrote:...I agree war 'forces the pace'...
Yes, war takes a lot of stuff that scientists theoretically know how to do, and gets it out of the lab and into production faster than would normally happen. It's only in wartime that you get something like General Groves saying, well, if nobody is sure which method of isotope separation is going to work best, then I guess we better start right now building a full-scale production plant for each of them... and if copper for magnet wire is in short supply, let's get silver from the Treasury and makes the magnets with silver wire.
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Re: A Low-Return Future? Are We Prepared?

Post by MossySF » Fri Aug 29, 2014 8:15 pm

Seems like an easy answer to the topic question. To plan for a low-return future, spend less -- save more.

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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat » Fri Aug 29, 2014 8:31 pm

MossySF wrote:Seems like an easy answer to the topic question. To plan for a low-return future, spend less -- save more.
Maybe, but the Conservative ones here imply that you should keep working and never retire, because "You never know for sure".

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Re: A Low-Return Future? Are We Prepared?

Post by Kevin M » Fri Aug 29, 2014 11:06 pm

Simplegift wrote:Are there any expert rebuttals to this "low-return" global future?
My earlier post didn't get any traction, so how about this, which is from the Damodaran paper I linked in previous post:

Image

As I said before, the current implied ERP for the S&P 500 is about 5.5%, which is the premium relative to the 10-year T-bond. Note that this is toward the top of the range (purple line) since 1961 (the red and green lines are arithmetic and geometric historical ERPs since 1928).

The implied ERP computed by Damodaran uses a discounted cash flow model, which is the type of model used by Bernstein. In Damodaran's model, stock buybacks are added to dividends for the cashflow component, analyst estimates are used for cashflow growth rate over the next five years, and the 10-year T-bond rate is used as the cashflow growth rate for subsequent years. This is in nominal terms, but since it's a risk premium relative to the T-bond rate, Damodaran argues it should be similar to the corresponding real value.

Damodaran is an academic who specializes in corporate finance and valuation, so I think he qualifies as an expert. It would be interesting to see a discussion comparing the Bernstein and Damodaran discounted cashflow analyses.

Kevin
Wiki ||.......|| Suggested format for Asking Portfolio Questions (edit original post)

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Sat Aug 30, 2014 1:48 am

Valuethinker wrote:"functioning technological civilization based on capitalism"

we are getting terribly close to the Karl Marx critique of industrial capitalism (profit and economic cycles of ever increasing violence due to the problem of labour surplus). It is way too broad an assertion to make.
His solutions fail to account for human nature and his labor theory of value doesn't hold up well but his analysis of the long term trends for capitalism seem pretty bang on.

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Sat Aug 30, 2014 1:50 am

Cut-Throat wrote:How is that being required to know the "'Exact Date of your death" ? :confused
Because if you don't guess the duration correctly you'll be out of luck. SWR modeling gives you a chance of running out of money at the end of the period, the VPW guarantees it. With a lifespan of unknown duration that doesn't seem like too great an idea.

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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat » Sat Aug 30, 2014 6:47 am

Clearly_Irrational wrote:
Cut-Throat wrote:How is that being required to know the "'Exact Date of your death" ? :confused
Because if you don't guess the duration correctly you'll be out of luck. SWR modeling gives you a chance of running out of money at the end of the period, the VPW guarantees it. With a lifespan of unknown duration that doesn't seem like too great an idea.
That is far different than knowing the "Exact Date of your death"!

Don't be ridiculous!...Just plug in age 105.....You aren't going to live that long. There's a very good chance to won't live to age 90.

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Re: A Low-Return Future? Are We Prepared?

Post by zaboomafoozarg » Sat Aug 30, 2014 8:44 am

garlandwhizzer wrote:1+

The future is of course unknown and unknowable. On the other hand isn't it better to try to prepare for what looks from here to be a likely but pessimistic outcome. If you're wrong and future returns are better, you have choices. It's not so bad having too much money. You can always take your foot off the gas petal a few years early. A mistake in the other direction however may have severe consequences and you may not have choices available to deal with it.

Garland Whizzer
Yeah, this is what I'm afraid of - if I don't save enough and returns are low as predicted, it may be too late and then there'd be no way to deal with it. And if returns are low, I may also need to take care of family members who don't have enough as well.

It does require giving up some things now to save 40% or 50%. But I grew up living cheap so it doesn't feel like I'm giving up too much. Just shoot for a $30k lifestyle, save the rest, and hope for the best (but be prepared for not so good).

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Re: A Low-Return Future? Are We Prepared?

Post by LongerPrimer » Sat Aug 30, 2014 10:37 am

It's getting harder to make good investments that give above market returns.

There were some annuities that does not recognize well, low return environments.

I'm trying to make as much $, now so that in 1-3 year's, we can ignore the issue.

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Sat Aug 30, 2014 1:14 pm

Cut-Throat wrote:Don't be ridiculous!...Just plug in age 105.....You aren't going to live that long. There's a very good chance to won't live to age 90.
The duration you plug in has a very large effect on the withdrawal rate.

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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat » Sat Aug 30, 2014 1:35 pm

Clearly_Irrational wrote:
Cut-Throat wrote:Don't be ridiculous!...Just plug in age 105.....You aren't going to live that long. There's a very good chance to won't live to age 90.
The duration you plug in has a very large effect on the withdrawal rate.
Tell me something I don't know.

Now if someone that was retired, actually used VPW for their Withdrawal Method (Like Myself)...They could easily figure out reasonable input values and be far ahead of the game.

But, if someone just wanted to be 'right', and wanted to argue the ridiculous (Like yourself), then no withdrawal method would be safe.

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Sat Aug 30, 2014 1:56 pm

Cut-Throat wrote:Tell me something I don't know.

Now if someone that was retired, actually used VPW for their Withdrawal Method (Like Myself)...They could easily figure out reasonable input values and be far ahead of the game.

But, if someone just wanted to be 'right', and wanted to argue the ridiculous (Like yourself), then no withdrawal method would be safe.
*shrug* Unless you're going to pair it with a deferred inflation indexed SPIA I don't see it as an improvement over the SWR model, in fact it seems less workable. If you're happy with it, then great, no need to convince me.

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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat » Sat Aug 30, 2014 2:21 pm

Clearly_Irrational wrote: I don't see it as an improvement over the SWR model, in fact it seems less workable.
I agree; You don't see it.

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Re: A Low-Return Future? Are We Prepared?

Post by EnjoyIt » Sat Aug 30, 2014 3:33 pm

This thread is rediculous. There is so much fear regarding the unknown that people are actually saving 50% in fear of some rediculous calamity.

I would hope that no boglehead is saving to retire on the bare minimum.
I hope the goal is to have some fun in retirent. Frequent vacations, eating healthy, some fun toys.
If for a few years things are bad, a normal human being would take less trips and buy less stuff. And when times are good they will do the opposite and spend more.

If you have a paid off house and get social security, most people could survive on just that for a few years if they need to. If you have 20 years of living expenses saved up (4%) what is it that you are worrying about? If you retire at 65 do you really think you will live much more than 20 years? Do you think you will be spending money at 86 like you did at 66?

Maybe I am young and naive, but all this talk sounds like financial porn. I am going to stay relaxed and stay the coarse.

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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat » Sat Aug 30, 2014 3:39 pm

EnjoyIt wrote:This thread is rediculous. There is so much fear regarding the unknown that people are actually saving 50% in fear of some rediculous calamity.

I would hope that no boglehead is saving to retire on the bare minimum.
I hope the goal is to have some fun in retirent. Frequent vacations, eating healthy, some fun toys.
If for a few years things are bad, a normal human being would take less trips and buy less stuff. And when times are good they will do the opposite and spend more.

If you have a paid off house and get social security, most people could survive on just that for a few years if they need to. If you have 20 years of living expenses saved up (4%) what is it that you are worrying about? If you retire at 65 do you really think you will live much more than 20 years? Do you think you will be spending money at 86 like you did at 66?

Maybe I am young and naive, but all this talk sounds like financial porn. I am going to stay relaxed and stay the coarse.
No you're smarter than most. I am retired and 100% agree with you!

These folks that are planning to live past 100, will fail to live while they're still alive. Just look at the Obits and see how many folks live past 95.

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Re: A Low-Return Future? Are We Prepared?

Post by EnjoyIt » Sat Aug 30, 2014 3:56 pm

Double post. Sorry.
Last edited by EnjoyIt on Sat Aug 30, 2014 4:09 pm, edited 1 time in total.

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Re: A Low-Return Future? Are We Prepared?

Post by Ldevelopment » Sat Aug 30, 2014 4:06 pm

Cut-Throat wrote:
EnjoyIt wrote:This thread is rediculous. There is so much fear regarding the unknown that people are actually saving 50% in fear of some rediculous calamity.

I would hope that no boglehead is saving to retire on the bare minimum.
I hope the goal is to have some fun in retirent. Frequent vacations, eating healthy, some fun toys.
If for a few years things are bad, a normal human being would take less trips and buy less stuff. And when times are good they will do the opposite and spend more.

If you have a paid off house and get social security, most people could survive on just that for a few years if they need to. If you have 20 years of living expenses saved up (4%) what is it that you are worrying about? If you retire at 65 do you really think you will live much more than 20 years? Do you think you will be spending money at 86 like you did at 66?

Maybe I am young and naive, but all this talk sounds like financial porn. I am going to stay relaxed and stay the coarse.
No you're smarter than most. I am retired and 100% agree with you!

These folks that are planning to live past 100, will fail to live while they're still alive. Just look at the Obits and see how many folks live past 95.
+1

Especially if you have a paid off house, many couples get by and do okay on just SS.

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Re: A Low-Return Future? Are We Prepared?

Post by tecmage » Sat Aug 30, 2014 4:49 pm

EnjoyIt wrote:This thread is rediculous. There is so much fear regarding the unknown that people are actually saving 50% in fear of some rediculous calamity.

I would hope that no boglehead is saving to retire on the bare minimum.
I hope the goal is to have some fun in retirent. Frequent vacations, eating healthy, some fun toys.
If for a few years things are bad, a normal human being would take less trips and buy less stuff. And when times are good they will do the opposite and spend more.

If you have a paid off house and get social security, most people could survive on just that for a few years if they need to. If you have 20 years of living expenses saved up (4%) what is it that you are worrying about? If you retire at 65 do you really think you will live much more than 20 years? Do you think you will be spending money at 86 like you did at 66?

Maybe I am young and naive, but all this talk sounds like financial porn. I am going to stay relaxed and stay the coarse.
Some of the conservative views have been shaped by watching family members grow older and need full time care or be a burden on the rest of the family. Sadly this seems to be all too common, I'm watching it happen to my grandparents now. Some people are saving not just for their retirement but to make sure they aren't a burden on their family if they need full time care, or to leave a legacy so their descendants get an inheritance.
Do you think you will be spending money at 86 like you did at 66?
Yes based on medical bills alone.

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Sat Aug 30, 2014 4:51 pm

Cut-Throat wrote:I agree; You don't see it.
The advantage is that you're guaranteed to use up all of the money, the only problem for me is that I don't see that as an advantage unless you pair it with an SPIA.

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Sat Aug 30, 2014 4:57 pm

Cut-Throat wrote:These folks that are planning to live past 100, will fail to live while they're still alive. Just look at the Obits and see how many folks live past 95.
For me, I look at it as a probability distribution. My current life expectancy is 82, I could die much earlier or much later than that but it's the 50% likelihood. If I plan to die at 62 then I shouldn't even bother saving for retirement, if I plan to die at 102 I need to save heavily, the probability curve helps me plan for the most likely outcomes and come up with a reasonable compromise figure.

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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat » Sat Aug 30, 2014 7:00 pm

Clearly_Irrational wrote:
Cut-Throat wrote:I agree; You don't see it.
The advantage is that you're guaranteed to use up all of the money, the only problem for me is that I don't see that as an advantage unless you pair it with an SPIA.
Nope, you still don't get it.

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Sat Aug 30, 2014 7:17 pm

Cut-Throat wrote:Nope, you still don't get it.
I see two possible advantages:

1) You're guaranteed to use up all of the money by the end of the duration, thus leaving no money unspent. In theory, if a retiree has no bequest motive he would want to run out of money exactly as he died. (assuming that intentionally going broke early in order to free ride on state assistance near the end is not considered a valid choice)

2) Due to point #1 for any comparable time period you'll have a higher overall withdrawal rate than a 4% SWR, in fact the withdrawal rate can be considered approximately optimum. (A true optimum isn't calculable due to lack of forward information)

If there is some other advantage, or you disagree that those are possible advantages then please elucidate.

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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat » Sat Aug 30, 2014 7:30 pm

Clearly_Irrational wrote:
Cut-Throat wrote:Nope, you still don't get it.
I see two possible advantages:

1) You're guaranteed to use up all of the money by the end of the duration, thus leaving no money unspent. In theory, if a retiree has no bequest motive he would want to run out of money exactly as he died. (assuming that intentionally going broke early in order to free ride on state assistance near the end is not considered a valid choice)

2) Due to point #1 for any comparable time period you'll have a higher overall withdrawal rate than a 4% SWR, in fact the withdrawal rate can be considered approximately optimum. (A true optimum isn't calculable due to lack of forward information)

If there is some other advantage, or you disagree that those are possible advantages then please elucidate.
To understand all of the advantages of VPW, you need to download it and backtest it fully to appreciate the advantages over any of the other withdrawal methods.

As far as Spending ALL of your money, yes you can do that, but that is a very minor point of VPW..... If you look at VPW when it starts to withdraw 10% of your portfolio, you can customize it so you never withdraw more than 10% (which is usually around age 90) so you don't ever run out of money.

A Big advantage of VPW is that you get to spend more money (A higher WR) in your early years 60-80 than other Methods. This is when it counts.

The other Real Advantage is that you don't have to be conservative until you HAVE to be. It will put the brakes on when markets are bad. Selling High when markets are good, and less selling when Markets are bad. Perfect Timing. Let us suppose for a moment that markets forward will be great. VPW will let you take advantage of it and let you spend more money. If you had planned a 3% WR..... You're scrimping when you don't need to.

But, But, But..... The REAL BIGGIE is that while a fixed SWR leaves its money in the market to prepare for the Big Market Drop.....it actually works against you because the money you left in the market to save you, gets Hammered in the Big Downturn. You could have spent it and had a Good time!

And of Course it will not Fail.

But download it and run it for your own situation and then you will see how powerful a tool it is.

Once you learn it, you will be a Proponent of it, instead of a critic.

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Re: A Low-Return Future? Are We Prepared?

Post by siamond » Sat Aug 30, 2014 7:40 pm

Clearly_Irrational wrote:
siamond wrote:Huh? What does population growth have to do with anything? I don't see the relation with expected returns... More workers and more consumers, sure, but this comes with a heap of other problems... Please explain?
Here's a picture that probably explains it better than I can just using words:

Image
This is a cool chart. Thanks for sharing. Where does it come from? Where can I find more background information about it?

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Sat Aug 30, 2014 7:57 pm

siamond wrote:This is a cool chart. Thanks for sharing. Where does it come from? Where can I find more background information about it?
I've seen similar diagrams in several places, I got that one from here: http://www.financialphysics.net/future.html

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Sat Aug 30, 2014 8:12 pm

Cut-Throat wrote:As far as Spending ALL of your money, yes you can do that, but that is a very minor point of VPW..... If you look at VPW when it starts to withdraw 10% of your portfolio, you can customize it so you never withdraw more than 10% (which is usually around age 90) so you don't ever run out of money.
*shrug* That's hardly specific to VPW but sure that's a nice advantage of a percentage system.
Cut-Throat wrote:A Big advantage of VPW is that you get to spend more money (A higher WR) in your early years 60-80 than other Methods. This is when it counts.
If you consider front loading desirable, then yes that's nice.
Cut-Throat wrote:The other Real Advantage is that you don't have to be conservative until you HAVE to be. It will put the brakes on when markets are bad. Selling High when markets are good, and less selling when Markets are bad. Perfect Timing. Let us suppose for a moment that markets forward will be great. VPW will let you take advantage of it and let you spend more money. If you had planned a 3% WR..... You're scrimping when you don't need to.
Yes, that is a good advantage. One of the downsides of the SWR model is that if things go quite well it doesn't adapt.
Cut-Throat wrote:But, But, But..... The REAL BIGGIE is that while a fixed SWR leaves its money in the market to prepare for the Big Market Drop.....it actually works against you because the money you left in the market to save you, gets Hammered in the Big Downturn. You could have spent it and had a Good time!
I'm not sure that's necessarily good, after all we're talking about income you're supposed to be living off of here. Spending it early sounds like fun, but that means there is less for later.
Cut-Throat wrote:And of Course it will not Fail.
That depends on how you define failure. It won't deplete your account prior to the end of the duration but that's not the same thing as maintaining a minimum level of spending.
Cut-Throat wrote:Once you learn it, you will be a Proponent of it, instead of a critic.
I'm not a critic, I'm just saying that it has drawbacks, different ones from the SWR model to be sure, but they're still there.

Used in conjunction with a deferred inflation indexed SPIA that kicks in at the end of the duration, then I agree it would be a decent choice. Otherwise I don't believe it would be reliable enough. You have too much chance of breaching your minimum spending level or running out before you die. Increasing the duration isn't a perfect fix for that problem since it reduces your spending level to match.

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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat » Sat Aug 30, 2014 8:18 pm

Clearly_Irrational wrote:
Cut-Throat wrote:But, But, But..... The REAL BIGGIE is that while a fixed SWR leaves its money in the market to prepare for the Big Market Drop.....it actually works against you because the money you left in the market to save you, gets Hammered in the Big Downturn. You could have spent it and had a Good time!
I'm not sure that's necessarily good, after all we're talking about income you're supposed to be living off of here. Spending it early sounds like fun, but that means there is less for later.
No, it doesn''t mean there is less for later, it disappeared in the Market Downturn. The more you leave in the Market Before the downturn, the More that disappears. It's gone!

Nope, you still don't get it and you won't until you run it and study it.

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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat » Sat Aug 30, 2014 8:22 pm

Clearly_Irrational wrote: I'm not a critic, I'm just saying that it has drawbacks
Sure you're not! :confused

You know exactly what it does and doesn't do, but you've never run it and spent any time studying it.

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Sat Aug 30, 2014 8:42 pm

Cut-Throat wrote:Sure you're not! :confused
There is no perfect withdrawal system because we don't have complete information. Each system attempts to compensate for that lack but they all fail in different ways. Choosing an appropriate failure mode is actually important because there are different ways to compensate for them. For example, if you have a desire to leave an estate then VPW is a terrible choice since it front loads and delivers a higher withdrawal rate. On the other hand, the SWR model fails to adapt to conditions that are better than expected and can end up leaving a lot of money unspent, especially if you choose a very conservative rate. Fixed percentage models do a great job of never running out of money, but don't do a very good job of ensuring a minimal level of spending, etc.

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Re: A Low-Return Future? Are We Prepared?

Post by Cut-Throat » Sat Aug 30, 2014 8:51 pm

Clearly_Irrational wrote:
Cut-Throat wrote:Sure you're not! :confused
There is no perfect withdrawal system because we don't have complete information. Each system attempts to compensate for that lack but they all fail in different ways. Choosing an appropriate failure mode is actually important because there are different ways to compensate for them. For example, if you have a desire to leave an estate then VPW is a terrible choice since it front loads and delivers a higher withdrawal rate. On the other hand, the SWR model fails to adapt to conditions that are better than expected and can end up leaving a lot of money unspent, especially if you choose a very conservative rate. Fixed percentage models do a great job of never running out of money, but don't do a very good job of ensuring a minimal level of spending, etc.
But, you have incomplete information as you continue to criticize VPW, yet you have never run it. If you understood VPW, you would know if you had a desire to leave an estate you would exclude those funds from VPW. No one said VPW was 'perfect' nothing in Life is. Yet you continue to describe shortcomings of something you know nothing about.

I am done trying to 'educate' you, because you apparently know everything while understanding nothing.

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Sat Aug 30, 2014 10:08 pm

Cut-Throat wrote:I am done trying to 'educate' you, because you apparently know everything while understanding nothing.
I'm sorry if you were personally offended, that was never my intent. Apparently it's time to move on to other topics.

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Re: A Low-Return Future? Are We Prepared?

Post by LongerPrimer » Sat Aug 30, 2014 10:39 pm

So, What is the answers to: A High-Return Future. Are we prepared?
:mrgreen:

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Re: A Low-Return Future? Are We Prepared?

Post by zaboomafoozarg » Sun Aug 31, 2014 12:00 pm

LongerPrimer wrote:So, What is the answers to: A High-Return Future. Are we prepared?
:mrgreen:
That's an easy problem to prepare for :D

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Re: A Low-Return Future? Are We Prepared?

Post by TareNeko » Sun Aug 31, 2014 12:26 pm

LongerPrimer wrote:So, What is the answers to: A High-Return Future. Are we prepared?
:mrgreen:
I was born ready.

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Re: A Low-Return Future? Are We Prepared?

Post by zaboomafoozarg » Sun Aug 31, 2014 7:11 pm

EnjoyIt wrote:I would hope that no boglehead is saving to retire on the bare minimum.
I hope the goal is to have some fun in retirent. Frequent vacations, eating healthy, some fun toys.
I don't plan to spend any more money in retirement than I do now. However, I do plan to spend way more time doing stuff I actually enjoy! :happy

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Re: A Low-Return Future? Are We Prepared?

Post by grayfox » Mon Sep 01, 2014 6:11 am

Simplegift wrote:Could we be living through a major shift in the long-term valuation of global financial assets? Many respected financial commentators, from Bill Gross to Burton Malkiel to Vanguard, continue to express their belief that today's persistently-high global asset prices will assure lower future returns for years to come.

• William Bernstein, in his Paradox of Wealth paper, lays out the theoretical foundations of our low-return future:
Berstein is showing one chart (Fig 6) from 1200-1800 A.D. and another chart from with data from 400 B.C. (Fig 7)
So his thesis is about a trend that occurs on a time-scale of centuries.

Figure 8, Shiller PE1880-2012, shows a possible trend of increasing valuation over decades, but huge variations around the trend line.

So even if the PE trend is correct, 0.058/Year, there will still be large swings in valuations, interest rates, discount rates, expected return, whatever you want to call it, over one investor's lifetime.

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Re: A Low-Return Future? Are We Prepared?

Post by grayfox » Mon Sep 01, 2014 6:28 am

Simplegift wrote:Just to offer a concrete example of what a "low-return" future looks like, the table below shows William Bernstein's estimates for expected annual real returns of major asset classes over the next 10 years (from his book, Rational Expectations, published May 2014). These estimates are mostly in line with those of other prominent forecasters of a low-return world.

Image
What does this mean? Probably not what you are implying with the OP title: A Low-Return Future? Are We Prepared?

Specifically, it does not imply that, from now on, all the money that someone saves and puts in the stock market will only earn 2% real.
The idea is easier to understand with a bond, but the same principle applies to stocks.

Suppose the 10-year Treasury today is yielding 2.35%.
All that means is when you invest $1,000 today in Aug-2014, you will get 2.35% p.a. over 10 years on that investment and it will grow to about $1,261.47.
It means nothing more than that.

Back in June 2007, you got 5% on your $1,000 investment, and it grows to $1,628.89.
Next month, when you have another $1,000 to invest, there will be a different rate, higher or lower.
And so on the next month, and next year and in 5 years and 10 years and 20 years.

Interest rates will fluctuate and will be higher or lower in the future than today. Maybe in 5 years we'll be getting 6% in the 10-Year Treasury and U.S, Large Stocks will be expected to return 10%. Maybe not. There's no way to know.

Whether or not Bernstein's theory about discount rates decreasing over the course of centuries is correct, interest rates will still vary greatly from year to year. His theory is not useful for predicting interest rates in 1, 5, 7, 10, 20 years. Other factors are more important and will dominate.

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Re: A Low-Return Future? Are We Prepared?

Post by SimpleGift » Mon Sep 01, 2014 9:39 am

grayfox wrote:Whether or not Bernstein's theory about discount rates decreasing over the course of centuries is correct, interest rates will still vary greatly from year to year. His theory is not useful for predicting interest rates in 1, 5, 7, 10, 20 years. Other factors are more important and will dominate.
Your points are well taken, Grayfox. But understand that the rationale behind a low-return future is not that discount rates have been falling for centuries, but that they have fallen dramatically since 1980. If you read the 2013 piece by Dimson, Marsh and Staunton ("The Low-Return World," pages 5-15), their findings mirror closely the classic 2002 paper by Fama and French ("The Equity Premium") — that lower discount rates since 1980 mean lower expected returns going forward.

Sure there will be year-to-year and even decade-to-decade variations, but investors looking forward today who expect the returns of the past — 6% real stock stock returns and 4% real bond returns since 1950 — are likely to be sorely disappointed.
Last edited by SimpleGift on Mon Sep 01, 2014 10:11 am, edited 1 time in total.
Cordially, Todd

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Re: A Low-Return Future? Are We Prepared?

Post by Nukeboilermaker » Mon Sep 01, 2014 10:03 am

Grt2bOutdoors wrote:Remain calm! All is well! There are a number of ways around lower returns, all of which requires some level of sacrifice: save more, lower your expectations of what retirement may look like, work longer, reduce consumption now. I expect this will work for the majority of Bogleheads, it will not work for those who are unable to save, work, reduce consumption. Good Luck!
I placed in bold some very important advice from Grt2b gave, which I would agree a vast majority of bogleheads will do instinctively under the presented circumstances. I'm only 28 years old and anything that is coming in the near future is realistically not that important as long as I continue to ensure I stick to my investing plan and savings rate. If market goes up, great look at the money I have made... If the market goes down, great I'm hopefully buying low...

Time will tell, keep calm and stay the course! This is more of a factor for those recently entering or soon to enter retirement.

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Re: A Low-Return Future? Are We Prepared?

Post by grayfox » Mon Sep 01, 2014 11:45 am

Simplegift wrote:
Your points are well taken, Grayfox. But understand that the rationale behind a low-return future is not that discount rates have been falling for centuries, but that they have fallen dramatically since 1980. If you read the 2013 piece by Dimson, Marsh and Staunton ("The Low-Return World," pages 5-15), their findings mirror closely the classic 2002 paper by Fama and French ("The Equity Premium") — that lower discount rates since 1980 mean lower expected returns going forward.
Are they all referring to the interest rate chart below that shows rates rise until 1980 and then falling until 1980.

Image

Are they merely extrapolating the trend from 1980-2012 to predict low or lower interest rates in the future? Are interest rate trends that easy to predict?

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Re: A Low-Return Future? Are We Prepared?

Post by SimpleGift » Mon Sep 01, 2014 12:26 pm

grayfox wrote:Are they merely extrapolating the trend from 1980-2012 to predict low or lower interest rates in the future? Are interest rate trends that easy to predict?
Most of the commentary on a "low-return future" that I've seen doesn't try to predict future interest rates. It simply observes that interest rates today are at historically low levels and have a lower bound (they can't go significantly lower). So the future holds either interest rates near today's low levels or else rising rates — both scenarios that are wholly different from what investors have seen over the past 35 years.

Most bond investors understand that past returns are largely irrelevant. They look at present yields to estimate future returns — that is, they look at the prices they're paying today for cash flows tomorrow. Only a novice would look at past bond returns to project future returns. Yet this is what many equity investors do when they plug the historical equity risk premium (ERP) into their discounted cash flow models.

There are good reasons to believe the historical ERP since 1980 is optimistic, as pointed out in the Fama-French research linked above. The effect of real interest rates falling from 10% in 1980 to 0% today significantly boosted the equity premium, in their view — and it's mathematically impossible for that to repeat going forward from today's low rates. Other commentary points out that markets have become more liquid and transparent, and the rule of law has strengthened, so global equities are fundamentally less risky than they were in last half of the twentieth century.
Cordially, Todd

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Re: A Low-Return Future? Are We Prepared?

Post by 1210sda » Mon Sep 01, 2014 2:11 pm

Clearly_Irrational wrote:
siamond wrote:Huh? What does population growth have to do with anything? I don't see the relation with expected returns... More workers and more consumers, sure, but this comes with a heap of other problems... Please explain?
Here's a picture that probably explains it better than I can just using words:

Image
"Clearly", I have a question. How do you get 8% Nominal GDP growth from 3.5% (Real?) Growth rate and 2.5% inflation?? Shouldn't that be 6% Nominal GDP, or am I reading this wrong??

1210

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Re: A Low-Return Future? Are We Prepared?

Post by Toons » Mon Sep 01, 2014 2:16 pm

I am as prepared as I can be,Control what you can,,,saving and investing let the rest go,what will be will be,enjoy :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: A Low-Return Future? Are We Prepared?

Post by Clearly_Irrational » Mon Sep 01, 2014 2:24 pm

1210sda wrote:"Clearly", I have a question. How do you get 8% Nominal GDP growth from 3.5% (Real?) Growth rate and 2.5% inflation?? Shouldn't that be 6% Nominal GDP, or am I reading this wrong??
I think it's just a typo.

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Re: A Low-Return Future? Are We Prepared?

Post by Valuethinker » Mon Sep 01, 2014 3:07 pm

Clearly_Irrational wrote:
1210sda wrote:"Clearly", I have a question. How do you get 8% Nominal GDP growth from 3.5% (Real?) Growth rate and 2.5% inflation?? Shouldn't that be 6% Nominal GDP, or am I reading this wrong??
I think it's just a typo.
Empirically quote earnings growth is about 1% pa less than GDP. The difference is made up by non listed companies (which tend to grow faster: either being at an earlier stage of life, or privately held for long term).

But also the above graph shows no allowance for changes in PE.

It assumes the PE stays the same all the time. When, in fact, we know that PE has oscillated *a lot* over as long as we have data.

We are not starting from the same place we were in 1980. The PE is a *lot* higher (or the price to book, or the dividend yield is lower-- all the same thing, basically (assuming constant payout ratio)).

Remember share buybacks have been a significant part of stock returns since the 1990s-- Andrew Smithers (Smithers and Wright) are very good on this. Management incentivization has led to a culture of buybacks (and LBOs of public companies).

6% is not a bad bet for equity returns going forward (3.5% real). In fact that's probably a return we are lucky if we get. 7% would be an optimistic scenario.

If you have over 30 years until you need the money, the good news is there may well be better times for stocks. The odds favour you on a 30 year view (unless US is the next Japan).

EDIT

Another problem. 3.5% real GDP growth? In whose world? We've not done anything like that since 2000 in US and Europe (nor Japan). Also US population growth rate (which has been 1.0% pa) is likely to do a fairly steep drop: Total Fertility Ratio has fallen (below France, in fact, according to some numbers somone posted here); and immigration is for sure not going to *increase*. TFR might rebound if the US finally has a buoyant economy, but less us not count our chickens.

If the US gets 2.5% next 5 years (average annual), and Europe gets 1.5%, I think we'll count ourselves lucky.

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Re: A Low-Return Future? Are We Prepared?

Post by SimpleGift » Mon Sep 01, 2014 3:10 pm

Just to avoid putting words in the mouths of commentators on the "low return future," I'll let Dimson, Marsh and Staunton speak for themselves, from their April 2013 article in the Financial Times:
Dimson, Marsh and Staunton wrote:While we have now been living with low rates for several years, many investors still seem to be in denial, hoping for a rapid return to “normal” conditions.

But the high equity returns of the second half of the 20th century were not normal; nor were the high bond returns of the past 30 years; and nor was the high real interest rate since 1980. While these periods may have conditioned our expectations, they were exceptional.

The interest rate paid out on cash (represented by Treasury bills) shows the return on an asset that is risk-free. Expected return on equities needs to be higher than this because investors require some compensation for the higher risk. If equity returns are equal to the risk-free rate plus a “risk premium”, it follows that, other things being equal, a low real interest rate world is also a lower-return world for equities.

To investigate whether history bears out this relationship between lower real equity returns and lower real interest rates, we examined 20 countries for which we have a complete 113-year investment history.
Image
Cordially, Todd

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Re: A Low-Return Future? Are We Prepared?

Post by Valuethinker » Mon Sep 01, 2014 3:17 pm

Simplegift wrote:
There are good reasons to believe the historical ERP since 1980 is optimistic, as pointed out in the Fama-French research linked above. The effect of real interest rates falling from 10% in 1980 to 0% today significantly boosted the equity premium, in their view — and it's mathematically impossible for that to repeat going forward from today's low rates. Other commentary points out that markets have become more liquid and transparent, and the rule of law has strengthened, so global equities are fundamentally less risky than they were in last half of the twentieth century.
Governance and financial reporting has gotten better in *some* places (Europe for one). But we are not out of the woods on this one, by any means.

One I think I note in the last 36 months is how much things have gone backwards. Current political situation with Russia is as bad as the Cold War. Iraq and Syria. China and those islands and the pile on with Japan, Taiwan, Phillipines. And then there's Libya.

North Korea one just crosses one's fingers and hope it never breaks out-- but they have missiles and nuclear warheads. When I think about India and Pakistan I keep my head under a pillow.

The political rumblings in Europe are just awful (Hungary!). The National Front is making huge headway in France-- this is an outright fascist political party.

I don't feel equities are less risky than they were in 1987 say. The 'Whig' view of financial history doesn't seem to me to be wholly sustained by recent events. Whilst one can paint an optimistic picture (Nigeria compared to just about any time in the last 30 years) it's not sweetness and light out there.

One difference from 1987. Valuations are a whole heck of a lot higher.

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