2000-2018 retirement - sequence of returns

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HomerJ
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2000-2018 retirement - sequence of returns

Post by HomerJ » Fri Aug 24, 2018 12:28 pm

I'm surprised I haven't seen an article on this before. For fun today, I was playing around with Excel and morningstar.com to look at year-to-year returns. (I use morningstar because it includes dividends)

Over the last 18 years, Total Bond Market has returned about 4.5% nominal.
Over the last 18 years, Total Stock Market has returned about 6.2% nominal

So you'd think someone retiring with more in stocks would have done better.

But sequence of returns really matter. Looking at 2000-2018, bonds did really well at the beginning of that period (and in the middle during 2008-2009 as well). Bonds have been lackluster this past few years.

Stocks did basically the opposite.. Lost in 2000-2002 of course, and then again in 2007-2009, but have done amazing these past 9 years. But amazing at the end of a time period is not what you want.

Here's 100% Total Stock Market Index portfolio

Someone who retired in August 2000 with $1 million, taking out 4%, increasing the withdrawal by 2% a year (for inflation) saw these balances.

Code: Select all

Year	        Beg Value	Spend	 Gain	End Value
Aug 2000	$1 million	$40,000	-0.225	$744,000
Aug 2001	$744,000	$40,800	-0.164	$587,875
Aug 2002	$587,875	$41,616	0.099	$600,339
Aug 2003	$600,339	$42,448	0.112	$620,374
Aug 2004	$620,374	$43,297	0.115	$643,441
Aug 2005	$643,441	$44,163	0.081	$647,819
Aug 2006	$647,819	$45,046	0.115	$672,091
Aug 2007	$672,091	$45,947	-0.087	$571,669
Aug 2008	$571,669	$46,866	-0.181	$429,814
Aug 2009	$429,814	$47,804	0.067	$407,605
Aug 2010	$407,605	$48,760	0.118	$401,189
Aug 2011	$401,189	$49,735	0.227	$431,234
Aug 2012	$431,234	$50,730	0.230	$468,020
Aug 2013	$468,020	$51,744	0.213	$504,942
Aug 2014	$504,942	$52,779	0.010	$456,685
Aug 2015	$456,685	$53,835	0.112	$447,969
Aug 2016	$447,969	$54,911	0.136	$446,514
Aug 2017	$446,514	$56,010	0.200	$468,605
Aug 2018	$468,605			
That is ugly.. Two years in, your million is less than $600,000, it slowly starts gaining, and then in August 2008, another crash, and you're down to $400,000. The only reason you're not broke is that most of the last nine years have been really good, and yet even after that you're barely gaining.

That is a stressful retirement. Another crash (or even a flat market) at this point will sink you. You're pulling $57,000 a year from your $468,000 portfolio. You need 12% returns going forward just to break even.

Now check out a 100% Total Bond Market Index portfolio

Code: Select all

Year  Beg Value	         Spend      Gain	 End Value
Aug 2000	$1,000,000	$40,000	0.123	$1,078,080
Aug 2001	$1,078,080	$40,800	0.059	$1,098,480
Aug 2002	$1,098,480	$41,616	0.044	$1,103,366
Aug 2003	$1,103,366	$42,448	0.056	$1,120,329
Aug 2004	$1,120,329	$43,297	0.041	$1,121,190
Aug 2005	$1,121,190	$44,163	0.019	$1,097,490
Aug 2006	$1,097,490	$45,046	0.054	$1,109,275
Aug 2007	$1,109,275	$45,947	0.057	$1,123,938
Aug 2008	$1,123,938	$46,866	0.076	$1,158,929
Aug 2009	$1,158,929	$47,804	0.097	$1,218,904
Aug 2010	$1,218,904	$48,760	0.049	$1,227,481
Aug 2011	$1,227,481	$49,735	0.051	$1,237,811
Aug 2012	$1,237,811	$50,730	-0.025	$1,157,405
Aug 2013	$1,157,405	$51,744	0.055	$1,166,472
Aug 2014	$1,166,472	$52,779	0.025	$1,141,535
Aug 2015	$1,141,535	$53,835	0.053	$1,145,348
Aug 2016	$1,145,348	$54,911	0.000	$1,090,437
Aug 2017	$1,090,437	$56,010	0.008	$1,042,703
Aug 2018	$1,042,703			
Now, again, this was a very good period for bonds, and not likely to be repeated going forward from today's low interest rates. But, man, what a difference. You never dropped below $1 million, and you still have $1,042,703 today. Bonds only had one negative year in there.

Here's a 50/50 stocks/bonds portfolio

Code: Select all

Year          Beg Value	       Spend	Gain	 End Value
Aug 2000	$1 million	$40,000	-0.051	$911,040
Aug 2001	$911,040	$40,800	-0.053	$824,552
Aug 2002	$824,552	$41,616	0.072	$838,916
Aug 2003	$838,916	$42,448	0.084	$863,371
Aug 2004	$863,371	$43,297	0.078	$884,040
Aug 2005	$884,040	$44,163	0.050	$881,870
Aug 2006	$881,870	$45,046	0.085	$907,536
Aug 2007	$907,536	$45,947	-0.015	$848,664
Aug 2008	$848,664	$46,866	-0.053	$759,704
Aug 2009	$759,704	$47,804	0.082	$770,276
Aug 2010	$770,276	$48,760	0.084	$781,762
Aug 2011	$781,762	$49,735	0.139	$833,779
Aug 2012	$833,779	$50,730	0.103	$863,312
Aug 2013	$863,312	$51,744	0.134	$920,318
Aug 2014	$920,318	$52,779	0.018	$882,721
Aug 2015	$882,721	$53,835	0.083	$897,269
Aug 2016	$897,269	$54,911	0.068	$899,638
Aug 2017	$899,638	$56,010	0.104	$931,366
Aug 2018	$931,366			
This one is much more tolerable to live through than the 100% stocks portfolio.

Edit: This one assumes rebalancing back to 50/50 every year.

But since one cannot count on bonds doing as well going forward, I wouldn't recommend 100% bonds.

50/50 seems like a good balance for retirement.

I certainly wouldn't pick 100% stocks if I was going into retirement tomorrow with a 4% withdrawal plan. 100% stocks failed in 1929, and it doesn't look good for 2000 retirees either.
Last edited by HomerJ on Fri Aug 24, 2018 1:38 pm, edited 3 times in total.
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HomerJ
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Re: 2000-2018 retirement - sequence of returns

Post by HomerJ » Fri Aug 24, 2018 12:32 pm

I should also point out I was going August to August (because I only felt like changing the years and not dates in morningstar graphs).

Interesting how it mutes the 2009 bottom. August 2008 to August 2009 only saw a 18% drop. So the bottom numbers of a 100% stock portfolio in March 2009 were even lower.

Dipping into the low $300,000s nine years into retirement when starting with a $1 million would give me a heart attack.
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rgs92
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Re: 2000-2018 retirement - sequence of returns

Post by rgs92 » Fri Aug 24, 2018 12:34 pm

Great post HomerJ. That's why I think a mix of SPIAs and a balanced portfolio is best.
I need to sleep at night knowing I have a foundation of some sort of income that won't let the bottom fall out.
The SPIAs don't have to cover all needed income, but enough so that if the portfolio starts to sink a lot I can have faith that it's temporary.

Could you do a 60/40 version of your charts? Was it that much more volatile than the 50/50? Thanks in advance.

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Re: 2000-2018 retirement - sequence of returns

Post by grok87 » Fri Aug 24, 2018 12:37 pm

Thanks
Keep calm and Boglehead on. KCBO.

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Re: 2000-2018 retirement - sequence of returns

Post by BogleMelon » Fri Aug 24, 2018 12:39 pm

Thanks for posting this. After reading your post and analysis, I went to check my IPS and found that my plan states that once I hit 17X my annual spending in retirement savings, my AA will be 50-50. Till then it will be gradually increasing towards bonds as I am currently 85-15. By the time I hit the 25X it should be 40-60.
I always wondered if this is a good plan, or too conservative, but your post helped me seeing that I have a good enough plan. At least for now :sharebeer
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

btenny
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Re: 2000-2018 retirement - sequence of returns

Post by btenny » Fri Aug 24, 2018 12:42 pm

I am curious what a 30/70 and 40/60 stock/bond portfolios would do during the same period? Could you add those to your calculations?

PS. I retired at year end 1998 and have my portfolio results for the above time period and my 50/50 returns were not that poor. But early on I was not that attentive in tracking my asset allocation and performance.

BogleMelon
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Re: 2000-2018 retirement - sequence of returns

Post by BogleMelon » Fri Aug 24, 2018 12:43 pm

HomerJ wrote:
Fri Aug 24, 2018 12:28 pm

Here's a 50/50 stocks/bonds portfolio

Does this include any rebalancing of any kind (rebalancing by withdrawing more bonds than stocks during the crash years for example)?
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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Leif
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Re: 2000-2018 retirement - sequence of returns

Post by Leif » Fri Aug 24, 2018 12:48 pm

For the 50/50 are you taking the spend from bonds, or an equal dollar amount from each class, or a % from each class based on class size?
Last edited by Leif on Fri Aug 24, 2018 12:50 pm, edited 1 time in total.

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HomerJ
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Re: 2000-2018 retirement - sequence of returns

Post by HomerJ » Fri Aug 24, 2018 12:49 pm

BogleMelon wrote:
Fri Aug 24, 2018 12:43 pm
HomerJ wrote:
Fri Aug 24, 2018 12:28 pm

Here's a 50/50 stocks/bonds portfolio

Does this include any rebalancing of any kind (rebalancing by withdrawing more bonds than stocks during the crash years for example)?
No rebalancing in those numbers (only possible in the third 50/50 portfolio). And yes, I think pulling money from the asset that is doing best each year would help the numbers in the 50/50 portfolio.

Edit: I was wrong here. The 50/50 portfolio is rebalanced each year in this scenario.
Last edited by HomerJ on Fri Aug 24, 2018 1:40 pm, edited 1 time in total.
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HomerJ
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Re: 2000-2018 retirement - sequence of returns

Post by HomerJ » Fri Aug 24, 2018 12:50 pm

Leif wrote:
Fri Aug 24, 2018 12:48 pm
For the 50/50 are you taking the spend from bonds, or an equal dollar amount from each class, or a % from each class?
Equal from each class. You're correct that if one pulled from the better performing asset, it would change the numbers and probably make the 50/50 portfolio look better.
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Leif
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Re: 2000-2018 retirement - sequence of returns

Post by Leif » Fri Aug 24, 2018 12:53 pm

HomerJ wrote:
Fri Aug 24, 2018 12:50 pm
Leif wrote:
Fri Aug 24, 2018 12:48 pm
For the 50/50 are you taking the spend from bonds, or an equal dollar amount from each class, or a % from each class?
Equal from each class. You're correct that if one pulled from the better performing asset, it would change the numbers and probably make the 50/50 portfolio look better.
It would certainly give equities a chance to recover.

ignition
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Re: 2000-2018 retirement - sequence of returns

Post by ignition » Fri Aug 24, 2018 12:54 pm

You can use cFiresim to do a similar analysis.

It seems 100% stocks would have worked for a 3% withdrawal rate (portfolio balance at the end of 2017: 806K)

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HomerJ
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Re: 2000-2018 retirement - sequence of returns

Post by HomerJ » Fri Aug 24, 2018 12:57 pm

70/30 portfolio (again, rebalancing, pulling equally from each asset each year)

Code: Select all

Year	       Beg Value	Spend	Gain	End Value
Aug 2000	$1 million	$40,000	-0.121	$844,224
Aug 2001	$844,224	$40,800	-0.097	$725,412
Aug 2002	$725,412	$41,616	0.083	$740,209
Aug 2003	$740,209	$42,448	0.095	$764,187
Aug 2004	$764,187	$43,297	0.093	$787,788
Aug 2005	$787,788	$44,163	0.062	$790,027
Aug 2006	$790,027	$45,046	0.097	$817,021
Aug 2007	$817,021	$45,947	-0.044	$737,300
Aug 2008	$737,300	$46,866	-0.104	$618,698
Aug 2009	$618,698	$47,804	0.076	$614,282
Aug 2010	$614,282	$48,760	0.097	$620,547
Aug 2011	$620,547	$49,735	0.174	$670,248
Aug 2012	$670,248	$50,730	0.154	$714,614
Aug 2013	$714,614	$51,744	0.166	$772,641
Aug 2014	$772,641	$52,779	0.015	$730,300
Aug 2015	$730,300	$53,835	0.094	$740,256
Aug 2016	$740,256	$54,911	0.095	$750,590
Aug 2017	$750,590	$56,010	0.142	$793,488
Aug 2018	$793,488			
60/40 and 40/60 look similar to 50/50. More bonds helped during this time period. Bonds did really well during 2000-2018. Bonds GAINED 12% in 2000. That's a pretty huge difference between stocks dropping 22%.

That first year is a big one. I would never want to be 100% stocks the first year of retirement (unless you're prepared to go back to work). Losing 20%-30% your first year is possible, and very hard to recover from.

Don't count on bonds doing this well over the next 18 years, but they should still help mute the effects of a large stock crash if that happens your first couple of years in retirement.
Last edited by HomerJ on Fri Aug 24, 2018 2:29 pm, edited 2 times in total.
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grok87
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Re: 2000-2018 retirement - sequence of returns

Post by grok87 » Fri Aug 24, 2018 1:00 pm

rgs92 wrote:
Fri Aug 24, 2018 12:34 pm
Great post HomerJ. That's why I think a mix of SPIAs and a balanced portfolio is best.
I need to sleep at night knowing I have a foundation of some sort of income that won't let the bottom fall out.
The SPIAs don't have to cover all needed income, but enough so that if the portfolio starts to sink a lot I can have faith that it's temporary.

Could you do a 60/40 version of your charts? Was it that much more volatile than the 50/50? Thanks in advance.
Tips ladder works too, at least for the first half of retirement.
As part of a three-legged stool approach:
Social securiTy
Pension/tips-ladder
Risk portfolio

As discussed here
viewtopic.php?f=10&t=245377

Hopefully there’ll be a competitive inflation adjusted Spia market at some point...
Keep calm and Boglehead on. KCBO.

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HomerJ
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Re: 2000-2018 retirement - sequence of returns

Post by HomerJ » Fri Aug 24, 2018 1:04 pm

ignition wrote:
Fri Aug 24, 2018 12:54 pm
You can use cFiresim to do a similar analysis.

It seems 100% stocks would have worked for a 3% withdrawal rate (portfolio balance at the end of 2017: 806K)
Wow 3% makes a huge difference for 100% stocks.

Balance in August 2018 is back over a $1 million! Instead of only $468,000 with the 4% withdrawal plan.

Code: Select all

Year	          Beg Value	Spend	Gain	End Value
Aug 2000	$1 million	$30,000	-0.225	$751,750
Aug 2001	$751,750	$30,600	-0.164	$602,881
Aug 2002	$602,881	$31,212	0.099	$628,265
Aug 2003	$628,265	$31,836	0.112	$663,228
Aug 2004	$663,228	$32,473	0.115	$703,292
Aug 2005	$703,292	$33,122	0.081	$724,454
Aug 2006	$724,454	$33,785	0.115	$770,096
Aug 2007	$770,096	$34,461	-0.087	$671,635
Aug 2008	$671,635	$35,150	-0.181	$521,281
Aug 2009	$521,281	$35,853	0.067	$517,952
Aug 2010	$517,952	$36,570	0.118	$538,186
Aug 2011	$538,186	$37,301	0.227	$614,585
Aug 2012	$614,585	$38,047	0.230	$709,141
Aug 2013	$709,141	$38,808	0.213	$813,114
Aug 2014	$813,114	$39,584	0.010	$781,265
Aug 2015	$781,265	$40,376	0.112	$823,869
Aug 2016	$823,869	$41,184	0.136	$889,130
Aug 2017	$889,130	$42,007	0.200	$1,016,548
Aug 2018	$1,016,548
Last edited by HomerJ on Fri Aug 24, 2018 1:35 pm, edited 1 time in total.
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Sasquatch
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Re: 2000-2018 retirement - sequence of returns

Post by Sasquatch » Fri Aug 24, 2018 1:23 pm

HomerJ, you should change your user name to “quant”. Nice work. I was thinking my 50/50 was too conservative (first distribution planned this December). That’s where I felt comfortable.

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HomerJ
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Re: 2000-2018 retirement - sequence of returns

Post by HomerJ » Fri Aug 24, 2018 1:34 pm

Leif wrote:
Fri Aug 24, 2018 12:53 pm
HomerJ wrote:
Fri Aug 24, 2018 12:50 pm
Leif wrote:
Fri Aug 24, 2018 12:48 pm
For the 50/50 are you taking the spend from bonds, or an equal dollar amount from each class, or a % from each class?
Equal from each class. You're correct that if one pulled from the better performing asset, it would change the numbers and probably make the 50/50 portfolio look better.
It would certainly give equities a chance to recover.
Actually I was wrong... the 50/50 portfolio in the OP IS rebalanced each year.

Because I just average the stock returns and bond returns each year in my spreadsheet. So I'm already assuming the total amount is 50/50 stocks/bonds each and every year.
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HomerJ
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Re: 2000-2018 retirement - sequence of returns

Post by HomerJ » Fri Aug 24, 2018 1:53 pm

Here's another fun one (Spreadsheets are fun!)

100% stocks with 4% spend. After first year crash, you drop to 3%. Keep that going for 4 years, stock market is rising again, you go back to 4% for a couple of years, then bam, another crash! So you tighten your belt, go back to 3% for another 4 years, market seems to be doing well again, you've had a couple of good years, you go back to 4%

And by today, you're almost back to $800,000

So even 4% withdrawal with 100% stocks would have worked if you're willing to cut back to 3% during market crashes.

Code: Select all

Year	        Beg Value	Spend	Gain	End Value
Aug 2000	$1 million	$40,000	-0.225	$744,000
Aug 2001	$744,000	$30,000	-0.164	$596,904
Aug 2002	$596,904	$30,600	0.099	$622,368
Aug 2003	$622,368	$31,212	0.112	$657,366
Aug 2004	$657,366	$31,836	0.115	$697,465
Aug 2005	$697,465	$44,163	0.081	$706,220
Aug 2006	$706,220	$45,046	0.115	$737,208
Aug 2007	$737,208	$45,947	-0.087	$631,121
Aug 2008	$631,121	$34,461	-0.181	$488,665
Aug 2009	$488,665	$35,150	0.067	$483,900
Aug 2010	$483,900	$35,853	0.118	$500,917
Aug 2011	$500,917	$36,570	0.227	$569,753
Aug 2012	$569,753	$50,730	0.230	$638,398
Aug 2013	$638,398	$51,745	0.213	$711,611
Aug 2014	$711,611	$52,779	0.010	$665,419
Aug 2015	$665,419	$53,835	0.112	$680,082
Aug 2016	$680,082	$54,912	0.136	$710,193
Aug 2017	$710,193	$56,010	0.200	$785,020
Aug 2018	$785,020			
Still pretty nerve wracking during 2009. I do not want to see my portfolio down 50% 9 years into retirement.
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John Z
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Re: 2000-2018 retirement - sequence of returns

Post by John Z » Fri Aug 24, 2018 2:01 pm

Yes, thank you for running these numbers. An eye-opener to me. This should open some eyes to consider a better bond allocation nearing retirement. I'm 6 years in and went from 75-25 going into retirement to about 45-55 now that I have won the game.

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Re: 2000-2018 retirement - sequence of returns

Post by Grt2bOutdoors » Fri Aug 24, 2018 2:48 pm

John Z wrote:
Fri Aug 24, 2018 2:01 pm
Yes, thank you for running these numbers. An eye-opener to me. This should open some eyes to consider a better bond allocation nearing retirement. I'm 6 years in and went from 75-25 going into retirement to about 45-55 now that I have won the game.
You got lucky with 75-25 going into retirement. You could have ended up in a worse position than you actually did.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Dottie57
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Re: 2000-2018 retirement - sequence of returns

Post by Dottie57 » Fri Aug 24, 2018 2:55 pm

Homer,

Thanks for the great analysis Homer! I am at 50/50 now and am glad to see an analysis which supports my conservative choice.

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Re: 2000-2018 retirement - sequence of returns

Post by WanderingDoc » Fri Aug 24, 2018 3:23 pm

HomerJ wrote:
Fri Aug 24, 2018 12:28 pm
I'm surprised I haven't seen an article on this before. For fun today, I was playing around with Excel and morningstar.com to look at year-to-year returns. (I use morningstar because it includes dividends)

Over the last 18 years, Total Bond Market has returned about 4.5% nominal.
Over the last 18 years, Total Stock Market has returned about 6.2% nominal

So you'd think someone retiring with more in stocks would have done better.

But sequence of returns really matter. Looking at 2000-2018, bonds did really well at the beginning of that period (and in the middle during 2008-2009 as well). Bonds have been lackluster this past few years.

Stocks did basically the opposite.. Lost in 2000-2002 of course, and then again in 2007-2009, but have done amazing these past 9 years. But amazing at the end of a time period is not what you want.

Here's 100% Total Stock Market Index portfolio

Someone who retired in August 2000 with $1 million, taking out 4%, increasing the withdrawal by 2% a year (for inflation) saw these balances.

Code: Select all

Year	        Beg Value	Spend	 Gain	End Value
Aug 2000	$1 million	$40,000	-0.225	$744,000
Aug 2001	$744,000	$40,800	-0.164	$587,875
Aug 2002	$587,875	$41,616	0.099	$600,339
Aug 2003	$600,339	$42,448	0.112	$620,374
Aug 2004	$620,374	$43,297	0.115	$643,441
Aug 2005	$643,441	$44,163	0.081	$647,819
Aug 2006	$647,819	$45,046	0.115	$672,091
Aug 2007	$672,091	$45,947	-0.087	$571,669
Aug 2008	$571,669	$46,866	-0.181	$429,814
Aug 2009	$429,814	$47,804	0.067	$407,605
Aug 2010	$407,605	$48,760	0.118	$401,189
Aug 2011	$401,189	$49,735	0.227	$431,234
Aug 2012	$431,234	$50,730	0.230	$468,020
Aug 2013	$468,020	$51,744	0.213	$504,942
Aug 2014	$504,942	$52,779	0.010	$456,685
Aug 2015	$456,685	$53,835	0.112	$447,969
Aug 2016	$447,969	$54,911	0.136	$446,514
Aug 2017	$446,514	$56,010	0.200	$468,605
Aug 2018	$468,605			
That is ugly.. Two years in, your million is less than $600,000, it slowly starts gaining, and then in August 2008, another crash, and you're down to $400,000. The only reason you're not broke is that most of the last nine years have been really good, and yet even after that you're barely gaining.

That is a stressful retirement. Another crash (or even a flat market) at this point will sink you. You're pulling $57,000 a year from your $468,000 portfolio. You need 12% returns going forward just to break even.

Now check out a 100% Total Bond Market Index portfolio

Code: Select all

Year  Beg Value	         Spend      Gain	 End Value
Aug 2000	$1,000,000	$40,000	0.123	$1,078,080
Aug 2001	$1,078,080	$40,800	0.059	$1,098,480
Aug 2002	$1,098,480	$41,616	0.044	$1,103,366
Aug 2003	$1,103,366	$42,448	0.056	$1,120,329
Aug 2004	$1,120,329	$43,297	0.041	$1,121,190
Aug 2005	$1,121,190	$44,163	0.019	$1,097,490
Aug 2006	$1,097,490	$45,046	0.054	$1,109,275
Aug 2007	$1,109,275	$45,947	0.057	$1,123,938
Aug 2008	$1,123,938	$46,866	0.076	$1,158,929
Aug 2009	$1,158,929	$47,804	0.097	$1,218,904
Aug 2010	$1,218,904	$48,760	0.049	$1,227,481
Aug 2011	$1,227,481	$49,735	0.051	$1,237,811
Aug 2012	$1,237,811	$50,730	-0.025	$1,157,405
Aug 2013	$1,157,405	$51,744	0.055	$1,166,472
Aug 2014	$1,166,472	$52,779	0.025	$1,141,535
Aug 2015	$1,141,535	$53,835	0.053	$1,145,348
Aug 2016	$1,145,348	$54,911	0.000	$1,090,437
Aug 2017	$1,090,437	$56,010	0.008	$1,042,703
Aug 2018	$1,042,703			
Now, again, this was a very good period for bonds, and not likely to be repeated going forward from today's low interest rates. But, man, what a difference. You never dropped below $1 million, and you still have $1,042,703 today. Bonds only had one negative year in there.

Here's a 50/50 stocks/bonds portfolio

Code: Select all

Year          Beg Value	       Spend	Gain	 End Value
Aug 2000	$1 million	$40,000	-0.051	$911,040
Aug 2001	$911,040	$40,800	-0.053	$824,552
Aug 2002	$824,552	$41,616	0.072	$838,916
Aug 2003	$838,916	$42,448	0.084	$863,371
Aug 2004	$863,371	$43,297	0.078	$884,040
Aug 2005	$884,040	$44,163	0.050	$881,870
Aug 2006	$881,870	$45,046	0.085	$907,536
Aug 2007	$907,536	$45,947	-0.015	$848,664
Aug 2008	$848,664	$46,866	-0.053	$759,704
Aug 2009	$759,704	$47,804	0.082	$770,276
Aug 2010	$770,276	$48,760	0.084	$781,762
Aug 2011	$781,762	$49,735	0.139	$833,779
Aug 2012	$833,779	$50,730	0.103	$863,312
Aug 2013	$863,312	$51,744	0.134	$920,318
Aug 2014	$920,318	$52,779	0.018	$882,721
Aug 2015	$882,721	$53,835	0.083	$897,269
Aug 2016	$897,269	$54,911	0.068	$899,638
Aug 2017	$899,638	$56,010	0.104	$931,366
Aug 2018	$931,366			
This one is much more tolerable to live through than the 100% stocks portfolio.

Edit: This one assumes rebalancing back to 50/50 every year.

But since one cannot count on bonds doing as well going forward, I wouldn't recommend 100% bonds.

50/50 seems like a good balance for retirement.

I certainly wouldn't pick 100% stocks if I was going into retirement tomorrow with a 4% withdrawal plan. 100% stocks failed in 1929, and it doesn't look good for 2000 retirees either.
This totally mind-blowing. This should be read by the OP of the weekly "why do I even need bonds" questions. I have also wondered the same thing myself. This paints a practical picture.

Rule #1: Don't lose money. I'd hate to look at my principal declining like that. This is why I prefer income in the form of a cash-flowing real estate portfolio. It's independent of the portfolio value. Buy and hold real estate investors don't care about portfolio equity. I only care when there is too much equity, then I know it's time to refinance.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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Re: 2000-2018 retirement - sequence of returns

Post by Random Walker » Fri Aug 24, 2018 3:56 pm

This emphasizes a point I’ve been trying to make for quite some time. Initially my points weren’t too clear because I didn’t understand the subject too well myself. But bottom line is that volatility is a portfolio killer and this effect is amplified big time during withdrawal phase. Money that is withdrawn from the portfolio will never have a chance to make a comeback after a losing period. If a portfolio drops 50% it needs to return 100% to get back to even. If a portfolio drops 25% it needs to make 33% to get back to even.

If one can create a portfolio with similar expected return but more narrow dispersion of returns, it will be a more efficient portfolio. It’s geometric return will be closer to the average annual return of its components, and it will be at less risk of major harm from adverse sequence of returns. How does one create a more efficient portfolio? First, don’t take more risk than necessary. Second, diversify across uncorrelated sources of risk and return. This certainly includes lots of bonds for starters, but bonds decrease the expected return of the portfolio. Diversification that won’t decrease expected return includes international equity, tilt to size and value, other uncorrelated factors such as momentum and profitability, and alternatives are worth consideration. All these steps involve increased cost beyond TSM/TBM, but we should appreciate that volatility is a cost too.

Dave

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Re: 2000-2018 retirement - sequence of returns

Post by marcopolo » Fri Aug 24, 2018 4:23 pm

WanderingDoc wrote:
Fri Aug 24, 2018 3:23 pm

Rule #1: Don't lose money. I'd hate to look at my principal declining like that. This is why I prefer income in the form of a cash-flowing real estate portfolio. It's independent of the portfolio value. Buy and hold real estate investors don't care about portfolio equity. I only care when there is too much equity, then I know it's time to refinance.
Please don't take the bait!
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: 2000-2018 retirement - sequence of returns

Post by HomerJ » Fri Aug 24, 2018 4:29 pm

marcopolo wrote:
Fri Aug 24, 2018 4:23 pm
WanderingDoc wrote:
Fri Aug 24, 2018 3:23 pm

Rule #1: Don't lose money. I'd hate to look at my principal declining like that. This is why I prefer income in the form of a cash-flowing real estate portfolio. It's independent of the portfolio value. Buy and hold real estate investors don't care about portfolio equity. I only care when there is too much equity, then I know it's time to refinance.
Please don't take the bait!
Nah, that was an okay post. Diversifying into real-estate is definitely a good option. There are risks being over-weighted on real-estate too, of course.

I find it comforting that even retiring at the worst possible time in recent decades, and into the highest valuations in U.S. history, and experiencing TWO crashes in the first 10 years, a 50/50 stocks/bond portfolio is, so far, holding up pretty well with a 4% withdrawal rate.
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Re: 2000-2018 retirement - sequence of returns

Post by willthrill81 » Fri Aug 24, 2018 4:34 pm

WanderingDoc wrote:
Fri Aug 24, 2018 3:23 pm
This totally mind-blowing. This should be read by the OP of the weekly "why do I even need bonds" questions.
For the sake of 'picking nits', this does not illustrate that bonds are necessary per se. One could replace bonds with CDs, a stable value fund, rental properties, gold*, etc. Some investors I know of have never used bonds at all. And in the current environment of rising rates, I can't say that I blame them.

*Just for fun, I did an analysis of the '4% rule' (what HomerJ did) from Jan., 2000, through July, 2018, and a 50/50 mix of TSM/gold literally blew away 50/50 TSM/TBM. The former would have a whopping $1,891,157 today as opposed to the latter's $1,115,667. Enter the 'but gold doesn't generate anything, so it's worthless' crowd. :wink:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 2000-2018 retirement - sequence of returns

Post by Dottie57 » Fri Aug 24, 2018 4:37 pm

willthrill81 wrote:
Fri Aug 24, 2018 4:34 pm
WanderingDoc wrote:
Fri Aug 24, 2018 3:23 pm
This totally mind-blowing. This should be read by the OP of the weekly "why do I even need bonds" questions.
For the sake of 'picking nits', this does not illustrate that bonds are necessary per se. One could replace bonds with CDs, a stable value fund, rental properties, gold*, etc. Some investors I know of have never used bonds at all. And in the current environment of rising rates, I can't say that I blame them.

*Just for fun, I did an analysis of the '4% rule' (what HomerJ did) from Jan., 2000, through July, 2018, and a 50/50 mix of TSM/gold literally blew away 50/50 TSM/TBM. The former would have a whopping $1,891,157 today as opposed to the latter's $1,115,667. Enter the 'but gold doesn't generate anything, so it's worthless' crowd. :wink:
When I hear ‘bonds’ I think fixed income.

I like gold, but more for jewelry!

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Re: 2000-2018 retirement - sequence of returns

Post by willthrill81 » Fri Aug 24, 2018 4:44 pm

Dottie57 wrote:
Fri Aug 24, 2018 4:37 pm
willthrill81 wrote:
Fri Aug 24, 2018 4:34 pm
WanderingDoc wrote:
Fri Aug 24, 2018 3:23 pm
This totally mind-blowing. This should be read by the OP of the weekly "why do I even need bonds" questions.
For the sake of 'picking nits', this does not illustrate that bonds are necessary per se. One could replace bonds with CDs, a stable value fund, rental properties, gold*, etc. Some investors I know of have never used bonds at all. And in the current environment of rising rates, I can't say that I blame them.

*Just for fun, I did an analysis of the '4% rule' (what HomerJ did) from Jan., 2000, through July, 2018, and a 50/50 mix of TSM/gold literally blew away 50/50 TSM/TBM. The former would have a whopping $1,891,157 today as opposed to the latter's $1,115,667. Enter the 'but gold doesn't generate anything, so it's worthless' crowd. :wink:
When I hear ‘bonds’ I think fixed income.
Fixed income can obviously be a good alternative to stocks, but rental real estate can be as well. From what I've seen, rental income didn't drop much for those who didn't own luxury properties back in the financial crisis. I know of one early retiree whose net worth is probably 50/50 split between TSM and rental properties; I don't know if she owns any fixed income at all.
Dottie57 wrote:
Fri Aug 24, 2018 4:37 pm
I like gold, but more for jewelry!
Gold's ability to stabilize a portfolio's performance over the last 40 years is pretty remarkable IMHO. But the crowd that ignores all past performance data typically has little more than disdain for gold.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 2000-2018 retirement - sequence of returns

Post by TomCat96 » Fri Aug 24, 2018 4:48 pm

HomerJ wrote:
Fri Aug 24, 2018 12:28 pm
I'm surprised I haven't seen an article on this before. For fun today, I was playing around with Excel and morningstar.com to look at year-to-year returns. (I use morningstar because it includes dividends)

Over the last 18 years, Total Bond Market has returned about 4.5% nominal.
Over the last 18 years, Total Stock Market has returned about 6.2% nominal

So you'd think someone retiring with more in stocks would have done better.

But sequence of returns really matter. Looking at 2000-2018, bonds did really well at the beginning of that period (and in the middle during 2008-2009 as well). Bonds have been lackluster this past few years.

Stocks did basically the opposite.. Lost in 2000-2002 of course, and then again in 2007-2009, but have done amazing these past 9 years. But amazing at the end of a time period is not what you want.

Here's 100% Total Stock Market Index portfolio

Someone who retired in August 2000 with $1 million, taking out 4%, increasing the withdrawal by 2% a year (for inflation) saw these balances.

Code: Select all

Year	        Beg Value	Spend	 Gain	End Value
Aug 2000	$1 million	$40,000	-0.225	$744,000
Aug 2001	$744,000	$40,800	-0.164	$587,875
Aug 2002	$587,875	$41,616	0.099	$600,339
Aug 2003	$600,339	$42,448	0.112	$620,374
Aug 2004	$620,374	$43,297	0.115	$643,441
Aug 2005	$643,441	$44,163	0.081	$647,819
Aug 2006	$647,819	$45,046	0.115	$672,091
Aug 2007	$672,091	$45,947	-0.087	$571,669
Aug 2008	$571,669	$46,866	-0.181	$429,814
Aug 2009	$429,814	$47,804	0.067	$407,605
Aug 2010	$407,605	$48,760	0.118	$401,189
Aug 2011	$401,189	$49,735	0.227	$431,234
Aug 2012	$431,234	$50,730	0.230	$468,020
Aug 2013	$468,020	$51,744	0.213	$504,942
Aug 2014	$504,942	$52,779	0.010	$456,685
Aug 2015	$456,685	$53,835	0.112	$447,969
Aug 2016	$447,969	$54,911	0.136	$446,514
Aug 2017	$446,514	$56,010	0.200	$468,605
Aug 2018	$468,605			
That is ugly.. Two years in, your million is less than $600,000, it slowly starts gaining, and then in August 2008, another crash, and you're down to $400,000. The only reason you're not broke is that most of the last nine years have been really good, and yet even after that you're barely gaining.

That is a stressful retirement. Another crash (or even a flat market) at this point will sink you. You're pulling $57,000 a year from your $468,000 portfolio. You need 12% returns going forward just to break even.

Now check out a 100% Total Bond Market Index portfolio

Code: Select all

Year  Beg Value	         Spend      Gain	 End Value
Aug 2000	$1,000,000	$40,000	0.123	$1,078,080
Aug 2001	$1,078,080	$40,800	0.059	$1,098,480
Aug 2002	$1,098,480	$41,616	0.044	$1,103,366
Aug 2003	$1,103,366	$42,448	0.056	$1,120,329
Aug 2004	$1,120,329	$43,297	0.041	$1,121,190
Aug 2005	$1,121,190	$44,163	0.019	$1,097,490
Aug 2006	$1,097,490	$45,046	0.054	$1,109,275
Aug 2007	$1,109,275	$45,947	0.057	$1,123,938
Aug 2008	$1,123,938	$46,866	0.076	$1,158,929
Aug 2009	$1,158,929	$47,804	0.097	$1,218,904
Aug 2010	$1,218,904	$48,760	0.049	$1,227,481
Aug 2011	$1,227,481	$49,735	0.051	$1,237,811
Aug 2012	$1,237,811	$50,730	-0.025	$1,157,405
Aug 2013	$1,157,405	$51,744	0.055	$1,166,472
Aug 2014	$1,166,472	$52,779	0.025	$1,141,535
Aug 2015	$1,141,535	$53,835	0.053	$1,145,348
Aug 2016	$1,145,348	$54,911	0.000	$1,090,437
Aug 2017	$1,090,437	$56,010	0.008	$1,042,703
Aug 2018	$1,042,703			
Now, again, this was a very good period for bonds, and not likely to be repeated going forward from today's low interest rates. But, man, what a difference. You never dropped below $1 million, and you still have $1,042,703 today. Bonds only had one negative year in there.

Here's a 50/50 stocks/bonds portfolio

Code: Select all

Year          Beg Value	       Spend	Gain	 End Value
Aug 2000	$1 million	$40,000	-0.051	$911,040
Aug 2001	$911,040	$40,800	-0.053	$824,552
Aug 2002	$824,552	$41,616	0.072	$838,916
Aug 2003	$838,916	$42,448	0.084	$863,371
Aug 2004	$863,371	$43,297	0.078	$884,040
Aug 2005	$884,040	$44,163	0.050	$881,870
Aug 2006	$881,870	$45,046	0.085	$907,536
Aug 2007	$907,536	$45,947	-0.015	$848,664
Aug 2008	$848,664	$46,866	-0.053	$759,704
Aug 2009	$759,704	$47,804	0.082	$770,276
Aug 2010	$770,276	$48,760	0.084	$781,762
Aug 2011	$781,762	$49,735	0.139	$833,779
Aug 2012	$833,779	$50,730	0.103	$863,312
Aug 2013	$863,312	$51,744	0.134	$920,318
Aug 2014	$920,318	$52,779	0.018	$882,721
Aug 2015	$882,721	$53,835	0.083	$897,269
Aug 2016	$897,269	$54,911	0.068	$899,638
Aug 2017	$899,638	$56,010	0.104	$931,366
Aug 2018	$931,366			
This one is much more tolerable to live through than the 100% stocks portfolio.

Edit: This one assumes rebalancing back to 50/50 every year.

But since one cannot count on bonds doing as well going forward, I wouldn't recommend 100% bonds.

50/50 seems like a good balance for retirement.

I certainly wouldn't pick 100% stocks if I was going into retirement tomorrow with a 4% withdrawal plan. 100% stocks failed in 1929, and it doesn't look good for 2000 retirees either.

I ran nearly identical numbers yesterday for the same time period, 100k initial investment for the 18 years starting in 2000 ending 2018. Indeed you see your portfolio drop by ~40% twice.

I still have nearly 3 decades to go, and am sitting at 100% stocks. But I don't kid myself.
I'm assuming an incredible amount of extra risk for a few percentage points of gains.
In fact for most of the 18 years, the 60/40 portfolio outperformed the 100% stock portfolio. It's only been the past few years the US market has been on a tear that it's finally "rewarded" holders for the extra risk assumed.

But if I were close to retirement, or in retirement, I would never consider a 100% stock portfolio. Doing a 4% withdrawal with that degree of volatility is just asking for trouble.

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Re: 2000-2018 retirement - sequence of returns

Post by WanderingDoc » Fri Aug 24, 2018 4:54 pm

willthrill81 wrote:
Fri Aug 24, 2018 4:34 pm
WanderingDoc wrote:
Fri Aug 24, 2018 3:23 pm
This totally mind-blowing. This should be read by the OP of the weekly "why do I even need bonds" questions.
For the sake of 'picking nits', this does not illustrate that bonds are necessary per se. One could replace bonds with CDs, a stable value fund, rental properties, gold*, etc. Some investors I know of have never used bonds at all. And in the current environment of rising rates, I can't say that I blame them.

*Just for fun, I did an analysis of the '4% rule' (what HomerJ did) from Jan., 2000, through July, 2018, and a 50/50 mix of TSM/gold literally blew away 50/50 TSM/TBM. The former would have a whopping $1,891,157 today as opposed to the latter's $1,115,667. Enter the 'but gold doesn't generate anything, so it's worthless' crowd. :wink:
You used the GLD fund for that analysis? I wonder how people would have done if they invested into Peter Schiff's fund instead? :oops:
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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Re: 2000-2018 retirement - sequence of returns

Post by WanderingDoc » Fri Aug 24, 2018 4:57 pm

willthrill81 wrote:
Fri Aug 24, 2018 4:44 pm
Dottie57 wrote:
Fri Aug 24, 2018 4:37 pm
willthrill81 wrote:
Fri Aug 24, 2018 4:34 pm
WanderingDoc wrote:
Fri Aug 24, 2018 3:23 pm
This totally mind-blowing. This should be read by the OP of the weekly "why do I even need bonds" questions.
For the sake of 'picking nits', this does not illustrate that bonds are necessary per se. One could replace bonds with CDs, a stable value fund, rental properties, gold*, etc. Some investors I know of have never used bonds at all. And in the current environment of rising rates, I can't say that I blame them.

*Just for fun, I did an analysis of the '4% rule' (what HomerJ did) from Jan., 2000, through July, 2018, and a 50/50 mix of TSM/gold literally blew away 50/50 TSM/TBM. The former would have a whopping $1,891,157 today as opposed to the latter's $1,115,667. Enter the 'but gold doesn't generate anything, so it's worthless' crowd. :wink:
When I hear ‘bonds’ I think fixed income.
Fixed income can obviously be a good alternative to stocks, but rental real estate can be as well. From what I've seen, rental income didn't drop much for those who didn't own luxury properties back in the financial crisis. I know of one early retiree whose net worth is probably 50/50 split between TSM and rental properties; I don't know if she owns any fixed income at all.
Dottie57 wrote:
Fri Aug 24, 2018 4:37 pm
I like gold, but more for jewelry!
Gold's ability to stabilize a portfolio's performance over the last 40 years is pretty remarkable IMHO. But the crowd that ignores all past performance data typically has little more than disdain for gold.
I agree with you (and your friend). I see no need to hold bonds with rental properties and partnerships providing a steady flow of income. Diversified among different assets and geographically especially.

I do hold cash, MMFs, and some in the TSP G-fund. I ask myself often why I am still investing in the G-fund, admittedly.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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Re: 2000-2018 retirement - sequence of returns

Post by HomerJ » Fri Aug 24, 2018 4:58 pm

TomCat96 wrote:
Fri Aug 24, 2018 4:48 pm
I still have nearly 3 decades to go, and am sitting at 100% stocks. But I don't kid myself.
I'm assuming an incredible amount of extra risk for a few percentage points of gains.
In fact for most of the 18 years, the 60/40 portfolio outperformed the 100% stock portfolio. It's only been the past few years the US market has been on a tear that it's finally "rewarded" holders for the extra risk assumed.
Yes, but it's far worse when you are WITHDRAWING money, and this is just showing results from 2000, the worst year to invest in stocks in recent memory.

Adding money each year to a 100% stocks portfolio, you've far outpaced the 60/40 portfolio.

And by not withdrawing, even the money you invested in 2000 has made 6.2% a year over the past 18 years... That's pretty good for the WORST year.

All the other years you invested money have made far more.
But if I were close to retirement, or in retirement, I would never consider a 100% stock portfolio. Doing a 4% withdrawal with that degree of volatility is just asking for trouble.
Agreed. 100% stocks is fine with you have decades of accumulation ahead of you.

0-5 years away from retirement? No way.
The J stands for Jay

3-20Characters
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Re: 2000-2018 retirement - sequence of returns

Post by 3-20Characters » Fri Aug 24, 2018 5:05 pm

Look at the bright side. A 100% stock scenario like that kills me early from stress so I die a relatively wealthy man. I’ve won the game! /s
:shock:
Last edited by 3-20Characters on Fri Aug 24, 2018 5:06 pm, edited 1 time in total.

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Re: 2000-2018 retirement - sequence of returns

Post by Nestegg_User » Fri Aug 24, 2018 5:06 pm

Random Walker wrote:
Fri Aug 24, 2018 3:56 pm
This emphasizes a point I’ve been trying to make for quite some time.

If one can create a portfolio with similar expected return but more narrow dispersion of returns, it will be a more efficient portfolio. It’s geometric return will be closer to the average annual return of its components, and it will be at less risk of major harm from adverse sequence of returns. How does one create a more efficient portfolio? First, don’t take more risk than necessary. Second, diversify across uncorrelated sources of risk and return. This certainly includes lots of bonds for starters, but bonds decrease the expected return of the portfolio. Diversification that won’t decrease expected return includes international equity, tilt to size and value, other uncorrelated factors such as momentum and profitability, and alternatives are worth consideration. All these steps involve increased cost beyond TSM/TBM, but we should appreciate that volatility is a cost too.

Dave

you might want to look at “Replacing the Failure Rate, a Downside Risk Perspective” by Javier Estrada {SSRN id3055014} and his other paper “ From Failure Rate to Success: Replacing the Failure Rate” {SSRN id2954549} both published in 2017.

they discuss the failure rate and risk-adjusted success for various allocations over 11 countries (including the US) of 86 thirty year retirement periods from 1900-2014. [BTW, Canada’s 60/40 beats the US 70/30 in both lower failure rates and better risk adjusted returns, as did New Zealand’s 80/20]

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Re: 2000-2018 retirement - sequence of returns

Post by 4nursebee » Fri Aug 24, 2018 5:45 pm

The scary examples suggest to me to use the VPW method.
Or, take 4% of assets each year, not of the starting balance.
4nursebee

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Re: 2000-2018 retirement - sequence of returns

Post by willthrill81 » Fri Aug 24, 2018 5:52 pm

4nursebee wrote:
Fri Aug 24, 2018 5:45 pm
The scary examples suggest to me to use the VPW method.
Or, take 4% of assets each year, not of the starting balance.
It all comes down to which you value more: steady withdrawals or maintaining your portfolio. The '4% rule' is all about the former, while 'variable' methods like the VPW are all about the latter.

If you use the '4% of the portfolio' method, you're mathematically guaranteed to never run out of money. But in the sequence outlined here by HomerJ, you would have taken more than a 40% 'paycut' with a 100% stock portfolio just a few years into retirement. That's harsh, even if your expenses are padded well with plenty of discretionary spending (which they probably should be if you were using this withdrawal method).
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 2000-2018 retirement - sequence of returns

Post by Random Poster » Fri Aug 24, 2018 6:07 pm

Thanks for running the numbers and various allocations.

The takeaway for me is that a 50/50 portfolio will work well (although instead of a pure TSM/TBM split, I think a 10% allocation to Total International might be worthwhile), but that one should keep their withdrawals to 2.5% or below to avoid future balance drops that could be heart attack inducing.

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Re: 2000-2018 retirement - sequence of returns

Post by willthrill81 » Fri Aug 24, 2018 6:22 pm

Random Poster wrote:
Fri Aug 24, 2018 6:07 pm
Thanks for running the numbers and various allocations.

The takeaway for me is that a 50/50 portfolio will work well (although instead of a pure TSM/TBM split, I think a 10% allocation to Total International might be worthwhile), but that one should keep their withdrawals to 2.5% or below to avoid future balance drops that could be heart attack inducing.
2.5% withdrawals? :shock:

You're saying that you want your portfolio more than 50% larger than what was necessary for the worst 30 year retirements over the last 100 years, including multiple world wars, periods of high inflation, the Great Depression, many recessions, etc. That's really pessimistic, unless you're trying to retire at age 30.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

rgs92
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Re: 2000-2018 retirement - sequence of returns

Post by rgs92 » Fri Aug 24, 2018 6:32 pm

The thing is that, you can't count on being 2 or 3 decades from retirement. (I thing if KlangFool is reading this, he would relate).
Mavbe if you are in your 20s, you can say you will work 10-20 years, but you need to count on being out of the workforce sometime in your 40s, even early 40s, if something goes wrong.

And even if you are not out of the workforce entirely, long periods of unemployment after age 30 may require substantial retirement portfolio withdrawals.

I know many people who got caught up in corporate downsizings who experienced this. You don't want your savings in the gutter in a bad market when this happens. So I say never be 100% stocks or even 80% stocks past age 25.

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ThereAreNoGurus
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Re: 2000-2018 retirement - sequence of returns

Post by ThereAreNoGurus » Fri Aug 24, 2018 6:39 pm

Nice work HomerJ, and thanks for sharing it!

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Re: 2000-2018 retirement - sequence of returns

Post by jimb_fromATL » Fri Aug 24, 2018 6:59 pm

HomerJ wrote:
Fri Aug 24, 2018 12:28 pm
I'm surprised I haven't seen an article on this before. For fun today, I was playing around with Excel and morningstar.com to look at year-to-year returns. (I use morningstar because it includes dividends)

Just in case you were not aware of it, Portfolio Visualizer can do a mind-boggling number of comparisons for you, automatically looking up the total return data, and automatically choosing allocations for a custom portfolios and a lot of popular ones including the Bogleheads 3 fund portfolio. Then it graphs and charts. It includes inflation rates and can do rolling average and automatic rebalancing, and show an incredible number of metrics and popular measurement tools.

HERE is an example.

You can also download the data to a spreadsheet to do more manipulation yourself. Downloading the data to a spreadsheet is also one of the easiest ways I know of to get total return data yearly, monthly or quarterly, for a zillion different funds and stocks -- which you can copy and paste into your own sheets (or just modify theirs).

jimb

Random Poster
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Re: 2000-2018 retirement - sequence of returns

Post by Random Poster » Fri Aug 24, 2018 7:38 pm

willthrill81 wrote:
Fri Aug 24, 2018 6:22 pm
Random Poster wrote:
Fri Aug 24, 2018 6:07 pm
Thanks for running the numbers and various allocations.

The takeaway for me is that a 50/50 portfolio will work well (although instead of a pure TSM/TBM split, I think a 10% allocation to Total International might be worthwhile), but that one should keep their withdrawals to 2.5% or below to avoid future balance drops that could be heart attack inducing.
2.5% withdrawals? :shock:

You're saying that you want your portfolio more than 50% larger than what was necessary for the worst 30 year retirements over the last 100 years, including multiple world wars, periods of high inflation, the Great Depression, many recessions, etc. That's really pessimistic, unless you're trying to retire at age 30.
Yes.

Because when I quit work, I'm quitting work. None of this "well, maybe if things get really bad, I'll get a job at Starbucks" equivocation. Now, perhaps I'll "work" at a grocery store or somewhere (although, I really doubt it) just too keep busy, but the mere possibility of ever having to go back to work because my withdrawals were too high and so I need the money is just, well, something that I don't ever want to have to deal with.

And so I'll stick with my 2.5% rate.

And save, save, save to get to a portfolio balance that will provide, based on such a withdrawal rate, an amount of money that I am reasonably confident will be plenty each year.

And, although I wanted to retire by 40, I'm now thinking 42. Or 43.

jclear
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Re: 2000-2018 retirement - sequence of returns

Post by jclear » Fri Aug 24, 2018 7:45 pm

John Z wrote:
Fri Aug 24, 2018 2:01 pm
Yes, thank you for running these numbers. An eye-opener to me. This should open some eyes to consider a better bond allocation nearing retirement. I'm 6 years in and went from 75-25 going into retirement to about 45-55 now that I have won the game.
It can take a lot of grit - or call it insouciance, for the risk-willing investors like me. I went FIRE summer 2007 just before the financial crisis. I was 85/15 and took 3% SWR. The worst balance trough I noticed after that was a bit over 40% down. Over the 11 years the portfolio balance grew at 3.5% CAGR. I'm still over 80/20. But I feel like I'm getting old for this.
Last edited by jclear on Fri Aug 24, 2018 8:00 pm, edited 1 time in total.

flyingaway
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Re: 2000-2018 retirement - sequence of returns

Post by flyingaway » Fri Aug 24, 2018 7:53 pm

Random Poster wrote:
Fri Aug 24, 2018 7:38 pm
willthrill81 wrote:
Fri Aug 24, 2018 6:22 pm
Random Poster wrote:
Fri Aug 24, 2018 6:07 pm
Thanks for running the numbers and various allocations.

The takeaway for me is that a 50/50 portfolio will work well (although instead of a pure TSM/TBM split, I think a 10% allocation to Total International might be worthwhile), but that one should keep their withdrawals to 2.5% or below to avoid future balance drops that could be heart attack inducing.
2.5% withdrawals? :shock:

You're saying that you want your portfolio more than 50% larger than what was necessary for the worst 30 year retirements over the last 100 years, including multiple world wars, periods of high inflation, the Great Depression, many recessions, etc. That's really pessimistic, unless you're trying to retire at age 30.
Yes.

Because when I quit work, I'm quitting work. None of this "well, maybe if things get really bad, I'll get a job at Starbucks" equivocation. Now, perhaps I'll "work" at a grocery store or somewhere (although, I really doubt it) just too keep busy, but the mere possibility of ever having to go back to work because my withdrawals were too high and so I need the money is just, well, something that I don't ever want to have to deal with.

And so I'll stick with my 2.5% rate.

And save, save, save to get to a portfolio balance that will provide, based on such a withdrawal rate, an amount of money that I am reasonably confident will be plenty each year.

And, although I wanted to retire by 40, I'm now thinking 42. Or 43.
I like this idea, provided my job is not killing me and I am younger than 65.
The safer SWR (safe withdraw rate) is really not very clear to me. I may be affected (emotionally) by the market valuation, accuracy of expenses estimate, unknown things that may happen, longevity, etc.

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Re: 2000-2018 retirement - sequence of returns

Post by marcopolo » Fri Aug 24, 2018 8:15 pm

Random Poster wrote:
Fri Aug 24, 2018 7:38 pm
willthrill81 wrote:
Fri Aug 24, 2018 6:22 pm
Random Poster wrote:
Fri Aug 24, 2018 6:07 pm
Thanks for running the numbers and various allocations.

The takeaway for me is that a 50/50 portfolio will work well (although instead of a pure TSM/TBM split, I think a 10% allocation to Total International might be worthwhile), but that one should keep their withdrawals to 2.5% or below to avoid future balance drops that could be heart attack inducing.
2.5% withdrawals? :shock:

You're saying that you want your portfolio more than 50% larger than what was necessary for the worst 30 year retirements over the last 100 years, including multiple world wars, periods of high inflation, the Great Depression, many recessions, etc. That's really pessimistic, unless you're trying to retire at age 30.
Yes.

Because when I quit work, I'm quitting work. None of this "well, maybe if things get really bad, I'll get a job at Starbucks" equivocation. Now, perhaps I'll "work" at a grocery store or somewhere (although, I really doubt it) just too keep busy, but the mere possibility of ever having to go back to work because my withdrawals were too high and so I need the money is just, well, something that I don't ever want to have to deal with.

And so I'll stick with my 2.5% rate.

And save, save, save to get to a portfolio balance that will provide, based on such a withdrawal rate, an amount of money that I am reasonably confident will be plenty each year.

And, although I wanted to retire by 40, I'm now thinking 42. Or 43.

At your target retirement age, you are really looking at a Perpetual Withdrawal Rate rather than a SWR, so 2.5% is very reasonable.

I think the reasoning is very different for someone at age 60 trying to decide whether or not to work another decade to go from 25x to 40x savings.
Once in a while you get shown the light, in the strangest of places if you look at it right.

skor99
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Re: 2000-2018 retirement - sequence of returns

Post by skor99 » Fri Aug 24, 2018 9:43 pm

HomerJ wrote:
Fri Aug 24, 2018 12:28 pm
I'm surprised I haven't seen an article on this before. For fun today, I was playing around with Excel and morningstar.com to look at year-to-year returns. (I use morningstar because it includes dividends)

Over the last 18 years, Total Bond Market has returned about 4.5% nominal.
Over the last 18 years, Total Stock Market has returned about 6.2% nominal

So you'd think someone retiring with more in stocks would have done better.

But sequence of returns really matter. Looking at 2000-2018, bonds did really well at the beginning of that period (and in the middle during 2008-2009 as well). Bonds have been lackluster this past few years.

Stocks did basically the opposite.. Lost in 2000-2002 of course, and then again in 2007-2009, but have done amazing these past 9 years. But amazing at the end of a time period is not what you want.

Here's 100% Total Stock Market Index portfolio

Someone who retired in August 2000 with $1 million, taking out 4%, increasing the withdrawal by 2% a year (for inflation) saw these balances.

Code: Select all

Year	        Beg Value	Spend	 Gain	End Value
Aug 2000	$1 million	$40,000	-0.225	$744,000
Aug 2001	$744,000	$40,800	-0.164	$587,875
Aug 2002	$587,875	$41,616	0.099	$600,339
Aug 2003	$600,339	$42,448	0.112	$620,374
Aug 2004	$620,374	$43,297	0.115	$643,441
Aug 2005	$643,441	$44,163	0.081	$647,819
Aug 2006	$647,819	$45,046	0.115	$672,091
Aug 2007	$672,091	$45,947	-0.087	$571,669
Aug 2008	$571,669	$46,866	-0.181	$429,814
Aug 2009	$429,814	$47,804	0.067	$407,605
Aug 2010	$407,605	$48,760	0.118	$401,189
Aug 2011	$401,189	$49,735	0.227	$431,234
Aug 2012	$431,234	$50,730	0.230	$468,020
Aug 2013	$468,020	$51,744	0.213	$504,942
Aug 2014	$504,942	$52,779	0.010	$456,685
Aug 2015	$456,685	$53,835	0.112	$447,969
Aug 2016	$447,969	$54,911	0.136	$446,514
Aug 2017	$446,514	$56,010	0.200	$468,605
Aug 2018	$468,605			
That is ugly.. Two years in, your million is less than $600,000, it slowly starts gaining, and then in August 2008, another crash, and you're down to $400,000. The only reason you're not broke is that most of the last nine years have been really good, and yet even after that you're barely gaining.

That is a stressful retirement. Another crash (or even a flat market) at this point will sink you. You're pulling $57,000 a year from your $468,000 portfolio. You need 12% returns going forward just to break even.

Now check out a 100% Total Bond Market Index portfolio

Code: Select all

Year  Beg Value	         Spend      Gain	 End Value
Aug 2000	$1,000,000	$40,000	0.123	$1,078,080
Aug 2001	$1,078,080	$40,800	0.059	$1,098,480
Aug 2002	$1,098,480	$41,616	0.044	$1,103,366
Aug 2003	$1,103,366	$42,448	0.056	$1,120,329
Aug 2004	$1,120,329	$43,297	0.041	$1,121,190
Aug 2005	$1,121,190	$44,163	0.019	$1,097,490
Aug 2006	$1,097,490	$45,046	0.054	$1,109,275
Aug 2007	$1,109,275	$45,947	0.057	$1,123,938
Aug 2008	$1,123,938	$46,866	0.076	$1,158,929
Aug 2009	$1,158,929	$47,804	0.097	$1,218,904
Aug 2010	$1,218,904	$48,760	0.049	$1,227,481
Aug 2011	$1,227,481	$49,735	0.051	$1,237,811
Aug 2012	$1,237,811	$50,730	-0.025	$1,157,405
Aug 2013	$1,157,405	$51,744	0.055	$1,166,472
Aug 2014	$1,166,472	$52,779	0.025	$1,141,535
Aug 2015	$1,141,535	$53,835	0.053	$1,145,348
Aug 2016	$1,145,348	$54,911	0.000	$1,090,437
Aug 2017	$1,090,437	$56,010	0.008	$1,042,703
Aug 2018	$1,042,703			
Now, again, this was a very good period for bonds, and not likely to be repeated going forward from today's low interest rates. But, man, what a difference. You never dropped below $1 million, and you still have $1,042,703 today. Bonds only had one negative year in there.

Here's a 50/50 stocks/bonds portfolio

Code: Select all

Year          Beg Value	       Spend	Gain	 End Value
Aug 2000	$1 million	$40,000	-0.051	$911,040
Aug 2001	$911,040	$40,800	-0.053	$824,552
Aug 2002	$824,552	$41,616	0.072	$838,916
Aug 2003	$838,916	$42,448	0.084	$863,371
Aug 2004	$863,371	$43,297	0.078	$884,040
Aug 2005	$884,040	$44,163	0.050	$881,870
Aug 2006	$881,870	$45,046	0.085	$907,536
Aug 2007	$907,536	$45,947	-0.015	$848,664
Aug 2008	$848,664	$46,866	-0.053	$759,704
Aug 2009	$759,704	$47,804	0.082	$770,276
Aug 2010	$770,276	$48,760	0.084	$781,762
Aug 2011	$781,762	$49,735	0.139	$833,779
Aug 2012	$833,779	$50,730	0.103	$863,312
Aug 2013	$863,312	$51,744	0.134	$920,318
Aug 2014	$920,318	$52,779	0.018	$882,721
Aug 2015	$882,721	$53,835	0.083	$897,269
Aug 2016	$897,269	$54,911	0.068	$899,638
Aug 2017	$899,638	$56,010	0.104	$931,366
Aug 2018	$931,366			
This one is much more tolerable to live through than the 100% stocks portfolio.

Edit: This one assumes rebalancing back to 50/50 every year.

But since one cannot count on bonds doing as well going forward, I wouldn't recommend 100% bonds.

50/50 seems like a good balance for retirement.

I certainly wouldn't pick 100% stocks if I was going into retirement tomorrow with a 4% withdrawal plan. 100% stocks failed in 1929, and it doesn't look good for 2000 retirees either.
I am seeing much different numbers for the same parameters on portfolio visualizer. 1000000 with 4% inflation adjusted withdrawal from 2000 to 2018 in US stock market shows 905000 ending balance and not 468000.

Random Walker
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Re: 2000-2018 retirement - sequence of returns

Post by Random Walker » Fri Aug 24, 2018 9:55 pm

This whole discussion is a a good reminder of the potential value of a good Monte Carlo Analysis. MCS can reveal sensitivity of outcome to AA changes and can focus the investor on different endpoints. For example, the plan that provides the highest likelihood of meeting one's goals likely is not the plan that maximizes terminal wealth. MCS allows one to get a strong feel for these trade offs.

In my own case, I was surprised at the lack of benefit to taking on a more risky portfolio.

Dave

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Re: 2000-2018 retirement - sequence of returns

Post by willthrill81 » Fri Aug 24, 2018 10:04 pm

Random Poster wrote:
Fri Aug 24, 2018 7:38 pm
willthrill81 wrote:
Fri Aug 24, 2018 6:22 pm
Random Poster wrote:
Fri Aug 24, 2018 6:07 pm
Thanks for running the numbers and various allocations.

The takeaway for me is that a 50/50 portfolio will work well (although instead of a pure TSM/TBM split, I think a 10% allocation to Total International might be worthwhile), but that one should keep their withdrawals to 2.5% or below to avoid future balance drops that could be heart attack inducing.
2.5% withdrawals? :shock:

You're saying that you want your portfolio more than 50% larger than what was necessary for the worst 30 year retirements over the last 100 years, including multiple world wars, periods of high inflation, the Great Depression, many recessions, etc. That's really pessimistic, unless you're trying to retire at age 30.
Yes.

Because when I quit work, I'm quitting work. None of this "well, maybe if things get really bad, I'll get a job at Starbucks" equivocation. Now, perhaps I'll "work" at a grocery store or somewhere (although, I really doubt it) just too keep busy, but the mere possibility of ever having to go back to work because my withdrawals were too high and so I need the money is just, well, something that I don't ever want to have to deal with.

And so I'll stick with my 2.5% rate.

And save, save, save to get to a portfolio balance that will provide, based on such a withdrawal rate, an amount of money that I am reasonably confident will be plenty each year.

And, although I wanted to retire by 40, I'm now thinking 42. Or 43.
For a conceivably 50 year retirement, a 2.5% withdrawal rate makes sense, especially if you don't want a real possibility of needing to return to the workforce.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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HomerJ
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Re: 2000-2018 retirement - sequence of returns

Post by HomerJ » Sat Aug 25, 2018 1:19 am

skor99 wrote:
Fri Aug 24, 2018 9:43 pm
I am seeing much different numbers for the same parameters on portfolio visualizer. 1000000 with 4% inflation adjusted withdrawal from 2000 to 2018 in US stock market shows 905000 ending balance and not 468000.
Could start date change things so drastically? Portfolio Visualizer runs from Dec 31, 2000 - Dec 31, 2001 for each year.

I did mine using August 24 as my start and end-date

Looking at VTSAX on morningstar, I get these numbers.

August 24, 2000 - August 24, 2001 - 10000 -> 7898 - 21% decline
August 24, 2001 - August 24, 2002 - 10000 -> 8366 - 16% decline
August 24, 2002 - August 24, 2003 - 10000 -> 10998 - 10% increase
August 24, 2003 - August 24, 2004 - 10000 -> 11242 - 12% increase


So starting from August 24, 2000 (ignoring inflation this time so spending stays fixed at 40,000)

1 million drops to 790,000 minus 40,000 spending - 750,000
750,000 drops to 630,000 minus 40,000 spending - 590,000
590,000 grows to 649,000 minus 40,000 spending - 609,000
609,000 grows to 682,000 minus 40,000 spending - 642,000


Dec 1, 2000 - Dec 1, 2001 - 10000 -> 8911 - 11% decline
Dec 1, 2001 - Dec 1, 2002 - 10000 -> 7825 - 21% decline
Dec 1, 2002 - Dec 1, 2003 - 10000 -> 13161 - 31% increase
Dec 1, 2003 - Dec 1, 2004 - 10000 -> 11261 - 12% increase

Starting from Dec 31, 2000

1 million drops to 890,000 minus 40,000 spending - 850,000
850,000 drops to 671,000 minus 40,000 spending - 631,000
631,000 grows to 826,000 minus 40,000 spending - 786,000
786,000 grows to 880,000 minus 40,000 spending - 840,000

Look at those numbers!! This is even more of a wow factor.

Retiring near the end of August 2000 leaves you with $200,000 less 4 years later, then if you retired at the end of December 2000.

Crazy that 4 months could make such a huge difference.

The answer is simple. From August 2000 to December 2000, the market declined 13%, so anyone who started with a million in August only had 870,000 by the time our hypothetical guy retired in December with his million (I guess he had $1,150,000 in August, lost $150,000 and still decided to retire in December).

That initial loss compounded into a huge difference 18 years later, where the August guy only has $468,000 left and the December guy has $905,000 (based on skor99 portfolio visualizer numbers)
The J stands for Jay

trasmuss
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Re: 2000-2018 retirement - sequence of returns

Post by trasmuss » Sat Aug 25, 2018 2:00 am

Remember Scott Burns original couch potato (50% S&P 500 or Total Stock and 50% Total Bond or intermediate term bond? Rebalanced at the end of each year.

I remember reading the original article in the paper thinking that it made a lot of sense. Many years later I still think it makes a lot of sense. He went on to create variations (e.g. adding international stocks, etc.) but his original portfolio has met the test of time.

Scott is in retirement now but deserves a pat on the back and a thank you.

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