willthrill81 wrote: ↑
Mon Aug 13, 2018 6:26 pm
CraigTester wrote: ↑
Mon Aug 13, 2018 12:29 pm
For those who don't believe valuation matters, I suppose this excellent article can just be discarded.
But for those who are a little bit more philosophical about how recency bias from this 10 year bull market might cloud ones thinking, the chart comparing SWR vs CAEP, is outstanding.
CAEP = about 3% today.
This suggests anyone starting their 30 year run today, is going to be flirting with being a "least common denominator", if they stay the course.
Thank you for posting....
I'm a 'valuation skeptic', but I would never say that "valuation doesn't matter." I certainly believe that they do. But valuations are (1) not reliably mean reverting, which virtually no one can empirically argue against, and (2) valuations have appeared to have, at best, only a moderate relationship with subsequent ~10 year returns (accounting for about 40% of the variation, leaving the other 60% 'unexplained'). In the context that Kitces is referring to, I think that valuations may have enough relevance to be actionable on the part of the individual investor. But if you note his research into historic valuations and subsequent SWRs, you'll note that he never found that valuations cast doubt on the '4% rule of thumb' for withdrawals. Even during periods of historically high valuations, 4% withdrawals always worked for 30 year retirements. If valuations were low, then the SWR went up significantly. But I doubt that anyone
here would say "CAPE is at 10! I can have 6% withdrawals for the next 30 years without ever checking up on my portfolio's performance!"
So the moral of the story seems to be the same old shtick: 25x annual expenses is a safe, though not guaranteed, target portfolio size for retirees with a 30 year horizon.
William Bengen (who did much of the work to coin the 4% rule we hear about today) really did nothing more than a "least common denominator" analysis.
In other words, based on all the retirement start dates available within his data range, he simply wanted to know who ran out of money first -- for a given withdrawal rate.
The unlucky winner happened to be the guy that retired in 1966.
The "4% rule" evolved from here to state that, as long as your not more unlucky than the 1966 guy, you'll be fine....
Understanding this, it really shouldn't be a surprise at all that Kitces analysis doesn't cast any doubt on the 4% rule. That was not really the point.
Instead, what Kitces is revealing for us is some pretty interesting data on where starting valuations happened to be when past retirees started their 30 year clock.
And what's interesting to note is that the same poor 1966 retiree who failed first, happened to also start his retirement at a moment when valuations were quite high.
He then goes on in his chart to plot where valuations were when all our historical retirees each began their 30 year run.
And the fascinating (though arguably intuitive) take-away is that Valuation matters.
In other words, if you start your 30 year retirement when valuations are high, you don't tend to have near as cushy of a ride as those who start their retirement when valuations are less stretched.
Again, if you choose to not believe that valuation matters, you can just ignore all of this historical "coincidence".
But for those willing to look at the empirical results, its extremely clear that valuation is the single biggest determinant of your future returns.
And as Kitces charts show, this simple truth extends to SWR's as well....