Anyone else experiencing number drift

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TheTimeLord
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Anyone else experiencing number drift

Post by TheTimeLord »

After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative. Apparently 2.5% is the new 4%. It has got me thinking I need to bump my original number by 78.57%. I was wondering if BH are experiencing number drift. Anyone increasing their number as a result of so many dire outlooks for returns from equities and bonds? I actually find it a touch disconcerting that even the most prepare in society are feeling under prepared.
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Re: Anyone else experiencing number drift

Post by ryman554 »

TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative. Apparently 2.5% is the new 4%. It has got me thinking I need to bump my original number by 78.57%. I was wondering if BH are experiencing number drift. Anyone increasing their number as a result of so many dire outlooks for returns from equities and bonds? I actually find it a touch disconcerting that even the most prepare in society are feeling under prepared.
Was there never any point in the last 100 or so years that looked like this?

"4%" takes care of historical worst cases. Do you believe that we are worse off now than "anytime" before?

Note that, while returns are down, so is interest rate growth. Focus on the *real* returns and not the *nominal*.....
frugalecon
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Re: Anyone else experiencing number drift

Post by frugalecon »

I adjust my "number" every year to reflect inflation, but as I have gotten closer to retirement and have more visibility on likely future expenses and likely pension income I have concluded that the real number I decided to target about ten years ago is still more or less valid. I had a big fudge factor built in, and I think that I was overly pessimistic about how much I needed, but I may have been overly optimistic about returns. There does seem to be a pretty high likelihood that returns will be modest over the next ten years, but I have always planned on no more than a 3% withdrawal rate.
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nisiprius
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Re: Anyone else experiencing number drift

Post by nisiprius »

Give up on thinking that you can predict your financial future with quantitative accuracy.

Sure, we need to plan, and in order to plan we need to calculate some sort of numbers. The 4% rule isn't totally useless by any means. It tells us that if think we "need" $40,000 a year in year-2016-dollar-value, in addition to Social Security, then for planning purposes we'd better try to save about $1 million. It tells us that $250,000 isn't going to be enough. It tells us that if we already have $2 million, we can relax.

Most important, it tells us that the people who were saying in the 1990s (e.g. Peter Lynch) that you could count on 7% were irresponsible, and that anyone who says today that you can count on 8% is even more irresponsible. Follow their advice and there's a good chance you'll have to adapt to half the income you think you "need." It seems as if the 1990s were the first time people really looked seriously at the problem. Before that people just assumed that if average "historical" rate of return of some portfolio had been X%, then X%/year was what you could withdraw. The discovery that portfolio volatility has the one-sided effect of reducing the safe withdrawal rate, by a lot--that yes, volatility is risk--was an important discovery. The discovery that the safe rate isn't 7-8%, it's 3.5%-4%, was worth making. Now we know, and there isn't much more to say.

The 4% rule never meant that if you have $1 million you could count on getting $40,000.00-a-year-plus-inflation. As the authors of the "Trinity" study wrote, "is not a matter of contract but rather a matter of planning."

It doesn't mean a thing if expert A says the safe rate is only 3.5% and expert B says you can get 4.2% with their dual-slope elastic-bucket pragmatologically-tilted system. It doesn't tell you a number of dollars. It isn't accurate to a tenth of percent. All it means is that if you need $40,000/year and you've got $1 million you will probably be OK. If the pessimistic experts are right you may have to adapt to a lower retirement income, but that was always in the cards anyway. Heck, stuff happens. There's at least a factor of three uncertainty in how long you live; at age 65 it's very possible you'll have less than ten years to live, and very possible you'll have more than thirty years. Within those years, there's at least a factor of two uncertainty in how much you will "need." (Wheelchair ramps and a stairlift?) What good does it do to try to predict the income side with high precision when you have so much uncertainty on the expense side?

The 2.5% number sounds crazy to me. If you can keep up with inflation, and you can just about do that with careful shopping for a high-interest bank account and CDs, then you can spend 1/30th of it every year--and it will keep up with inflation and last 30 years. In other words, a 3.3% safe withdrawal rate. If you can do that with a bank account, it seems crazy to me to say you can't do it with a brokerage account.
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Re: Anyone else experiencing number drift

Post by livesoft »

The OP cannot possibly be serious. If they were serious, they would have used even more decimal places, like 78.57199412%.
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Re: Anyone else experiencing number drift

Post by pkcrafter »

TimeLord, we just got past a "lost decade" (2001-2010) where market returns were 1.4%/year. How did retirees survive this and what adjustments did they make? And don't forget, during that decade we did not actually know we were experiencing a "lost decade." Hint: most didn't make much of an adjustment at all except maybe cut back on discretionary expenses. Also, a well-diversifed portfolio did much better.

Having said that, I do expect another bubble burst that will unwind the indexing phenomenon, but it won't be as severe as the tech bubble.

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TheTimeLord
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Re: Anyone else experiencing number drift

Post by TheTimeLord »

livesoft wrote:The OP cannot possibly be serious. If they were serious, they would have used even more decimal places, like 78.57199412%.
Actual percentage was 78.5714285714286% but I thought listing all the decimal places was overkill.
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Re: Anyone else experiencing number drift

Post by randomguy »

nisiprius wrote:G

Most important, it tells us that the people who were saying in the 1990s (e.g. Peter Lynch) that you could count on 7% were irresponsible, and that anyone who says today that you can count on 8% is even more irresponsible. Follow their advice and there's a good chance you'll have to adapt to half the income you think you "need."
That 7% was pretty accurate. It looks stupid because you compare it to Bergens 4% while ignoring the fact that Peter didn't have an inflation adjustment in his numbers. It is hard to remember how different the early 90s world was investment wise.

And for real fun, if Bergen would have started with a diversified portfolio with international and small caps, the 5% rule (think it was 4.8%) might have become the standard:)
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Re: Anyone else experiencing number drift

Post by grayfox »

TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative. Apparently 2.5% is the new 4%. It has got me thinking I need to bump my original number by 78.57%. I was wondering if BH are experiencing number drift. Anyone increasing their number as a result of so many dire outlooks for returns from equities and bonds? I actually find it a touch disconcerting that even the most prepare in society are feeling under prepared.
:?: Using a Trinity-style X% inflation-adjusted withdrawal method, what is X, i.e. the initial percentage that will deplete the portfolio over the 30 year period 2016-2045? Call it MWR(2016-2035)

:arrow: Answer: MWR(2016-2035) depends on the sequence of annual portfolio returns during the period.

:idea: Implication: Since no one knows what those returns will be, no one knows the value of MWR(2016-2035). It could end up being 4%, 6%, 3%, 2.5%. In 2016, nobody knows. We'll know in 2046.

Now all the experts are not trying to predict the exact MWR, but are just trying to determine the least X could end up, with some high level of confidence, like 95%. Historically, MWR has varied from about 4% to over 10%. The historians, using U.S. data, said 4% worked 100% in history. But then additional research using International data showed it could be lower, or could be higher if included small-cap stocks, and may depend on interest rates and valuations, and now we have the race to the bottom.

But the truth is nobody knows whether you need 20x, 25x, 33x or 40x, just like nobody knows what your portfolio return will be every year in the future,
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Re: Anyone else experiencing number drift

Post by Toons »

Not changing a thing .
I Accept what the market offers.
:happy
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Re: Anyone else experiencing number drift

Post by BigJohn »

TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative. Apparently 2.5% is the new 4%. It has got me thinking I need to bump my original number by 78.57%.
Agree with comments above that 4% was based on surviving worst case scenarios so I think anyone suggesting 2.5% is significantly overreacting. Sure, the next decade might have lower than average returns but at some point mean reversion should take over and you'll get a better than average decade. Based on your past posts I don't think you are planning a subsistence level retirement so you have room to belt tighten as needed to survive until things improve.

Lots of nightmare scenarios can be painted (eg look at Japan for the last 20 years) but none are any more accurate than financial forecasts have always been (ie not very). What is 100% certain is that every year you postpone retirement is one less year you have to enjoy it.
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Re: Anyone else experiencing number drift

Post by Svensk Anga »

One of the things that drove the SWR down to 4% was the way inflation killed real bond returns in the 1970's. They had no TIPS then, so the historical SWR studies could not model inflation indexed bonds. I suspect that a healthy allocation to TIPS/I-bonds could reduce the risk of that problem fouling up your retirement should inflation return. Whether its enough to counteract presumed low equity returns going forward and get back to 4% (+?) is questionable.
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Re: Anyone else experiencing number drift

Post by orca91 »

Step one... Stop doing this...
TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative.
None of this is new. What did obsessing over all this last weekend change that you hadn't thought of a week or a month ago?

Go watch the grass grow or the clouds float by rather than reading dreary threads over and over. :happy
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Re: Anyone else experiencing number drift

Post by 22twain »

nisiprius wrote:It tells us that if we already have $2 million, we can relax.
Except for that guy who was talking about 1.8% in a thread I read here somewhere yesterday. :shock: )
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Re: Anyone else experiencing number drift

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TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative. Apparently 2.5% is the new 4%. It has got me thinking I need to bump my original number by 78.57%. I was wondering if BH are experiencing number drift. Anyone increasing their number as a result of so many dire outlooks for returns from equities and bonds? I actually find it a touch disconcerting that even the most prepare in society are feeling under prepared.
Pretty much, it is a function if interest rates. With lower interest rates and lower future expected returns, the more you have to save in order to meet your number. This not only works in the accumulation phase as you have to save more but also works in the decumulation phase as the percentage amount you can safely withdraw without exhausting the portfolio during your life also decreases.

It wasn't so hard to save 40 years for a 15 year retirement. But with people retiring earlier and living longer, the math of saving 30 years for a 40 year retirement somehow doesn't work out too well.

All the effects discussed above describe exactly why traditional pension plans are in so much trouble. My state has about a $21 Billion deficit for its public employee retirement system. Math is hard as it delivers news we don't want to hear.
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Re: Anyone else experiencing number drift

Post by WhyNotUs »

There are two sides to the ledger. I think reducing current and planned expenses is a better safety net than seeking to save twice as much. We have invested based on 4% return and will adjust our travel budget to reflect reality. We are lucky that we enjoy a both camping trip in the US and a sailing trip on the Med. If things don't grow, then we will see more Natl Parks.
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Re: Anyone else experiencing number drift

Post by randomguy »

22twain wrote:
nisiprius wrote:It tells us that if we already have $2 million, we can relax.
Except for that guy who was talking about 1.8% in a thread I read here somewhere yesterday. :shock: )
Sounds pretty aggressive. Planning on -4% would be prudent:)

Seriously if you are looking at a 30 year retirement, you can get ~3.5% by buying tips. When you stretch the time out you become more dependant on returns versus spending down principle but to get down sub 2% you are looking at 50 years. How do people get low numbers? They pay advisors 1% (i.e. Pfau makes this assumption a lot. Those fees pretty much come right out of your spending) and take on risk (i.e. holding 70% stock) in hopes of growing principle over time. If you are willing to only plan for 30 years (say your 70) and spend down your principle, you can use the TIPs only number.

The other thing is that even if the SWR drops to say 3%, most people will still be fine with 4%. Your odds of being the 1 or 2 cases that fails at the lower rate is still only 5-10% (i.e. you have the misfortune of retiring in 1966 or 1972 in the past 40 years. Maybe 2000). And you know pretty early on if you are in a failure case. The market dropping 20%+ in your first year is a sign that you might need to be more conservative:)
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Re: Anyone else experiencing number drift

Post by vitaflo »

TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative. Apparently 2.5% is the new 4%.
We need to stop with this 2.5% nonsense. SWR shouldn't ever have to go below 3.33% on a 30 year retirement because you can ladder TIPS paying 0% and still have enough money at the end. And 30 year TIPS are paying more than 0% real.
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Re: Anyone else experiencing number drift

Post by friar1610 »

pkcrafter wrote:
Having said that, I do expect another bubble burst that will unwind the indexing phenomenon, but it won't be as severe as the tech bubble.

Paul
Not to hijack the thread, but I'd be interested if you could amplify on the above comment. I don't doubt that there's another bubble down the road but don't get the "...unwind the indexing phenomenon..." angle.

Thank you.
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Re: Anyone else experiencing number drift

Post by randomguy »

vitaflo wrote:
TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative. Apparently 2.5% is the new 4%.
We need to stop with this 2.5% nonsense. SWR shouldn't ever have to go below 3.33% on a 30 year retirement because you can ladder TIPS paying 0% and still have enough money at the end. And 30 year TIPS are paying more than 0% real.

The problem is that to get to that 3.3% number you have to go 100% TIPS. As soon as you make the choice to take a risk of getting a higher number (remember the average SWR is something like 6%), you run the risk of underperforming that 3.3% number. If you invest say 30/70 and don't rebalance, and the stocks go to 0, you SWR drops to 2.3%. If you rebalance it can drop even more. Now in reality, odds are you would get something out of the stocks so getting below 3% takes some work. Now if you keep upping stocks and holding risky bonds (i.e. treasuries:)), you can get those sub 2.5% numbers that people sometimes posts if you make some pessimistic assumptions (i.e. Japan returns globally for the next 20 years).

Or of course if you pay someone 1% to manage your TIP portfolio and your 3.3 drops to 2.3%:)
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Re: Anyone else experiencing number drift

Post by siamond »

TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative.
Don't confuse dire expected returns over the coming decade with expected returns over your entire lifetime. What happened in the past after each severe crisis? Hey, a recovery! This being said, dire returns for the first decade does affect your entire trajectory, but this is certainly not the 'new normal' by any mean. It's funny how people easily get confused on this matter, and yet it only takes a cursory look at past historical returns to get the point.

Bottomline: yes, we'll probably have to sit tight in the next decade, but this doesn't mean that you have to increase your number by 75% or whatever dramatic factor. This might even be a nice opportunity for you to 'buy low' if you keep working during the coming decade.
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Re: Anyone else experiencing number drift

Post by jcar »

Time Lord don't know when you plan to retire. I'm planning on having a physical tomorrow and if I get an all clear give my notice of retirement immediately. I know what you mean about number drift, changing market climates, etc. I just did my best to accumulate as much as possible and always made a real effort to live below my actual means. I intend to definitely withdraw from my accounts about 1% per year and then when we wish to do something special tap the accounts for additional money.along with SS and pensions I will be fine. The path I intend to follow is tap my taxable savings first, followed by deferred, then tax free accounts last. This is Vanguard Flagship advice BTW. One thing I'm doing a bit different is I hold 3 years living expense in a savings account which I intend to tap when markets correct, crash, whatever, that way I'm not selling funds when there way down. Having said that I don't know what future holds but I figure if there is a big bpoow up I will deal with that just!like everyone else. As some other commenters said ignore the noise and make your own common sense decision. Take care.
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Re: Anyone else experiencing number drift

Post by pkcrafter »

friar1610 wrote:
pkcrafter wrote:
Having said that, I do expect another bubble burst that will unwind the indexing phenomenon, but it won't be as severe as the tech bubble.

Paul
Not to hijack the thread, but I'd be interested if you could amplify on the above comment. I don't doubt that there's another bubble down the road but don't get the "...unwind the indexing phenomenon..." angle.

Thank you.
236 Billion into Vanguard in 2015. An all time record. 148 Billion into Vanguard in first half of 2016, another record. Most of the new money went to large cap index funds like the S&P500, total market, and large growth index. This was driven by naive, performance-chasing investors, a.k.a. dumb money. It's also driving momentum. Same thing happened in the tech bubble. Most of these investors are flighty and will get out at the first sign of negative returns.

http://blogs.barrons.com/focusonfunds/2 ... f-of-2016/

I am making no adjustments in my AA.

Paul
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Re: Anyone else experiencing number drift

Post by friar1610 »

pkcrafter,

Thank you.
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Re: Anyone else experiencing number drift

Post by tadamsmar »

pkcrafter wrote:
friar1610 wrote:
pkcrafter wrote:
Having said that, I do expect another bubble burst that will unwind the indexing phenomenon, but it won't be as severe as the tech bubble.

Paul
Not to hijack the thread, but I'd be interested if you could amplify on the above comment. I don't doubt that there's another bubble down the road but don't get the "...unwind the indexing phenomenon..." angle.

Thank you.
236 Billion into Vanguard in 2015. An all time record. 148 Billion into Vanguard in first half of 2016, another record. Most of the new money went to large cap index funds like the S&P500, total market, and large growth index. This was driven by naive, performance-chasing investors, a.k.a. dumb money. It's also driving momentum. Same thing happened in the tech bubble. Most of these investors are flighty and will get out at the first sign of negative returns.

http://blogs.barrons.com/focusonfunds/2 ... f-of-2016/

I am making no adjustments in my AA.

Paul
1. There are bond indexes as well, if investors flee stocks for bonds, then that will boost holdings and price in the bond index, this would not be an unwinding of he indexing phenomenon.

2. If investors are indeed putting money into the total market index as you say, then if they fly from the total market index, that will have an equal impact (on average) on each and every dollar invested in US stocks. It will have no extra impact on dollars invested in the total market index. There is no reason to call this a unwinding of the indexing phenomenon. If anything it's would properly be called an unwinding of the US stock investing phenomenon of late.
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Re: Anyone else experiencing number drift

Post by pkcrafter »

tadamsmar wrote:
pkcrafter wrote:
friar1610 wrote:
pkcrafter wrote:
Having said that, I do expect another bubble burst that will unwind the indexing phenomenon, but it won't be as severe as the tech bubble.

Paul
Not to hijack the thread, but I'd be interested if you could amplify on the above comment. I don't doubt that there's another bubble down the road but don't get the "...unwind the indexing phenomenon..." angle.

Thank you.
236 Billion into Vanguard in 2015. An all time record. 148 Billion into Vanguard in first half of 2016, another record. Most of the new money went to large cap index funds like the S&P500, total market, and large growth index. This was driven by naive, performance-chasing investors, a.k.a. dumb money. It's also driving momentum. Same thing happened in the tech bubble. Most of these investors are flighty and will get out at the first sign of negative returns.

http://blogs.barrons.com/focusonfunds/2 ... f-of-2016/

I am making no adjustments in my AA.

Paul
1. There are bond indexes as well, if investors flee stocks for bonds, then that will boost holdings and price in the bond index, this would not be an unwinding of he indexing phenomenon.

2. If investors are indeed putting money into the total market index as you say, then if they fly from the total market index, that will have an equal impact (on average) on each and every dollar invested in US stocks. It will have no extra impact on dollars invested in the total market index. There is no reason to call this a unwinding of the indexing phenomenon. If anything it's would properly be called an unwinding of the US stock investing phenomenon of late.
If investors leave indexes for active funds or bonds, it will unwind the index love affair.

I believe investors leaving index funds will head toward active stock funds with good recent records. The bond market is a different problem, but it could emerge. If rates are increased, there may be a big flow from overextended stock allocations to bonds not just at Vanguard, but everywhere.

Paul
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Re: Anyone else experiencing number drift

Post by triceratop »

pkcrafter wrote:
tadamsmar wrote:
pkcrafter wrote:
friar1610 wrote:
pkcrafter wrote:
Having said that, I do expect another bubble burst that will unwind the indexing phenomenon, but it won't be as severe as the tech bubble.

Paul
Not to hijack the thread, but I'd be interested if you could amplify on the above comment. I don't doubt that there's another bubble down the road but don't get the "...unwind the indexing phenomenon..." angle.

Thank you.
236 Billion into Vanguard in 2015. An all time record. 148 Billion into Vanguard in first half of 2016, another record. Most of the new money went to large cap index funds like the S&P500, total market, and large growth index. This was driven by naive, performance-chasing investors, a.k.a. dumb money. It's also driving momentum. Same thing happened in the tech bubble. Most of these investors are flighty and will get out at the first sign of negative returns.

http://blogs.barrons.com/focusonfunds/2 ... f-of-2016/

I am making no adjustments in my AA.

Paul
1. There are bond indexes as well, if investors flee stocks for bonds, then that will boost holdings and price in the bond index, this would not be an unwinding of he indexing phenomenon.

2. If investors are indeed putting money into the total market index as you say, then if they fly from the total market index, that will have an equal impact (on average) on each and every dollar invested in US stocks. It will have no extra impact on dollars invested in the total market index. There is no reason to call this a unwinding of the indexing phenomenon. If anything it's would properly be called an unwinding of the US stock investing phenomenon of late.
If investors leave indexes for active funds or bonds, it will unwind the index love affair.

I believe investors leaving index funds will head toward active stock funds with good recent records. The bond market is a different problem, but it could emerge. If rates are increased, there may be a big flow from overextended stock allocations to bonds not just at Vanguard, but everywhere.

Paul
Can you please show your work in how an investor in the Total Stock Market Index Fund is negatively impacted by X% of its investors moving to active funds which invest solely in the U.S. Stock Market?

Let's assume this investor has 100% of his or her investments in a tax-protected account. Let us further assume that at present there are no negative effects of Total Stock Market investors on accurate price discovery, as the doomsday prophesiers in the financial industry currently predict.

Thanks.
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PaFromFL
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Re: Anyone else experiencing number drift

Post by PaFromFL »

The potential is there for extreme number drift. My concern is that we will follow Japan into the deflationary rut. Even with the relatively high savings rate in Japan, some retirees are now shoplifting to get into prison because their pensions and investment earnings are below the cost of living, even with socialized medicine. In the USA, prisons are not an attractive option and the health industry owns Congress. I'm not sure how to hedge against this possible future.
http://fortune.com/2016/03/28/japan-elderly-crime/
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Re: Anyone else experiencing number drift

Post by jabberwockOG »

PaFromFL wrote:The potential is there for extreme number drift. My concern is that we will follow Japan into the deflationary rut. Even with the relatively high savings rate in Japan, some retirees are now shoplifting to get into prison because their pensions and investment earnings are below the cost of living, even with socialized medicine. In the USA, prisons are not an attractive option and the health industry owns Congress. I'm not sure how to hedge against this possible future.
http://fortune.com/2016/03/28/japan-elderly-crime/

No way we follow Japan into deflation primarily due to the huge amount of money the US Fed has created each year since 2008. Also a huge differentiating factor is our growing population in the US due to higher replacement birthrate and significant net positive immigration, as well as our open trade policies (at least currently). For 30 years Japan has successfully curtained government spending significantly reducing deficit spending, severely restricted open international trade, and severely restricted immigration so they have had little to no net positive immigration into Japan despite their rapidly aging population. The result of these moves has been an ongoing 30 year depression for Japan.

The US Fed has been doing a nice job of holding reasonably stable equilibrium in terms of rates and money supply so far but if things go out of whack and they lose control the most likely result of the resultant instability would be several back to back years of moderately high inflation in the US. The herd of course would panic and think the end is nigh but the system would inevitably adjust towards equilibrium ether naturally via business cycle influence or via public policy moves.

Globalization's unavoidable disintermediation impacts on the US economy have been severe but they will subside over time. Latter stage globalization produces labor and capital costs that tend to equalize over time. My prediction is that the US economy will continue to recover and recreate itself and will continue to be robust over time and that smart investors are likely to get average or better returns from the US market over the next 30 years.
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grayfox
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Re: Anyone else experiencing number drift

Post by grayfox »

vitaflo wrote:
TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative. Apparently 2.5% is the new 4%.
We need to stop with this 2.5% nonsense. SWR shouldn't ever have to go below 3.33% on a 30 year retirement because you can ladder TIPS paying 0% and still have enough money at the end. And 30 year TIPS are paying more than 0% real.
There is a spreadsheet created by #Cruncher that builds a TIPS ladder and calculates the cost. You can download it here

#Cruncher updated it on 7/29/2016. The spreadsheet shows that to get $30,000 inflation-adjusted per year, would cost $853,431. This is 3.51%

So there you go. Assuming you bought TIPS at those prices, 3.5% withdrawal rate, guaranteed buy the U.S. Treasury.
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Re: Anyone else experiencing number drift

Post by grayfox »

randomguy wrote:
vitaflo wrote:
TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative. Apparently 2.5% is the new 4%.
We need to stop with this 2.5% nonsense. SWR shouldn't ever have to go below 3.33% on a 30 year retirement because you can ladder TIPS paying 0% and still have enough money at the end. And 30 year TIPS are paying more than 0% real.

The problem is that to get to that 3.3% number you have to go 100% TIPS. As soon as you make the choice to take a risk of getting a higher number (remember the average SWR is something like 6%), you run the risk of underperforming that 3.3% number. If you invest say 30/70 and don't rebalance, and the stocks go to 0, you SWR drops to 2.3%. If you rebalance it can drop even more. Now in reality, odds are you would get something out of the stocks so getting below 3% takes some work. Now if you keep upping stocks and holding risky bonds (i.e. treasuries:)), you can get those sub 2.5% numbers that people sometimes posts if you make some pessimistic assumptions (i.e. Japan returns globally for the next 20 years).

Or of course if you pay someone 1% to manage your TIP portfolio and your 3.3 drops to 2.3%:)
Ah, there's the rub! You only get the government guaranteed 3.5% [see #Cruncher spreadsheet] if you actually fund your 30-year retirement with the TIPS Ladder.

Like you say, if you instead have a portfolio of stock and bond funds, the maximum withdrawal rate (MWR) is a random variable.

Now what is the Expected Value of MWR, E[MWR]. Unfortunately, no one knows the actual probability distribution or its mean or median, but my guess is that it likely is somewhere around the historical average 6-7%, just like Peter Lynch thought. Maybe it has shifted down a little thanks to low interest rates. But if you use 4% or 3%, most of the time you end up with a big pile of money at the end. It's just that 5% left tail that presents the risk.
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Re: Anyone else experiencing number drift

Post by Snowjob »

TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative. Apparently 2.5% is the new 4%. It has got me thinking I need to bump my original number by 78.57%. I was wondering if BH are experiencing number drift. Anyone increasing their number as a result of so many dire outlooks for returns from equities and bonds? I actually find it a touch disconcerting that even the most prepare in society are feeling under prepared.
I don't know if you necessarily need to bump up your number dramatically so much as you may need to increase your savings rate (or extend your time at work) to get the the same number you desire. Said another way, if my number was 1 Million, and I had 500k in the S&P trading at 10x earnings, I am a lot closer to my goal than if that same 500k was at a 20x multiple. I have experienced this particular drift and its not much fun. However, I did participate in a good portion of the multiple expansion. Those who feel cheated either did not participate adequately during the PE expansion or are simply kidding themselves into thinking that there was a commensurate real growth in the intrinsic value of the equity.
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Re: Anyone else experiencing number drift

Post by Ari »

TheTimeLord wrote:After reading over and over again in threads this weekend how returns over the next 10 years will be somewhere between minuscule and negative. Apparently 2.5% is the new 4%. It has got me thinking I need to bump my original number by 78.57%. I was wondering if BH are experiencing number drift. Anyone increasing their number as a result of so many dire outlooks for returns from equities and bonds? I actually find it a touch disconcerting that even the most prepare in society are feeling under prepared.
As I see it, you're in one of three scenarios:

1: You have an internationally diversified portfolio.
In this scenario, you don't need to worry. Valuations aren't that high and expected returns aren't that bad. The failure rate of a 4% WR has historically been low for this sort of portfolio.

2: You have 100% US in your portfolio, and you think the US market is undervalued.
In this scenario, you should be fine, too. The US is undervalued, the market is wrong and you will have excellent returns despite the high valuations. The US will continue to be a top performer and the 4% WR should be safe.

3: You have 100% US in your portfolio, and you think the US market is fairly valued.
In this scenario, you might be in trouble if you insist on avoiding international equities. You have pooled your assets into an economy with high valuations and thus low future return expectations. If the US performs more like the average country did in the last century, the failure rate for 4% WR is around 25%. The "safe" withdrawal rate of 4% isn't very safe at all, unless the US has the top-notch performance it had in the last century. The 4% certainly does NOT include any "worst-case scenarios", but is based on a period of history where the US basically took over the world economy. Fortunately, the problems in this scenario can be easily avoided by diversifying your portfolio into other markets.
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Re: Anyone else experiencing number drift

Post by vitaflo »

randomguy wrote: The problem is that to get to that 3.3% number you have to go 100% TIPS. As soon as you make the choice to take a risk of getting a higher number (remember the average SWR is something like 6%), you run the risk of underperforming that 3.3% number. If you invest say 30/70 and don't rebalance, and the stocks go to 0, you SWR drops to 2.3%. If you rebalance it can drop even more. Now in reality, odds are you would get something out of the stocks so getting below 3% takes some work. Now if you keep upping stocks and holding risky bonds (i.e. treasuries:)), you can get those sub 2.5% numbers that people sometimes posts if you make some pessimistic assumptions (i.e. Japan returns globally for the next 20 years).
This still doesn't mean SWR is less than 3.33%. If it were, you could go from 2.5% to 3.33% SWR with almost zero risk. This makes little sense.
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Re: Anyone else experiencing number drift

Post by HomerJ »

TheTimeLord wrote:Apparently 2.5% is the new 4%.
All the articles stating that 2.5% is the new 4% just makes me think all the "experts" are fools.
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Re: Anyone else experiencing number drift

Post by whodidntante »

We need to get the millennials to believe in the stock market to keep the Ponzi scheme going. It might be tough. They have a clear memory of two major stock market crashes. But in fairness, we only crashed the financial system once, and that probably won't happen again for a while.

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Re: Anyone else experiencing number drift

Post by randomizer »

I do expect some number drift, although I haven't gone so far as to consider 2.5% is the new 4%.

As it is, I am already saving all I can, so I can't really expect to solve this problem by increasing my saving rate; instead I'll just have to reduce my spending rate in retirement.
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Re: Anyone else experiencing number drift

Post by grayfox »

vitaflo wrote:
randomguy wrote: The problem is that to get to that 3.3% number you have to go 100% TIPS. As soon as you make the choice to take a risk of getting a higher number (remember the average SWR is something like 6%), you run the risk of underperforming that 3.3% number. If you invest say 30/70 and don't rebalance, and the stocks go to 0, you SWR drops to 2.3%. If you rebalance it can drop even more. Now in reality, odds are you would get something out of the stocks so getting below 3% takes some work. Now if you keep upping stocks and holding risky bonds (i.e. treasuries:)), you can get those sub 2.5% numbers that people sometimes posts if you make some pessimistic assumptions (i.e. Japan returns globally for the next 20 years).
This still doesn't mean SWR is less than 3.33%. If it were, you could go from 2.5% to 3.33% SWR with almost zero risk. This makes little sense.
I don't think you're looking at it properly.

If you have the TIPS ladder, you have a guaranteed 3.5% withdrawal. Agreed?

If instead you have a 50/50 stock/bond portfolio, there is no guaranteed number, but a distribution of possible outcomes. The expected or median MWR doesn't doesn't go down to 2.5%. It is something higher, maybe 5% or 6%. (Who knows? Historical the average was around 6%.) But the left tail can be lower than the 3.5% guaranteed with TIPS. You are taking a risk for a chance of doing better. The experts who are saying SWR now is 2.5% mean that, thanks to low interest rates and high valuations, the 5%-tile has shifted down from 4% to 2.5%.

In other words, it was believed that 5% of the distribution was below 4%. Now they are saying everything has shifted left and 5% of the distribution is below 2.5%
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Re: Anyone else experiencing number drift

Post by 4nursebee »

The number drift I experience is down, not up.
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Re: Anyone else experiencing number drift

Post by goodenyou »

I believe the sane way to approach a comfortable SWR is to determine what percentage is for essentials. If your subsistence level is 2%, for example, (roof over your head eating rice and beans), then you can modulate your spending accordingly. I don't necessarily subscribe to a SWR as this (to me) is a maximum amount of withdrawal that will likely allow me to outlive my money. My goal is not to die penniless at my last breath nor be one of the richest in the graveyard. I think trying to mathematically predict a SWR that will allow maximum safe withdrawal rate is an interesting but misguided exercise. In my planning, SWR stands for Subsistence Withdrawal Rate.
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Re: Anyone else experiencing number drift

Post by David Jay »

4nursebee wrote:The number drift I experience is down, not up.
Yup. Especially on the first day back at work after the holiday.
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Re: Anyone else experiencing number drift

Post by heyyou »

With 30-40 years of experience at living within your means now, you will do just fine in the future.
There is always a scary worst case and many, many better-than-worst sequences, and you will see the worst case developing, it is not a surprise at the end.

DW and I expect to adapt our WDs to our portfolio values during retirement, and we will compare our annual values against the historical values of the worst periods. Thank you, VPW website for the 1966 retiree values.

Your parents and grandparents survived the Great Depression without the savings and investments that you have now.
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Re: Anyone else experiencing number drift

Post by englishgirl »

4nursebee wrote:The number drift I experience is down, not up.
Me too. I read this thread yesterday, and wondered if I was the only one to experience this. Not only the number is going down, but my planned retirement age is as well. Cutting expenses down and getting a handle on how and when I will spend down each account, along with a better idea of what my social security payment might be have all really helped.

I mean, cutting $20k per year from your expenses means you can drop your number $500k if you're shooting for a 4% initial withdrawal rate. That's a big drop and it wasn't all that hard for me to do.
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TheTimeLord
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Re: Anyone else experiencing number drift

Post by TheTimeLord »

englishgirl wrote:
4nursebee wrote:The number drift I experience is down, not up.
Me too. I read this thread yesterday, and wondered if I was the only one to experience this. Not only the number is going down, but my planned retirement age is as well. Cutting expenses down and getting a handle on how and when I will spend down each account, along with a better idea of what my social security payment might be have all really helped.

I mean, cutting $20k per year from your expenses means you can drop your number $500k if you're shooting for a 4% initial withdrawal rate. That's a big drop and it wasn't all that hard for me to do.

So you have no concern by retiring earlier on less you won't have the money to do the things you enjoy in retirement or to cover the cost of care should you need it in old age? I guess I look at it more like if I work another year that is an extra trip I can take for each of the first 10 or 12 years of my retirement when I expect to be the healthiest and most likely to enjoy the experiences.
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Re: Anyone else experiencing number drift

Post by Devil's Advocate »

Time Lord

Your machinations on the OMY phenomenon is becoming comical. Like Ground Hog Day. I love the fact your work ethic is what it is, but seriously must you make a public display of your angst? (tongue firmly in cheek)


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Re: Anyone else experiencing number drift

Post by The Wizard »

Devil's Advocate wrote:Time Lord

Your machinations on the OMY phenomenon is becoming comical. Like Ground Hog Day. I love the fact your work ethic is what it is, but seriously must you make a public display of your angst? (tongue firmly in cheek)


DA
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Right.
It's interesting looking for his thread of the week with some slight variation from previously.
Just get to $2 million in financial assets and pull the plug.
It'll work out...
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Re: Anyone else experiencing number drift

Post by TheTimeLord »

Devil's Advocate wrote:Time Lord

Your machinations on the OMY phenomenon is becoming comical. Like Ground Hog Day. I love the fact your work ethic is what it is, but seriously must you make a public display of your angst? (tongue firmly in cheek)


DA
8-)
Actually my original post was more a commentary on what I had read here over the Labor Day weekend highlighted by the changes I felt I would need to make to adjust to the scenarios being put forth. But I do find it disconcerting that the most prepared people in the country are feeling so unprepared, but not from a financial angle. :confused As for me I have renounced my membership in the OMY Club. :D I have found it counter productive spending some much mental energy on the topic of when to retire. :annoyed Instead I am just going to keep going until one day something inside says "enough" then go from there. :shock: It is like breaking through the turbulence above the cloud and flying through a clear blue sky. I have said it before and I will say it again spending so much time concentrating on being able to retire at age XX (which I am now past) is the biggest regret I have. Way too much wasted energy for something it turned out I didn't want after all. :oops: Like with most things in life keeping up with the Joneses of early retirement can be as counterproductive as keeping up with their spendthrift counterparts. Just follow your own path. :sharebeer
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Re: Anyone else experiencing number drift

Post by jabberwockOG »

TheTimeLord wrote:
Devil's Advocate wrote:Time Lord

Your machinations on the OMY phenomenon is becoming comical. Like Ground Hog Day. I love the fact your work ethic is what it is, but seriously must you make a public display of your angst? (tongue firmly in cheek)


DA
8-)
Actually my original post was more a commentary on what I had read here over the Labor Day weekend highlighted by the changes I felt I would need to make to adjust to the scenarios being put forth. But I do find it disconcerting that the most prepared people in the country are feeling so unprepared, but not from a financial angle. :confused As for me I have renounced my membership in the OMY Club. :D I have found it counter productive spending some much mental energy on the topic of when to retire. :annoyed Instead I am just going to keep going until one day something inside says "enough" then go from there. :shock: It is like breaking through the turbulence above the cloud and flying through a clear blue sky. I have said it before and I will say it again spending so much time concentrating on being able to retire at age XX (which I am now past) is the biggest regret I have. Way too much wasted energy for something it turned out I didn't want after all. :oops: Like with most things in life keeping up with the Joneses of early retirement can be as counterproductive as keeping up with their spendthrift counterparts. Just follow your own path. :sharebeer
The concepts of "retirement age" and "early retirement" are becoming increasingly non nonsensical. These terms made sense 40 years ago when folks worked one or two jobs for the 40-45 years and then most retired at 65 with some sort of defined pension. The goal for most back then was to quit a job you hated and then putter, engage in hobbies, and baby sit grandkids till you croaked.

These days folks like me reach financial independence and quit working 40 hour weeks for high dollar salary at some professional or corporate job because they can afford to do so and they want the freedom and the time to make alternative choices in the use of their days. At 61 I am still relatively young, vigorous, and very much engaged in our life and our community. Being financially independent with paid off home and cars, no debt, and living in a LCOL area we need very little in terms of income. I may work again either for income or as a volunteer but in "retirement" I will do so only because I clearly enjoy the work and find it meaningful.
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Re: Anyone else experiencing number drift

Post by englishgirl »

TheTimeLord wrote:
englishgirl wrote:
4nursebee wrote:The number drift I experience is down, not up.
Me too. I read this thread yesterday, and wondered if I was the only one to experience this. Not only the number is going down, but my planned retirement age is as well. Cutting expenses down and getting a handle on how and when I will spend down each account, along with a better idea of what my social security payment might be have all really helped.

I mean, cutting $20k per year from your expenses means you can drop your number $500k if you're shooting for a 4% initial withdrawal rate. That's a big drop and it wasn't all that hard for me to do.

So you have no concern by retiring earlier on less you won't have the money to do the things you enjoy in retirement or to cover the cost of care should you need it in old age? I guess I look at it more like if I work another year that is an extra trip I can take for each of the first 10 or 12 years of my retirement when I expect to be the healthiest and most likely to enjoy the experiences.
No. Well, NO concern at all would be too much to say, as one never knows about healthcare expenses, but I have very little concern.

We won't have the cash to do a fancy big luxury vacation three times a year, but I don't want to do that anyway. We want to buy a small RV and go and hike in a bunch of national parks while we still have the knees to do it. And maybe do a vacation abroad every other year, as we do now. As for the cost of care in old age, I look around at my own family and see people getting by. More people I see need a bit of help around the house or getting dressed/into the shower than they need help with skilled nursing. That type of in home nursing aide care is not financially ruinous for most, plus insurance is paying for some. But also, those that need more care aren't going on any vacations, let alone fancy ones, and they aren't going out for dinner or to the theater all the time. So I figure one expense category replaces another. Also, those that need care tend to be living in very small apartments or with family, so some extra cash would come from downsizing the primary residence. People seem to adapt. I expect I and my SO will adapt as well. He especially is able to be super frugal when necessary (way better than me) so we'll figure it out as we go along.

Having said all of that, I may continue to work seasonally for a while after retiring. We have a big influx of people in the winter where I live, so if we come back and work for 4 months during the busy season when the weather is nicer here anyway, and stay part of the working world for a while longer, it won't be a great hardship for me. And will cut the expenses needed from the portfolio plus provide surplus for more luxuries. I am budgeting to retire without working, but some low key work may be nice to keep the mental faculties sharp anyway.
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Re: Anyone else experiencing number drift

Post by 4nursebee »

My number has drifted down based upon
1. An increased desire to own all of my own time.
2. An increased satisfaction with not being the richest couple in Babylon
3. Mostly from an increased understanding of VWR.
4. We have run the numbers perhaps hundreds of times, acting like a ruminant, and have finally digested that we will be ok.
5. Ignoring the news/fear/politics.
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