[Book: Living off Your Money, by M. McClung (Prime Harvesting)]

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siamond
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Re: New Book: Living off Your Money (Michael McClung)

Post by siamond » Mon May 30, 2016 10:50 am

coachz wrote:Has anyone read the book and is able to comment on this please? The free chapters speak of "market invariates" as consistent behaviours or data that DOES predict the LIKELY future. Does the rest of the book go into how these are identified. It seems the whole book is setting to be based on these so it seems critical that these are explained thoroughly.

I'm also suprised taxes get only a mention on page 276 per the table of contents. I expected an entire chapter on it considering the title.
Took me a while to find the quote you were referring to... You meant "market invariants"... I just checked, this precise terminology isn't used anywhere else in the book, I believe the author was essentially making a general comment along the lines of "the future doesn't predict the past, but it will probably rhyme with it" (therefore backtesting has value, when performed with proper care). The book makes a very heavy use of backtesting for sure, in-sample (US) and out-of-sample (UK, Japan). It does discuss valuation metrics at some point (e.g. chapter 9), but with the appropriate big grain of salt, not as strict invariants.

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siamond
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Re: New Book: Living off Your Money (Michael McClung)

Post by siamond » Mon May 30, 2016 10:52 am

sixtyforty wrote:I've looked through the first three chapters and it looks like a very interesting book. My big concern with this book is how the backtesting was done. What data did he use ? How accurate was that data ? Were the programs and data maybe verified by an independent firm ?
The primary data set being used was primarily Shiller, SBBI/Ibbotson and... our own Simba spreadsheet (was cool to see that). For out-of-sample testing, the author used UK returns from Global Financial Data, and Japanese returns (probably same source, not sure). All well-known sources of data.

I do not know if a peer review of sorts was performed (good question), but I actually intend to do so on some themes that picked my interest, at least with the same US data (I don't have access to Global Financial Data). First to truly convince myself (as you're suggesting), and next to analyze the data with other types of metrics, and/or to combine several items in one go (e.g. a given variable withdrawal method with 'prime harvesting', etc).

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Re: New Book: Living off Your Money (Michael McClung)

Post by 4803 » Mon May 30, 2016 12:07 pm

Hello,

First - I have no relation to the author.

Second - I am another person who has registered and became a member to be able to post about the book. I learned about the book here (thanks for posting siamond!), got the free part, and then purchased the pdf.

I find this book to be thought-provoking at a level rarely seen in personal finance books. The third chapter alone, describing numerous income harvesting strategies and evaluating them, was worth the money to me (even though that part of the book is available for a free download). The main value I gained from that part of the book is how to decide when equities reach a point where they should be harvested (when their value, including reinvested dividends, reaches a point that is 20% inflation-adjusted higher than their tarting point).

The forth chapter, describing numerous variable withdrawals strategies, is similar in depth and introduced me to several valuable ideas, including how to decide when one can allow themselves to extract a higher inflation-adjusted income (times turn out to be good), or alternatively, when one has to limit their income ratio (times turn out to be not as good as hoped for).

While the book is solely based on back testing, as people wrote before, several different data sets are used from different countries, and several different ways are used to use the data. I do find the presented evidence to be overall convincing in terms of providing support to the recommended income harvesting approaches.

Regarding the recommended variable withdrawals strategies, they are sensible in being based on life expectancy at their core. They are also very efficient (at least based on the presented evidence). To my taste at this point, they are a bit too complex. It is very possible that to be as efficient in utilizing the portfolio, one has to revert to such complexity. My personal experience shows me that in investing, the simple methods may work better in practice, perhaps because one can better stick with simple rules they understand when the going gets tough.

As an example, I think that for me, it would be better to use the floor-to-ceiling rule (with a not-so-low floor and a not-so-high ceiling), instead of the complexity of the recommended method. Good numbers for that, in my limited view, could be 3%-3.5% for the floor and 5%-5.5% for the ceiling), especially thinking of a low-return world (well described in the book). The book evaluates this method with a floor of 4.5% and a ceiling of 6.25%, which seems a bit too high to offer a fair evaluation of a method that can help cut a lot of the complexity.

The rest of the book conducts detailed investigation regarding several important aspects of a holistic approach. I think they are useful even if one may not chose to adopt their details.

Overall, kudos to Michael McClung on an excellent book!

Best wishes,

:) 4803.

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Re: New Book: Living off Your Money (Michael McClung)

Post by AlohaJoe » Mon May 30, 2016 12:39 pm

siamond wrote:
coachz wrote:Has anyone read the book and is able to comment on this please? The free chapters speak of "market invariates" as consistent behaviours or data that DOES predict the LIKELY future. Does the rest of the book go into how these are identified. It seems the whole book is setting to be based on these so it seems critical that these are explained thoroughly.
Took me a while to find the quote you were referring to... You meant "market invariants"... I just checked, this precise terminology isn't used anywhere else in the book
It's actually on page 7 ("The Past Versus The Future"):
The market exhibits fundamental behavior in the form of real returns. Although real returns vary greatly year to year, they also maintain some forms of consistency across diverse conditions over long time periods. I call these consistent behaviors market invariants. Market invariants have influenced real market returns throughout history. Just as important, there is no reason to believe these invariants will cease to exert their in influence in the future.

Market invariants play a role in financial economics. Fama and French’s three-factor model of the market is based on invariants. Shiller’s valuation work based on price-earnings ratios (i.e., CAPE-10) is also based on invariants. There appears to be consensus that momentum is an invariant.
To answer coachz's question: how are they identified? "General consensus of researchers".

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Re: New Book: Living off Your Money (Michael McClung)

Post by AlohaJoe » Mon May 30, 2016 12:57 pm

sixtyforty wrote:I've looked through the first three chapters and it looks like a very interesting book. My big concern with this book is how the backtesting was done. What data did he use ? How accurate was that data ? Were the programs and data maybe verified by an independent firm ?
On page 6 the author lists one of the four criteria for the recommendations he provides:
All recommendations must be verified using at least one independent data source but preferably several; testing with independent data is the only way to insure correct results, preventing a data-mining bias (which is thoroughly defined later).
There are several examples where a strategy that initially looks promising falters under out-of-sample testing. Figures 30 & 31 show out-of-sample testing and find that Parker's income harvesting strategy does substantially worse, age-based glide paths ("age in bonds") do exceptionally poorly in the UK; annual rebalancing does very poorly with non-US (i.e. out-of-sample) datasets. Blanchett's Mortality Updating Failure Percentage performs less well under out-of-sample testing.

The author comes up with a #1 performing strategy (Delta Prime) and ends up discarding it when out-of-sample testing shows it has some weaknesses.

Overall I feel like this book does a better job with out-of-sample testing than any other work in the area (since most of them don't do any out-of-sample testing, so it is admittedly a pretty low bar :happy )

In private correspondence, the author mentioned to me that he spent time calibrating his programs against public sources (like firecalc and cfiresim). I think asking an independent (and as-yet unsuccessful) author to hire a firm to verify programs is asking a bit much, to be honest. I've also built my own simulations of the Prime Harvesting strategy and my results are broadly in line with his own (I coded my own data and used slightly different datasets and assumptions). I think independent replication is more likely and more meaningful than auditing anyway.

Appendix A lists the datasets used:
  • Ibbotson's SBBI Yearbook (2011)
  • Schiller's dataset
  • Global Financial Data's UK dataset
  • Global Financial Data's Japan dataset
  • Simba's dataset

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Re: New Book: Living off Your Money (Michael McClung)

Post by dcabler » Mon May 30, 2016 6:08 pm

Just finished reading the freebie download of the first 3 chapters. First two chapters are like an extended introduction, but interesting nonetheless. Chapter 3 has some interesting info in it with some of the better-known withdrawal methods. Will probably buy the pdf and start digging into it.

Thinking about "Prime Harvesting", I quickly went back to Simba's spreadsheet and looked at how long it would take various stock asset classes to get to 120% of their initial value after adjusting for inflation, starting in 1972. In general, small caps got there quicker than mid or large caps and value got there faster than blends or growth. The amount of time that bonds were not replenished was pretty extreme in a couple of cases. Will probably dig into Fama-French's data to see if that market cap trends hold for other bear markets. Does make one wonder once again about the current market with low interest rates as well as the current state of stock valuations for a fixed-%-withdrawal-adjusted-for-inflation method. But I do see that Chapter 4 is going to go through variable withdrawal methods, so looking forward to more not-so-light reading! :)

All the best!
Big-Papa

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Re: New Book: Living off Your Money (Michael McClung)

Post by rapporteur » Mon May 30, 2016 10:24 pm

Dear dcabler,

I, too, have only read the first three chapters. (I've ordered and am awaiting the hardcover version; I'll undoubtedly soon have an opportunity to 'complement' it with the more searchable pdf version. I'll feel little guilt from such piracy having already paid for the book once. I, of course, do not recommend my incorrigible ways to others. Think of me as the embodiment of the old adage: No one is completely useless - even the worst can serve as a horrible example. :happy)

One point was unclear with respect to McClung's +20% 'harvesting criterion' - is that (inflation-adjusted) price only, or does it also include reinvested dividends (i.e., total return)? Hopefully, having the whole book will clarify this point.

The 20% harvesting strategy McClung recommends vaguely echoes the opportunistic +20% rebalancing strategy described in Opportunistic Rebalancing: A New Paradigm for Wealth Managers, G. Daryanani, Journal of Financial Planning, 2008-01.
http://www.tdainstitutional.com/pdf/Opp ... yanani.pdf

McClung, however, only skims out from equity to bonds, never the other way.

It is my hope that someone will supplement McClung's 'historical returns' analysis with a forward-looking Monte Carlo analysis based on today's more pessimistic expected returns. His work is promising but needs further exploration.

Regards,

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Re: New Book: Living off Your Money (Michael McClung)

Post by AlohaJoe » Tue May 31, 2016 12:34 am

rapporteur wrote:One point was unclear with respect to McClung's +20% 'harvesting criterion' - is that (inflation-adjusted) price only, or does it also include reinvested dividends (i.e., total return)? Hopefully, having the whole book will clarify this point.
On page 40 under "The Default Parameters and Assumptions" he says
Reinvested dividends—the focus is always on total return throughout this book.
rapporteur wrote:It is my hope that someone will supplement McClung's 'historical returns' analysis with a forward-looking Monte Carlo analysis based on today's more pessimistic expected returns. His work is promising but needs further exploration.
Page 182 has "Considering a Low Return World" has some technical explanation and then says
It is worth restating, the low-return world as described by Dimson et al. is already part of known risk; it’s included in the Baseline Market and as such factored into the backtesting results. (ed: emphasis added)

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Re: New Book: Living off Your Money (Michael McClung)

Post by rapporteur » Tue May 31, 2016 11:02 am

Dear AlohaJoe,

As you point out, McClung does state that:
Reinvested dividends—the focus is always on total return throughout this book.
This suggests - but does not explicitly state - that bond returns include reinvested interest.

Your citations from page 182 are interesting - I look forward to reading those later chapters in detail. (The three chapter preview only goes to page 93.)

McClung's comments on page 33 regarding Monte Carlo methods (and modified Monte Carlo methods: bootstrapping) were decidedly negative and deprecatory. Although he conditionally qualifies it, his statement "...general Monte Carlo simulations are not attractive for estimating retirement risk." seems not just brash but unsupportable. (Well, he doesn't say much to support it in the first 93 pages). Moreover, I am doubtful he can provide a plausible alternative to analyze the forward-looking case - which is really all that anyone other than academics cares about. But if he can provide such an alternative I will be delighted to have my doubts dispelled :-)

Regards,

dcabler
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Re: New Book: Living off Your Money (Michael McClung)

Post by dcabler » Tue May 31, 2016 1:09 pm

I purchased the book and am still skimming through before the deep dive. But I think I saw that he did ultimately run Monte Carlo as well, using bootstrapping. But I think his view of it is similar to Jim Otar's.

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Re: New Book: Living off Your Money (Michael McClung)

Post by PeteyDink » Wed Jun 01, 2016 7:01 pm

To those making colorful comments about the author's retirement plan versus the price of the book, most authors have little to no say on the price of their work. That is determined by the publisher, and is usually much higher for academic grade books such as this, due to the extra formatting and work required for charts, formula, etc.

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Re: New Book: Living off Your Money (Michael McClung)

Post by Kevin M » Wed Jun 01, 2016 8:29 pm

Submitted a purchase request to my local library yesterday, and it was turned down today. That was quick.

Kevin
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Re: New Book: Living off Your Money (Michael McClung)

Post by thx1138 » Wed Jun 01, 2016 11:10 pm

PeteyDink wrote:To those making colorful comments about the author's retirement plan versus the price of the book, most authors have little to no say on the price of their work. That is determined by the publisher, and is usually much higher for academic grade books such as this, due to the extra formatting and work required for charts, formula, etc.
Not to mention those costs being amortized over an expected much smaller printing/distribution than the more "accessible" books.

I also find it amusing that people penny pinch on knowledge, I can't imagine a more apropos example of knowing the price of everything and the value of nothing. (I should emphasize I completely understanding skipping out on books in the interests of keeping things simple or not having interest in the topic, I just don't understand the logic of "other books cost $10 so this one should cost the same").

Inter-library loan is a really good option for some of these books less likely to be purchased by most library systems. Most places I've lived inter-library loan is either free or a nominal fee of just a few dollars. If you are willing to wait a little bit it is an excellent way to avoid spending money on a expensive book you don't need long term for reference.

I've downloaded the free sample chapters and so far like the approach, I'll probably purchase the PDF eventually. Look forward to hearing more discussion on this.

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Re: New Book: Living off Your Money (Michael McClung)

Post by freebeer » Wed Jun 01, 2016 11:26 pm

littlebird wrote:The author is apparently trying to protect himself against loss of income.
Not necessarily... maybe he hasn't heard of price elasticity of demand... the reason few books are $60 (other than mandated textbooks and specialized books needed by professionals) is that this price doesn't maximize income...

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Re: New Book: Living off Your Money (Michael McClung)

Post by coachz » Thu Jun 02, 2016 7:13 am

Kevin M wrote:Submitted a purchase request to my local library yesterday, and it was turned down today. That was quick.

Kevin
But they'll get the latest Kardashian book. For some reason Illiad that requests books has deleted my request twice in the last week. I'm going up the chain to get to the bottom of this. hmm .......going up to get to the bottom......that sounds like me.

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Re: New Book: Living off Your Money (Michael McClung)

Post by Leif » Sat Jun 04, 2016 12:18 am

I must say that even though I still frequently read new personal finance books, and read many posts here, it is really rare that I come away with anything that changes the way I invest. The last time that happened was reading a book from Dr. Bernstein where he does not recommend using bond ETFs since buy/sell spreads can significantly increase when the market is volatile. That is exactly the time you may want to sell for expenses in retirement. That lead me to reduce, and eventually eliminate, the Vanguard ST TIPS fund via ETF (and invest instead via mutual fund).

I've read many posts here on alternative withdrawal strategies during retirement. I was thinking of a fixed asset allocation (50/50) where I would maintain this allocation in retirement by taking withdrawals from either stocks or bonds to rebalance. I also was thinking (not fully decided) that I would not sell bonds to invest in stocks to rebalance. This was difficult for me during 2008-9 (I rebalanced a couple of times then stopped by selling bonds buying equities), so I can only guess how difficult it would be in retirement. I'm always keeping Japan in mind. No one is guaranteeing a quick market rebound to a deep bear market.

Reading chapter 3 in Living off Your Money did open my eyes to alternate ideas. I like the plan suggested since it is relatively simple to implement, and has done very well when compare with other withdrawal methods not only in the US, but in Japan and other places. The revelation to me is instead of a fixed allocation it is suggested to let the asset allocation float, but never buy additional equities once in retirement (allowing for reinvesting Cap Gains and Dividends). For equities you only sell when they are up using a one sided rebalance percentage. And by "up" I don't mean up this year. Up means up compared to the inflation adjusted stock balance at the time of retirement. So up covers multiple years, which I think makes more sense. Also, this method reduces the Japan issue, IMO, by not continuously catching the falling knife as it drops.
Investors should diversify across many asset-classes so that whatever happens, we will not have all our investments in underperforming asset classes and thereby fail to meet our goals-Taylor Larimore

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Re: New Book: Living off Your Money (Michael McClung)

Post by John Z » Sat Jun 04, 2016 7:33 pm

Yes, Chapter 3 made me aware of numerous strategies for withdrawal during retirement, a topic I've been searching for since I retired 4 years ago. Sure, there is plenty of press on constant percentage, constant 4% (or whatever amount you choose) withdrawal, floor and ceiling, etc. But the author presented other strategies I hadn't heard of and used many years of backtesting to achieve his comparison findings. Will the same results hold for the future? No one knows. But I feel more comfortable with making a few changes in my withdrawal strategy including never buying additional equities while in retirement assuming you are comfortable with your AA.

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Prime Harvesting anyone?

Post by buckeye7983 » Sun Jun 05, 2016 1:17 pm

[Thread merged into here, see below (page 3) --admin LadyGeek]

In Chapter 3 of Michael McClung's new book, Living Off Your Money, he describes and analyzing numerous "income harvesting strategies". He makes a persuasive argument for "Prime Harvesting" as described below:

"1. Withdrawals are always funded by bonds, providing a buffer from stock volatility.

2. The bond allocation is based on a percentage of the total portfolio, as opposed to setting aside a fixed number of years of income.

3. Bonds are replenished from stock sells only when the total market is up (i.e., stocks are never sold at a loss if possible).

4. A comprehensive metric is used to identify when the market is up, covering multiple years as opposed to the most recent performance."


Are you convinced enough that you plan on using this method? Why or why not?

Thanks!

P.S.- First three chapters can be downloaded here for free:
http://livingoffyourmoney.com/

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Re: Prime Harvesting anyone?

Post by Sents » Sun Jun 05, 2016 1:25 pm

Yes, I'm convinced enough to basically follow that procedure for my stock/bond portfolio. Ideally one could also have an additional side-stream of income to provide additional financial flexibility and to help weather storms in the market.
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Re: Prime Harvesting anyone?

Post by grabiner » Sun Jun 05, 2016 2:42 pm

Principle 3 has the effect of rebalancing without actually calling it that.

Say you have $600K in stock and $400K in bonds, and you withdraw $40K from bonds. Your allocation changes from 60% to 63% stock.

Now, suppose the stock market drops by 10%. You now have $540K in stock and $360K in bonds, and by not replenishing your bonds, you have gone back to a 60%-stock allocation.

Conversely, suppose that the stock market rises. You now sell stocks for a gain, getting back to your 40% bond target.
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Re: Prime Harvesting anyone?

Post by NMJack » Sun Jun 05, 2016 3:11 pm

buckeye7983 wrote:In Chapter 3 of Michael McClung's new book, Living Off Your Money, he describes and analyzing numerous "income harvesting strategies". He makes a persuasive argument for "Prime Harvesting" as described below:

"1. Withdrawals are always funded by bonds, providing a buffer from stock volatility.

2. The bond allocation is based on a percentage of the total portfolio, as opposed to setting aside a fixed number of years of income.

3. Bonds are replenished from stock sells only when the total market is up (i.e., stocks are never sold at a loss if possible).

4. A comprehensive metric is used to identify when the market is up, covering multiple years as opposed to the most recent performance."


Are you convinced enough that you plan on using this method? Why or why not?
I am not. Taking all four collectively, the only difference between this approach and a normal asset allocation with periodic rebalancing is this crazy concept of "a comprehensive metric used to identify when the market is up." "Up" is a relative term. In traditional AA rebalancing, the market is deemed up when stocks have appreciated relative to the other assets in the portfolio (typically bonds). That is a simple robust approach that serves most/all investors very well. I am curious as to how the author's "comprehensive metric" is calculated and used to define "up."

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Re: Prime Harvesting anyone?

Post by wolf359 » Sun Jun 05, 2016 3:26 pm

buckeye7983 wrote:
4. A comprehensive metric is used to identify when the market is up, covering multiple years as opposed to the most recent performance." [/i]
http://livingoffyourmoney.com/
I don't understand #4. Can you explain what he's doing there? (That's probably the key to this method.)

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Re: Prime Harvesting anyone?

Post by stlutz » Sun Jun 05, 2016 3:46 pm

The "comprehensive" metric of "up" is that that the market is a certain percentage higher (i.e. 20%) than it was at the date you retired. So, had you retired in 2007, you would have rebalanced into stocks on the way down in 08-09, but you would not have rebalanced out of stocks until the market had reached a point 20% higher than it was in 2007--sometime in 2013.

It's simply a way to work around "sequence of return risk" by temporarily increasing one's equity allocation when stocks go down.

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Re: Prime Harvesting anyone?

Post by midareff » Sun Jun 05, 2016 4:00 pm

buckeye7983 wrote:In Chapter 3 of Michael McClung's new book, Living Off Your Money, he describes and analyzing numerous "income harvesting strategies". He makes a persuasive argument for "Prime Harvesting" as described below:

Interesting post buckeye... while some of us may or may not have come to similar conclusions I think we only know for sure in hindsight. There are many strategies, buckets, methods and withdrawal scholars.. many articles and philosophies which may vary by how well funded your retirement is and the WR you need vs. the WR you want.

"1. Withdrawals are always funded by bonds, providing a buffer from stock volatility.
Not exactly..... withdrawals are funded by withdrawals from bond funds, monthly dividends from bond funds and quarterly dividends from stock funds. YMMV, then they become funded by those items and distributions from Roths and RMD's from IRAs.


2. The bond allocation is based on a percentage of the total portfolio, as opposed to setting aside a fixed number of years of income.
If the fixed number of years of WR from bonds = your expected life needs there is nothing wrong with that approach either.

3. Bonds are replenished from stock sells only when the total market is up (i.e., stocks are never sold at a loss if possible).
And in retirement they would be replenished from where else? Yes, stocks are never sold at a loss and that would be for direct pay to bank for needs, not to replenish a bond fund.


4. A comprehensive metric is used to identify when the market is up, covering multiple years as opposed to the most recent performance."

All time highs are all time highs.

Are you convinced enough that you plan on using this method? Why or why not?
Not to be negative but the situation seems a bit simpler than most encounter and certainly does not reflect on alternatives during the lost decade as well as many other methods and situations. How does all of these questions play into the market does a decade of nothing with slowly but steadily increasing interest rates by the Fed depressing bond pricing? What do you do realistically with #3 then?

There are many paths to Dublin, many situations that occur in decades of investing and attempting to boil them sdown to 4 or 5 questions of what if seems a bit overly generalized. There are elements that are OK, and elements that could be operated differently.
P.S.- First three chapters can be downloaded here for free:
http://livingoffyourmoney.com/

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Re: Prime Harvesting anyone?

Post by Dandy » Sun Jun 05, 2016 5:12 pm

2. The bond allocation is based on a percentage of the total portfolio, as opposed to setting aside a fixed number of years of income.


I prefer Dr Bernstein's idea of having 20-25 years worth of drawdown dollars in "Safe" assets as the primary goal of the fixed income portfolio rather than a percentage -- if you can afford to do so. In retirement the overall allocation becomes secondary.

Actually, I modified that to enough years to reach age 90. Withdrawals from the "safe" assets when the rest of your portfolio does poorly, some or all from the rest of your portfolio when the "risk" portfolio does well. Withdrawing from the "safe" portfolio to delay SS until age 70 if you can.

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Re: Prime Harvesting anyone?

Post by siamond » Sun Jun 05, 2016 5:23 pm

I am not in a rush to do it, but this is intriguing enough to consider running some solid backtesting tests with it.

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Re: Prime Harvesting anyone?

Post by rgs92 » Sun Jun 05, 2016 5:46 pm

Anyone who knew definitively that the stock market was "up" could be very rich in a pretty short time with some simple trades.
A "comprehensive metric" = snake oil.
The whole theory depends on this, so it's all pretty darn stupid if you ask me.
(I guess you would have sold off much of your stock portfolio in 1993...)
Last edited by rgs92 on Sun Jun 05, 2016 5:52 pm, edited 1 time in total.

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Re: Prime Harvesting anyone?

Post by NMJack » Sun Jun 05, 2016 5:51 pm

stlutz wrote:So, had you retired in 2007, you would have rebalanced into stocks on the way down in 08-09, but you would not have rebalanced out of stocks until the market had reached a point 20% higher than it was in 2007--sometime in 2013.
I just read through some of the freebie first three chapters of the book. According to what I read, you would not have rebalanced into stocks on the way down. The book states that, other than dividend reinvestment, you never purchase additional stock after retirement begins (page 67).

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Re: Prime Harvesting anyone?

Post by NMJack » Sun Jun 05, 2016 6:01 pm

rgs92 wrote:Anyone who knew definitively that the stock market was "up" could be very rich in a pretty short time with some simple trades.
A "comprehensive metric" = snake oil.
The whole theory depends on this, so it's all pretty darn stupid if you ask me.
(I guess you would have sold off much of your stock portfolio in 1993...)
I initially had the same reaction, but then read the relevant sections of the book. It is actually quite simplistic. The market is defined as "up" at any time that the total value of stocks in the retirement assets exceeds 120% of the value (inflation adjusted) as of day one of retirement. Upon exceeding that threshold, the portfolio is rebalanced to bring stocks back to their initial value. So, if the market is returning 5% after inflation, it takes four years before stocks are sold and bonds are purchased. I suppose one could choose their own number, as the 120% seemed arbitrary (it may be further supported in the book, by I didn't see any such reference). The key characteristics that seem to distinguish this approach from many others are:

a) Other than dividend reinvestments, additional equities are never purchased after retirement begins
c) Stocks are never sold at a loss (first lot sells in 3+ years with 20% gain, next lot sells in another 3+ years with 40% gain, etc.)

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Re: Prime Harvesting anyone?

Post by NMJack » Sun Jun 05, 2016 6:09 pm

The free first three chapters contain some interesting info comparing multiple strategies. I am a strong believer in a Rising Glide Path approach. I was disappointed to see it mentioned, but not included in the back testing data. The author correctly points out that since a RGP approach contains more equities on average, the returns are much better than a simple fixed AA with annual rebalancing. This was also true of most/all of the other approaches compared, but not mentioned within the text. In general (it's just math) all approaches that contained more equities on average had better results. :oops:

I did appreciate the indictment of the classic "age in bonds" approach, and the author's suggestion that it had become somewhat of an "urban myth." Jack Bogle fans may not like the author's other comments on this approach. (page 48)

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Re: Prime Harvesting anyone?

Post by bertilak » Sun Jun 05, 2016 6:28 pm

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Re: Prime Harvesting anyone?

Post by Clive » Sun Jun 05, 2016 6:52 pm

Dandy wrote:
2. The bond allocation is based on a percentage of the total portfolio, as opposed to setting aside a fixed number of years of income.

I prefer Dr Bernstein's idea of having 20-25 years worth of drawdown dollars in "Safe" assets as the primary goal of the fixed income portfolio rather than a percentage -- if you can afford to do so. In retirement the overall allocation becomes secondary.

Actually, I modified that to enough years to reach age 90. Withdrawals from the "safe" assets when the rest of your portfolio does poorly, some or all from the rest of your portfolio when the "risk" portfolio does well. Withdrawing from the "safe" portfolio to delay SS until age 70 if you can.
$1M portfolio, $30K of income/year required from portfolio x 20 years invested in safe inflation pacing = $600K, leaving $400K invested in stock/accumulation (dividends reinvested) and if that achieves a 4.7% annualised real it grows to $1M in inflation adjusted terms after the 20 years. Stable/regular inflation adjusted income 3% SWR (from bonds) for 20 years, risk shifted to longevity/heirs. If stocks 1% real you end 20 years with getting on for $0.5M. 2% real and $0.6M. 3% and $0.7M. 4% and $0.875M. 5% and $1M. 6% and $1.3M. The last two were historically pretty average outcomes.

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Re: Prime Harvesting anyone?

Post by dbr » Sun Jun 05, 2016 7:41 pm

NMJack wrote:
I did appreciate the indictment of the classic "age in bonds" approach, and the author's suggestion that it had become somewhat of an "urban myth." Jack Bogle fans may not like the author's other comments on this approach. (page 48)
I don't think age in bonds was ever contemplated as a specific strategy to optimize withdrawal rate in retirement. It is true that most withdrawal studies would indicate that age in bonds would not be optimum as those studies show that having too little in stocks during withdrawal can be a less optimum approach. The issue only comes to the fore when stocks fall below 30% give or take a bunch and I doubt it is that important for eighty year olds to continue to follow this Bogleism from only 20% stocks down to 10% stocks at age 90 and zero stocks at age 100.

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Re: Prime Harvesting anyone?

Post by coachz » Sun Jun 05, 2016 8:03 pm

Can the author comment here?

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Re: Prime Harvesting anyone?

Post by NMJack » Sun Jun 05, 2016 8:28 pm

coachz wrote:Can the author comment here?
Is the author a member of the forum?

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Re: Prime Harvesting anyone?

Post by grabiner » Sun Jun 05, 2016 8:34 pm

NMJack wrote:
rgs92 wrote:Anyone who knew definitively that the stock market was "up" could be very rich in a pretty short time with some simple trades.
A "comprehensive metric" = snake oil.
The whole theory depends on this, so it's all pretty darn stupid if you ask me.
(I guess you would have sold off much of your stock portfolio in 1993...)
I initially had the same reaction, but then read the relevant sections of the book. It is actually quite simplistic. The market is defined as "up" at any time that the total value of stocks in the retirement assets exceeds 120% of the value (inflation adjusted) as of day one of retirement. Upon exceeding that threshold, the portfolio is rebalanced to bring stocks back to their initial value.
If you retired in 1966, this would never happen. The stock market didn't keep up with inflation from 1966-1982, and you probably didn't have enough bonds to last seventeen years without touching the stock. If you spent the stock dividends, this would further reduce the value of the stocks. At some point, you would have an all-stock portfolio.

The strategy also doesn't make financial sense. If you and I have similar retirement needs and current assets, we should have the same allocation. But given the rule above, if you started retirement earlier than I did, the rule might say that you should sell stocks while I should keep my stock allocation; the fact that the stock market is "up" since you retired and "down" since I retired has no effect on our future needs.
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Re: Prime Harvesting anyone?

Post by siamond » Sun Jun 05, 2016 10:24 pm

NMJack wrote:
coachz wrote:Can the author comment here?
Is the author a member of the forum?
Yes, his user name is 'mmcc', but I believe he was asked to not directly discuss his book as this could be construed as 'business solicitation' (which is against forum policy) or something like that. Not clear to me if this would extend to a thread like this one.

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Re: Prime Harvesting anyone?

Post by castlemodesto » Sun Jun 05, 2016 11:31 pm

I found this to be a quite reasonable approach for someone in retirement. It is a more conservative, safer approach than traditional re-balancing. One may miss out on a "volatility bonus", but why play that risk game when you are retired, unless you need to. This may not be a good approach in the accumulation stage when the "volatility bonus" has a good chance of being ones friend. But in retirement ( which is the sole focus of the book) if there is a safer way to handle ones funds, and, as a bonus, would have had historically very good performances ( but of course history is no guarantee) , then I am all ears.
PS I wish posters would actually read carefully source material before posting. Many of the preceding posts show that many posters have not done so. I love this forum, but that is one thing that I find really ,really annoying. To me it shows disrespect for forum members.

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Re: Prime Harvesting anyone?

Post by AlohaJoe » Mon Jun 06, 2016 5:55 am

I'm not the author but I've read the book, which is apparently more than most of the replies. :shock:
grabiner wrote:Principle 3 has the effect of rebalancing without actually calling it that.
Principle 3 behaves nothing like rebalancing. This is what happens with a retiree in 1978 who uses Prime Harvesting. This is the stock percentage each year after "harvesting":

Image

Not many would call that "rebalancing". The strategy harvests 20% of the stock raise and pays no attention to what your previous or starting allocation was. There is no "bond target".
NMJack wrote:Taking all four collectively, the only difference between this approach and a normal asset allocation with periodic rebalancing is this crazy concept of "a comprehensive metric used to identify when the market is up."
As my chart shows, it is dramatically different that periodic rebalancing.
NMJack wrote:I am curious as to how the author's "comprehensive metric" is calculated and used to define "up."
I don't think you understand how the strategy works.
midareff wrote:Not exactly..... withdrawals are funded by withdrawals from bond funds, monthly dividends from bond funds and quarterly dividends from stock funds. YMMV, then they become funded by those items and distributions from Roths and RMD's from IRAs.
The author clearly stated that dividends are reinvested. I'm not sure why you are claiming he said otherwise.
midareff wrote: If the fixed number of years of WR from bonds = your expected life needs there is nothing wrong with that approach either.
The author spends a fair amount of time explaining why fixed number of years in suboptimal and percentage based is better.
rgs92 wrote:Anyone who knew definitively that the stock market was "up" could be very rich in a pretty short time with some simple trades.
It is pretty easy to see if the market is up. Just look at your portfolio balance. It is how the IRS determines capital gains. Vanguard has a chart showing it to me when I login. Another knee-jerk reaction without bothering to read the source, makes it hard to understand how you thought this was helpful to the OP who was clearly looking for informed opinions.
Last edited by AlohaJoe on Mon Jun 06, 2016 6:47 am, edited 3 times in total.

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Re: Prime Harvesting anyone?

Post by dcabler » Mon Jun 06, 2016 6:03 am

I read the first 3 chapters and was intrigued enough to shell out the $50 for the pdf version. I'm in the process of coding up a backtest of my own but I can already see that a late 1960's retirement start would deplete the bond portion of the portfolio before stocks reached 1.2x of their initial value, after inflation. Now the algorithm does allow for withdrawal from stocks if bonds are depleted, but either a lower withdrawal rate and/or a more bond-heavy portfolio would help prevent that from happening. If TIPs had existed during that time, I suspect they'd also stretch out the time the bond portion would last.

Later in the book the author mentions that he chose 120% because it seemed to work across a number of market conditions. He mentions one could choose a smaller number like 100% or 110% with a little performance degradation.

Yes, in once sense this sort of looks like a rebalancing strategy with a +20% inflation adjusted band, as opposed to a +/- band. In another sense, this looks to me like a bucket approach: It looks like a 2 bucket approach where withdrawals happen from bucket #1 and there is a a specific rule for replenishing bucket #1 from bucket #2.

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Re: Prime Harvesting anyone?

Post by AlohaJoe » Mon Jun 06, 2016 6:09 am

grabiner wrote:The strategy also doesn't make financial sense. If you and I have similar retirement needs and current assets, we should have the same allocation. But given the rule above, if you started retirement earlier than I did, the rule might say that you should sell stocks while I should keep my stock allocation; the fact that the stock market is "up" since you retired and "down" since I retired has no effect on our future needs.
The strategy reacts to the market. It is fine to say you think that is a bad approach that will lead to suboptimal results but I don't think it can be characterised as not making financial sense. Yes, it has no effect on your future needs but it has an effect on your need to take risk, which has gone down for one retiree but not the other.

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Re: Prime Harvesting anyone?

Post by coachz » Mon Jun 06, 2016 6:29 am

I was ready to buy the book but realized pretty quickly that I am not smart enough to know if the strategies make sense or not. I hope this thread can stress test the ideas presented in the book so we can see if there is merit in these techniques. Thanks for the hard work guys ! :sharebeer

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Re: Prime Harvesting anyone?

Post by zzcooper123 » Mon Jun 06, 2016 6:44 am

My portfolio draw down is more influenced by taxes than anything else. I use the Larry portfolio with a rising equity glidepath. Much of the Prime Harvesting method appears to be momentum play i.e. "don't sell your stocks too early."

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Re: Prime Harvesting anyone?

Post by midareff » Mon Jun 06, 2016 6:59 am

AlohaJoe wrote:I'm not the author but I've read the book, which is apparently more than most of the replies. :shock:

midareff wrote:Not exactly..... withdrawals are funded by withdrawals from bond funds, monthly dividends from bond funds and quarterly dividends from stock funds. YMMV, then they become funded by those items and distributions from Roths and RMD's from IRAs.
The author clearly stated that dividends are reinvested. I'm not sure why you are claiming he said otherwise.

I'm not claiming he said anything, I'm talking about my own situation. If he prefers to reinvest dividends, which he has to pay tax on anyways, to then have small lots to record when he sells them at a gain or loss to buy more bonds, that's his prerogative.
midareff wrote: If the fixed number of years of WR from bonds = your expected life needs there is nothing wrong with that approach either.
The author spends a fair amount of time explaining why fixed number of years in suboptimal and percentage based is better.

Perhaps he should explain it to Dr. Bernstein (who happens to be a supporter of liability matching) why he is wrong.

It seemed to me the OP asked for comments and I provided some of mine. There are lots of guru's out there and they don't think and write like carbon copies. Some will be "righter" or "wronger" depending on the situation of the individual. From the items laid out by the OP of Michael McClung's writings I'm not signing up and don't feel compelled to read his book to have an opinion on the points the OP laid out. Having read Bogle, Bogleheads, Bernstein, Browne, Easterling, Edleson, Evensky & Katz, Dreman, Ellis, Ferri, Graham, Lynch, Malkiel, O'Shaughnessy, Otar, Sheard, Solin, Swedroe and Swensen, among quite a few others I think I have a reasonably sound background to have an opinion of bullet points without reading the book they came from. You opinion may differ and you are welcome to it. :)
O
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Re: Prime Harvesting anyone?

Post by coachz » Mon Jun 06, 2016 7:06 am

zzcooper123 wrote:My portfolio draw down is more influenced by taxes than anything else. I use the Larry portfolio with a rising equity glidepath. Much of the Prime Harvesting method appears to be momentum play i.e. "don't sell your stocks too early."
Larry ?

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Re: Prime Harvesting anyone?

Post by plannerman » Mon Jun 06, 2016 7:47 am

The first question you need to ask yourself is if maximizing portfolio withdrawals in retirement the right strategy for you. It seems to me that this strategy is most appropriate for those who are just on the edge having "enough" financial assets to retire on. Those that have more than "enough" are probably more interested in minimizing traditional portfolio risk or perhaps investing for future generations. Those that don't have enough, need to work longer or spend less.

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Re: Prime Harvesting anyone?

Post by AlohaJoe » Mon Jun 06, 2016 8:21 am

buckeye7983 wrote:Are you convinced enough that you plan on using this method? Why or why not?
I thought the author provided a compelling case that Prime Harvesting, to mis-quote Churchill, is the worst form of harvesting, except for all the others. He shows why alternatives do poorly and makes common sense adjustments to address them. He provides more evidence than alternatives do. Overall, it is really a codification of what many people are trying to do anyway (witness the number of people out there with large cash cushions) but based on actual research instead of gut feel and random numbers. Prime Harvesting isn't really an invention so much as a hippogriff of the best parts of other people's research. IMHO, the strongest arguments against it are methodological and risk-based.

His entire approach is based on back-testing and he often shows how other strategies look fine under one backtest but perform less good out-of-band. He does a much better job than most of trying to explore this but...well, the financial rubbish pile is full of great-looking backtested ideas that didn't pan out. Of course, in and of itself, that isn't a great argument for just sticking with the status quo either....

He also doesn't do a great job of measuring and evaluating risk but partly that's because I think he believes the standard definitions of risk are misguided for retirees. On page 21 he says
In retirement, it's best to put aside discussions on what might happen to portfolio value. It's not the loss of portfolio value retirees should care about; it's the loss of retirement income.
I happen to agree with that, but it puts him squarely at odds with many who fear low bond percentages and exposure to subsequent volatility. I think he could have done a better job addressing that, especially in the context of Prime Harvesting where the bond percentage can fluctuate so wildly.

One problem with all of these kind of monte carlo and backtesting investigations is that the averages can hide things. For instance, Prime Harvesting with a 4.0% constant withdrawal rate and 60% stock allocation will, on average drop down to 23.70%. But that's across dozens of different scenarios. Unfortunately books (and research papers) are space-constrained and can't show every slice and dice dataset. How many of those scenarios results in bonds dropping to 0%? Or 10%? How many of them had a 70-year old retiree at 10% bonds? Or an 80-year old retiree at 5% bonds? Yes, portfolio value shouldn't matter to a retiree but we all look anyway and worry about it. So what happens to future portfolio values for that 80-year retiree who ended up with 5% bonds? What happens if that is us except instead of being rewarded with the go-go 1980s we end up in a Japan-like slump?

Those are the kinds of worry-wart horrors the kind of person who frequents Bogleheads and reads this kind of research all too often worries about. That's why Bernstein's Liability Matching Portfolio is so popular around here even though it means you have to work over a decade longer than less conservative approaches.

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Re: Prime Harvesting anyone?

Post by coachz » Mon Jun 06, 2016 8:41 am

Bonus points for "hippogriff" ! :mrgreen:

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Re: Prime Harvesting anyone?

Post by midareff » Mon Jun 06, 2016 8:47 am

AlohaJoe wrote:

Those are the kinds of worry-wart horrors the kind of person who frequents Bogleheads and reads this kind of research all too often worries about. That's why Bernstein's Liability Matching Portfolio is so popular around here even though it means you have to work over a decade longer than less conservative approaches.
Interesting Joe but one size never fits all. I retired a few years before FRA because I could. My change to a "Bernstein's Liability Matching Portfolio" was due to the ultimate courtesy of a raging bull which enabled me to dial the risk to virtually off, more recently. I find your assumption that Bernstein's portfolio to require an additional decade plus of work to be singularly unique, and apparently unsupported elsewhere.

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Re: Prime Harvesting anyone?

Post by NMJack » Mon Jun 06, 2016 11:00 am

AlohaJoe wrote:
buckeye7983 wrote:Are you convinced enough that you plan on using this method? Why or why not?
I thought the author provided a compelling case that Prime Harvesting, to mis-quote Churchill, is the worst form of harvesting, except for all the others. He shows why alternatives do poorly and makes common sense adjustments to address them. He provides more evidence than alternatives do.
As I pointed out earlier, despite providing interesting back testing comparisons for many other approaches, the author did not provide the same for a rising equity glide path approach. Until I see convincing evidence to the contrary, it is highly unlikely that I will consider using any other method.

I think there is an emotional element to the prime harvesting approach that will have appeal to many (never buy more stocks once I quit working, never sell stocks unless I've made at least 20% profit, etc.) For those of us who held tight and continued to DCA from 1998 to today, we sure wouldn't want to go back and forfeit all of those great deals when stocks were selling at 50% off retail. 8-)

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