Perpetual Withdrawal Rates for 18 Portfolios

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klaus14
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Perpetual Withdrawal Rates for 18 Portfolios

Post by klaus14 » Sun Jun 09, 2019 7:13 pm

Below I gathered PWRs for 18 portfolios from Portfolio Charts.

I picked 18 years as the time window to study. Because for most portfolios, 2000-2018 is the worst period and this number is more conservative than portfolio's 30/40 year SWR/PWR. I think especially for early retirees, this number is more relevant.

So below numbers are the maximum withdraw rates that maintained starting principal (inflation adjusted) for each portfolio during the WORST 18 year window for that portfolio since 1970 (not always 2000-2018)

IVY 2.4%
TOTAL STOCK MARKET 2.5%
US 60/40 2.5%
THREE-FUND 2.8%
SANDWICH 2.9%
ALL SEASONS 3.0%
SWENSEN 3.1%
LARRY 3.1%
NO-BRAINER 3.1%
RICK FERRI CORE FOUR 3.1%
7TWELVE 3.3%
COWARD’S 3.4%
IDEAL INDEX 3.5%
COFFEEHOUSE 3.6%
MERRIMAN ULTIMATE 3.6%
PERMANENT 3.6%
PINWHEEL 4.4%
GOLDEN BUTTERFLY 5.1%

To check the 18YR PWR for your own portfolio, go here, put your numbers, and then change to 18 years (from 30).
Last edited by klaus14 on Mon Jun 10, 2019 3:03 am, edited 3 times in total.

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willthrill81
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Re: Perpetual Withdraw Rates for 18 Portfolios

Post by willthrill81 » Sun Jun 09, 2019 9:58 pm

It's largely the result of backtesting, but darn if the Golden Butterfly doesn't look interesting.

For all the flack that a prominent forum member brings against it, Merriman's Ultimate portfolio would certainly have done a lot better for retirees than the 3-fund; both have a 40% bond allocation.
“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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klaus14
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Re: Perpetual Withdraw Rates for 18 Portfolios

Post by klaus14 » Sun Jun 09, 2019 10:11 pm

willthrill81 wrote:
Sun Jun 09, 2019 9:58 pm
It's largely the result of backtesting, but darn if the Golden Butterfly doesn't look interesting.

For all the flack that a prominent forum member brings against it, Merriman's Ultimate portfolio would certainly have done a lot better for retirees than the 3-fund; both have a 40% bond allocation.
Indeed, to put another way, since 2000, Merriman's had 4.44% real CAGR vs 3.40% of 3-fund.

I agree Golden Butterfly and Pinwheel looks like the the result of backtesting. Still, I incorporated some ideas from Pinwheel to my own portfolio: 10% gold, SCV and EM overweight. These seem to have some theoretical backing. But I didn't buy REIT due to current valuations.

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Re: Perpetual Withdraw Rates for 18 Portfolios

Post by Tyler Aspect » Mon Jun 10, 2019 12:08 am

In my opinion these tests are meaningless. Who insisted our portfolio must maintain its starting value despite of our withdrawals? By keeping this unrealistic requirements you bring up lots of witches' brews.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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Re: Perpetual Withdraw Rates for 18 Portfolios

Post by willthrill81 » Mon Jun 10, 2019 12:26 am

Tyler Aspect wrote:
Mon Jun 10, 2019 12:08 am
Who insisted our portfolio must maintain its starting value despite of our withdrawals? By keeping this unrealistic requirements you bring up lots of witches' brews.
It's not at all unrealistic for someone planning on a 40 year or longer retirement. It's actually quite prudent.
“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: Perpetual Withdraw Rates for 18 Portfolios

Post by typical.investor » Mon Jun 10, 2019 12:30 am

Tyler Aspect wrote:
Mon Jun 10, 2019 12:08 am
In my opinion these tests are meaningless. Who insisted our portfolio must maintain its starting value despite of our withdrawals? By keeping this unrealistic requirements you bring up lots of witches' brews.
Check out the NYTimes for a sad article on the abuse that disabled people in group homes face (particularly since the abusers have protected employment). Anyone with a disabled child might find perpetual withdrawal rates relevant as they might be interested in doing something to keep their child out of such a situation.

Just because you have no such desire, doesn't mean others don't.

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by MotoTrojan » Mon Jun 10, 2019 1:46 am

I feel that a longer timeframe or a variety of lengths would be more meaningful.

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klaus14
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by klaus14 » Mon Jun 10, 2019 2:02 am

MotoTrojan wrote:
Mon Jun 10, 2019 1:46 am
I feel that a longer timeframe or a variety of lengths would be more meaningful.
https://portfoliocharts.com/portfolio/portfolio-matrix/
Sort by PWR will give you 30 yr numbers, which are higher than 18 year numbers.

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by typical.investor » Mon Jun 10, 2019 2:22 am

MotoTrojan wrote:
Mon Jun 10, 2019 1:46 am
I feel that a longer timeframe or a variety of lengths would be more meaningful.
It does go up to 40 years.

It's interesting to see the SWR and PRW converge.

This is for my actual allocation.

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chem6022
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by chem6022 » Mon Jun 10, 2019 2:33 am

I would be wary of any high gold percentage backtests in the 70s, as 40 prior years of fixed exchange due to the gold standard had just ended. Literally take any portfolio and swap in 5-10% gold and it will get a jump in this 18 year test.

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klaus14
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by klaus14 » Mon Jun 10, 2019 2:35 am

chem6022 wrote:
Mon Jun 10, 2019 2:33 am
I would be wary of any high gold percentage backtests in the 70s, as 40 prior years of fixed exchange due to the gold standard had just ended. Literally take any portfolio and swap in 5-10% gold and it will get a jump in this 18 year test.
70s has nothing to do with these results. I listed WORST case numbers (not average or best) which is 2000-2018 for almost all portfolios. For permanent portfolio (25% gold), i think worst was 90s, due to gold underperformance, so it uses that.
Last edited by klaus14 on Mon Jun 10, 2019 2:42 am, edited 1 time in total.

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jainn
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by jainn » Mon Jun 10, 2019 2:41 am

The results may be very different for taxable accounts.

Our allocation almost entirely in taxable, is:
47% Total US
23% Total Intl
27% Tax Exempt Intermediate Muni
3% Short-Term Treasury (IRA/Roth)

https://fwp.partners/what-would-yale-do ... s-taxable/
https://www.wealthmanagement.com/high-n ... as-taxable

Swensen’s book was designed for tax-exempt investors.

Even though Yale has generated top returns for its beneficiaries through the use of hedge funds, what does Swensen, like many other successful investors such as Warren Buffett, suggest for taxable investors?

Index funds.

Why?

Well, maybe the following quote from his second book (this one for taxable investors), Unconventional Success says it best:

“The management of taxable…assets without considering the consequences of trading activity represents a…little considered scandal. A serious fiduciary with responsibility for taxable assets recognizes that only extraordinary circumstances justify deviation from a simple strategy…”


https://www.northinfo.com/documents/614.pdf

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by AlohaJoe » Mon Jun 10, 2019 2:42 am

klaus14 wrote:
Sun Jun 09, 2019 7:13 pm
Below I gathered PWRs for 18 portfolios from Portfolio Charts.

I picked 18 years as the time window to study. Because for most portfolios, 2000-2018 is the worst period and this number is more conservative than portfolio's 30/40 year SWR/PWR. I think especially for early retirees, this number is more relevant.
I actually don't think PWRs are that relevant and I think using PortfolioCharts for this exacerbates the underlying problems with using PWRs. (Though, to be clear, I don't think that is PortfolioChart's fault, simply a limitation of the data he has available.)

Let's look at the 60/40 portfolio since that's one of the few portfolios we can look at before 1970. You say that the PWR over 18 years is 2.5%.

But that is wrong and it is wrong by a lot. The actual 18-year PWR if we use data from 1871-2018 is negative 0.46%. That is, every year you have to add 0.46% to your portfolio. I don't know what a retiree is meant to do with that kind of information? "Prepare for a retirement where you need to add to your portfolio for 18 years to meet your goals"?

It turns out there are actually three retirement cohorts with a negative PWR over an 18 year period: 1964, 1903, and 1902. There are 7 more retirement cohorts with a PWR under 1%: 1965, 1962, 1966, 1901, 1963, 1967. And then another 8 that are under 2%.

And we didn't really need to look at 18 year PWRs to know "hey, in a bad crash, it might take more than 15-20 years for a portfolio to recover, especially when you are withdrawing anything but a trivially small amount of money from it". I think most everyone would have agreed that without even looking at the historical data. It is unfortunate for PortfolioCharts that the data it has available -- 1970-onwards -- doesn't really have any severe, prolonged crashes for US assets. The only thing even close is 2008 but it recovered so quickly it doesn't tell us much about worst case scenarios.

So imagine someone looks at PortfolioCharts results and thought 2.5% was -- not a guarantee exactly -- but a 95th percentile "almost guaranteed" kind of thing. Then we look a bigger data sample and find that is more like 83rd percentile -- almost 20% of the time it didn't leave you with 100% of your original portfolio after 18 years.

Leaving aside the data-length issues, PWRs have two other things I don't like. They have the weird (somewhat non-intuitive) effect that the longer the period the higher your PWR. You see that on PortfolioCharts where the PWR for 18 years is 2.5% but for 19 years it is 2.8%. This makes complete sense because all it is saying is "the longer you wait, the more likely the stocks will make a lot of money", which isn't news to anyone. But when you're picking a fixed length of time it makes the whole PWR exercise into a bit of nonsense.

How do you know 18 years is the "right" length to pick? Especially when we just saw how sensitive it is to the length of time. Going from 18 years to 17 years changes things a lot. Going from 18 to 19 also changes things a lot. So we have to have a lot of belief that 18 is the right number for us to do anything meaningful with it. What does "right" even mean? For a real world retired couple there is an 11% chance they died before that 18th year. Why is it a "perpetual withdrawal rate" if they are dead before it ever got back to 100% the original portfolio value? And as you extend the time period to 30- or 40- or 50-years the reality of stochastic mortality becomes even more relevant. So it becomes some weird exercise about how, sure, the portfolio might not recover in time for me to use it, but at least my heirs will. But at that point....why is 40-years the number we're picking? Why not 80 or 90 years? Or 200 years? Once we get into dynastic wealth conversations it all becomes a bit weird.

But the biggest problem with PWRs is they ignore the reality of portfolio drawdowns. SWRs share the same issue but at least with SWRs we can (sort of) ignore it (since the person already explicitly said they are okay with the portfolio going to $0). But someone who is talking about PWRs clearly cares a lot about portfolio drawdowns! Are they really going to be okay when their portfolio falls 42% from its starting value? (From $1,000,000 to $587,000.) Are they really going to be okay spending an entire decade with their portfolio drawndown over 20% from its starting value?

How do we know that a different asset allocation didn't have a slightly worse PWR (which means, in practice, that it took 19 years to recover instead of 18 years) but the overall drawdown was shallower? (Maybe the peak drawdown was only -25% not -42%.)

Ultimately, I think most people looking at PWRs are trying to figure out something about the drawdown characteristics of an asset allocation or a strategy. But PWR is actually not very good at telling you much about that. Instead we should be looking at things like the Ulcer Index or PortfolioCharts's own drawdown charts.

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by klaus14 » Mon Jun 10, 2019 2:52 am

AlohaJoe wrote:
Mon Jun 10, 2019 2:42 am
klaus14 wrote:
Sun Jun 09, 2019 7:13 pm
Below I gathered PWRs for 18 portfolios from Portfolio Charts.

I picked 18 years as the time window to study. Because for most portfolios, 2000-2018 is the worst period and this number is more conservative than portfolio's 30/40 year SWR/PWR. I think especially for early retirees, this number is more relevant.
I actually don't think PWRs are that relevant and I think using PortfolioCharts for this exacerbates the underlying problems with using PWRs. (Though, to be clear, I don't think that is PortfolioChart's fault, simply a limitation of the data he has available.)

Let's look at the 60/40 portfolio since that's one of the few portfolios we can look at before 1970. You say that the PWR over 18 years is 2.5%.

But that is wrong and it is wrong by a lot. The actual 18-year PWR if we use data from 1871-2018 is negative 0.46%. That is, every year you have to add 0.46% to your portfolio. I don't know what a retiree is meant to do with that kind of information? "Prepare for a retirement where you need to add to your portfolio for 18 years to meet your goals"?

It turns out there are actually three retirement cohorts with a negative PWR over an 18 year period: 1964, 1903, and 1902. There are 7 more retirement cohorts with a PWR under 1%: 1965, 1962, 1966, 1901, 1963, 1967. And then another 8 that are under 2%.

And we didn't really need to look at 18 year PWRs to know "hey, in a bad crash, it might take more than 15-20 years for a portfolio to recover, especially when you are withdrawing anything but a trivially small amount of money from it". I think most everyone would have agreed that without even looking at the historical data. It is unfortunate for PortfolioCharts that the data it has available -- 1970-onwards -- doesn't really have any severe, prolonged crashes for US assets. The only thing even close is 2008 but it recovered so quickly it doesn't tell us much about worst case scenarios.

So imagine someone looks at PortfolioCharts results and thought 2.5% was -- not a guarantee exactly -- but a 95th percentile "almost guaranteed" kind of thing. Then we look a bigger data sample and find that is more like 83rd percentile -- almost 20% of the time it didn't leave you with 100% of your original portfolio after 18 years.

Leaving aside the data-length issues, PWRs have two other things I don't like. They have the weird (somewhat non-intuitive) effect that the longer the period the higher your PWR. You see that on PortfolioCharts where the PWR for 18 years is 2.5% but for 19 years it is 2.8%. This makes complete sense because all it is saying is "the longer you wait, the more likely the stocks will make a lot of money", which isn't news to anyone. But when you're picking a fixed length of time it makes the whole PWR exercise into a bit of nonsense.

How do you know 18 years is the "right" length to pick? Especially when we just saw how sensitive it is to the length of time. Going from 18 years to 17 years changes things a lot. Going from 18 to 19 also changes things a lot. So we have to have a lot of belief that 18 is the right number for us to do anything meaningful with it. What does "right" even mean? For a real world retired couple there is an 11% chance they died before that 18th year. Why is it a "perpetual withdrawal rate" if they are dead before it ever got back to 100% the original portfolio value? And as you extend the time period to 30- or 40- or 50-years the reality of stochastic mortality becomes even more relevant. So it becomes some weird exercise about how, sure, the portfolio might not recover in time for me to use it, but at least my heirs will. But at that point....why is 40-years the number we're picking? Why not 80 or 90 years? Or 200 years? Once we get into dynastic wealth conversations it all becomes a bit weird.

But the biggest problem with PWRs is they ignore the reality of portfolio drawdowns. SWRs share the same issue but at least with SWRs we can (sort of) ignore it (since the person already explicitly said they are okay with the portfolio going to $0). But someone who is talking about PWRs clearly cares a lot about portfolio drawdowns! Are they really going to be okay when their portfolio falls 42% from its starting value? (From $1,000,000 to $587,000.) Are they really going to be okay spending an entire decade with their portfolio drawndown over 20% from its starting value?

How do we know that a different asset allocation didn't have a slightly worse PWR (which means, in practice, that it took 19 years to recover instead of 18 years) but the overall drawdown was shallower? (Maybe the peak drawdown was only -25% not -42%.)

Ultimately, I think most people looking at PWRs are trying to figure out something about the drawdown characteristics of an asset allocation or a strategy. But PWR is actually not very good at telling you much about that. Instead we should be looking at things like the Ulcer Index or PortfolioCharts's own drawdown charts.
Thank you.
This all makes perfect sense, however i still think data i shared is useful. it mostly looks what happened to year 2000 retirees with different portfolios. 18YR PWR is usually worse than both 17 and 19. That's why i picked 18 years. If a portfolio has another worst starting point (like Ivy) it uses that.

I think for people aiming early retirement, this is a good test about their portfolios. I won't claim stick to this number and forever withdraw. It's just an exercise showing portfolio construction matters a lot. If you compare best and worst performing portfolios difference is 2x.

I also think recent recessions are more relevant than very old ones. It was very different before 1970s.

I agree about Ulcer Index being very useful. These are all different tests for our portfolios.

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Re: Perpetual Withdraw Rates for 18 Portfolios

Post by YRT70 » Mon Jun 10, 2019 3:14 am

willthrill81 wrote:
Sun Jun 09, 2019 9:58 pm
For all the flack that a prominent forum member brings against it, Merriman's Ultimate portfolio would certainly have done a lot better for retirees than the 3-fund; both have a 40% bond allocation.
Can you tell me who the forum member is and what his criticism comes down to?

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by student » Mon Jun 10, 2019 4:44 am

OP: Thanks for the info.

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by VAslim16 » Mon Jun 10, 2019 4:54 am

I admit I get tempted by the Golden Butterfly at times also...

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by sambb » Mon Jun 10, 2019 5:00 am

3 fund looks weak in this

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Re: Perpetual Withdraw Rates for 18 Portfolios

Post by UpperNwGuy » Mon Jun 10, 2019 6:20 am

YRT70 wrote:
Mon Jun 10, 2019 3:14 am
willthrill81 wrote:
Sun Jun 09, 2019 9:58 pm
For all the flack that a prominent forum member brings against it, Merriman's Ultimate portfolio would certainly have done a lot better for retirees than the 3-fund; both have a 40% bond allocation.
Can you tell me who the forum member is and what his criticism comes down to?
I have this question too.

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Re: Perpetual Withdraw Rates for 18 Portfolios

Post by typical.investor » Mon Jun 10, 2019 6:59 am

UpperNwGuy wrote:
Mon Jun 10, 2019 6:20 am
YRT70 wrote:
Mon Jun 10, 2019 3:14 am
willthrill81 wrote:
Sun Jun 09, 2019 9:58 pm
For all the flack that a prominent forum member brings against it, Merriman's Ultimate portfolio would certainly have done a lot better for retirees than the 3-fund; both have a 40% bond allocation.
Can you tell me who the forum member is and what his criticism comes down to?
I have this question too.
Well what do you think Bogle himself would say? Anyone who has adopted Bogle's views would think the same thing.

I would like more I do actually. Value and international haven't done well in the last decade, Merriman's Ultimate is heavier on both than so I'm pretty sure that the starting values won't be the same.

There's just so much going on - value funds not being really easily investable during much of that time, and small stocks coming into the market.

I'm not picking a portfolio based on on PWR, that's for sure. Still, the ballpark 20,000 foot view is somewhat interesting.

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Re: Perpetual Withdraw Rates for 18 Portfolios

Post by willthrill81 » Mon Jun 10, 2019 9:59 am

YRT70 wrote:
Mon Jun 10, 2019 3:14 am
willthrill81 wrote:
Sun Jun 09, 2019 9:58 pm
For all the flack that a prominent forum member brings against it, Merriman's Ultimate portfolio would certainly have done a lot better for retirees than the 3-fund; both have a 40% bond allocation.
Can you tell me who the forum member is and what his criticism comes down to?
Exhibit A.
Taylor Larimore wrote:
Thu Mar 07, 2019 7:31 pm
Bogleheads:

It is enticing to tinker with our portfolios hoping to "beat the market." However, in the opinion of many experts, including Mr. Bogle, it is better to select a portfolio of broad market index funds and then stay-the-course. These experts agree:
Frank Armstrong, advisor and author of The Informed Investor: "Endless tinkering is unlikely to improve performance, and chasing last period's stellar achiever is a losing strategy."

Barber Odean Study: "Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent. Our central message is that trading is hazardous to your health."

William Bernstein, author of Four Pillars of Investing: If you become upset when one of your asset classes does poorly, even when the rest of your portfolio is doing well, then you should not be managing your own money."

Jack Bogle: "Stay the Course. No matter what happens, stick to your program. I've said "Stay the course" a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you."

Bogleheads Guide to Investing: "Wall Street can't stand buy-and-hold strategies because brokers need trading activity to make money."

Jack Brennan, former Vanguard CEO: "If you're determined to succeed at investing, make it your first priority to become a buy-and-hold investor."

Warren Buffett: "Inactivity strikes us as intelligent behavior."

"Andrew Clarke, author of Wealth of Experience: "Setting a goal, developing an appropriate asset allocation, and selecting a handful of funds are not hugely complex tasks. The hard part comes next: Battling your emotions so that you can stick with your plan through thick and thin."

Jonathan Clements, author and Wall Street Journal columnist: "Take my word on it. Buy-and-hold is still your best long-run strategy."

Phil DeMuth, adviser and co-author of seven investment books: "The investor says to his adviser: 'Every year you tell me to do nothing. What do I need you for?' The adviser replied: 'Every year you need me to keep your from doing anything.' "

Paul Farrell, author of Lazy Persons Guide to Investing: "In a study of 66,400 Merrill Lynch investors, professors Odean and Barber discovered that buy-and-hold investors beat the more active investors by a fairly sizable margin: 18.5% to 11.4% over a six-year period."

Rick Ferri, advisor and financial author: "Write down your strategy -- and stay-the-course."

Steve Forbes: "Everyone is a long-term investor until the market goes down."

Alan Greenspan, former Chairman of the Federal Reserve: "The best strategy for equity investor has always been buy and hold, and forget it."

Mark Hebner, author of "Index Funds": "Prices change to reflect news which is both random and unpredictable. Stock picking and market timing don't work. Stay the course in a risk-appropriate index portfolio and invest and relax."

Morgan Housel, financial columnist: "Do nothing" are the two most powerful -- and underused -- words in investing. The urge to act has transferred an inconceivable amount of wealth from investors to brokers."

Michael LeBoeuf, author of The Millionaire in You: "Simple buy-and-hold index investing is one of the best, most efficient ways to grow your money to the ultimate goal of financial freedom."

Jessie Livermore, famous stock trader: "The big money is not in the buying or the selling, but in the sitting."

Burton Malkiel, author of Random Walk Down Wall Street: "Buying-and-holding a broad-based market index fund is still the only game in town."

Morningstar video: Bad Timing Costs Investors 2.5% Per Year

Mike Piper, editor of The Oblivious Investor: "One of the most important lessons in investing is that there is no “perfect” portfolio, but there are many “perfectly fine” portfolios. Once you are confident that you have a “perfectly fine” portfolio, just stick with the plan and let the portfolio do what it is meant to do."

Bill Schultheis, author of The Coffeehouse Investor: "42% of millionaires of this country make less than one transaction per year in their investments."

Fred Schwed Jr. author of "Where are the Customers' Yachts? "It turns out that I should have just bought them (securities) and thereafter I should have just sat on them like a fat, stupid peasant."

Chandan Sengupta, author of The Only Proven Road to Investment Success: "If you are not going to stick to your chosen investment method through thick and thin, there is almost no chance of your succeeding as an investor."

Dan Solin, financial author and adviser: "Once you understand that monitoring the markets is harmful to your long-term returns, a whole new world of opportunities will await you."

Larry Swedroe, advisor and financial author: "There are lots of people out there who have something to gain by your taking action instead of your adhering to your well-thought-out plan."

Eric Tyson, author of Mutual Funds for Dummies: "Don't trade in and out of funds. Stay invested. Not only does buy-and-hold investing offer better returns, but it's also less work."

Jason Zweig, financial author and Wall Street Journal columnist: "The ultimate benefits of owning stocks accrue only to those who can buy and hold."
Best wishes
Taylor
Exhibit B.
Taylor Larimore wrote:
Mon Nov 26, 2018 9:28 am
masonstone wrote:
Mon Nov 26, 2018 9:00 am
What do bogleheads think of Paul Merriman’s recommendation of putting 10% of funds in small cap value?
masonstone:

Our mentor's answer (underline mine):
"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk." -- "The odds of outpacing an all-market index fund are, well, terrible." -- Jack Bogle
The Three-Fund Portfolio

Best wishes.
Taylor
Exhibit C.
Jags4186 wrote:
Sat May 26, 2018 9:08 pm
Taylor Larimore wrote:
Sat May 26, 2018 8:44 pm
zadie wrote:
Sat Oct 18, 2014 1:16 pm
I agree that it is more complicated than the 3 fund portfolio, his study shows a far greater return as well.
zadie:

Not according to Market Watch.

The winning portfolio is the Second Grader's Three-Fund Portfolio.

Best wishes.
Taylor
Taylor you know it’s disingenuous to compare those portfolios listed on market watch. The version of Merriman’s portfolio listed there is 40% bonds, the 2nd graders portoflio is 10% bonds.
“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: Perpetual Withdraw Rates for 18 Portfolios

Post by YRT70 » Mon Jun 10, 2019 10:39 am

willthrill81 wrote:
Mon Jun 10, 2019 9:59 am
Exhibit A.
Nice. Thank you.

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Tyler9000
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by Tyler9000 » Mon Jun 10, 2019 11:21 am

AlohaJoe wrote:
Mon Jun 10, 2019 2:42 am
The actual 18-year PWR if we use data from 1871-2018 is negative 0.46%. ... So imagine someone looks at PortfolioCharts results and thought 2.5% was -- not a guarantee exactly -- but a 95th percentile "almost guaranteed" kind of thing. Then we look a bigger data sample and find that is more like 83rd percentile -- almost 20% of the time it didn't leave you with 100% of your original portfolio after 18 years.
I appreciate your attention to detail. :sharebeer

I'm going to assume you used Simba's backtesting spreadsheet to find your PWR numbers back to 1871. Good! I encourage others to do the same.

A common tradeoff in investing research is the depth (number of years) vs. breadth (number of assets) of the historical data, and both choices introduce error in the results. For example, using broad data since 1970 crops out a handful of particularly poor older periods that would lower the calculated WR. And using deep data back to 1871 ignores the many different investing options that exist today beyond large-cap US stocks, 10-year treasuries, and T-bills. You can't simply assume that the percentage of stocks drives the WR for all portfolios, as not all stocks and bonds are created equal. Using different tools to study investing performance from multiple perspectives is always more informative than blindly trusting the first one you see. The PC tools are my offering to expand the conversation and apply the same calculation methodologies to diverse portfolio ideas, and I'll happily add more history as I find it.

For reference, I provide examples calibrating the Portfolio Charts SWR data since 1970 to identical portfolios since 1871 from several independent sources, and the difference over 30-year retirements is only about 0.3%. Long-term PWRs should have a similar amount of error. But you're absolutely correct that the error gets higher as you study shorter retirement timeframes, and I'll look into adding another FAQ topic to cover that point just so there's no confusion.

In any case, I would argue the numbers are still quite valuable for general portfolio comparison purposes. Because withdrawal rates heavily depend on portfolio consistency, I anticipate the rank of the list in the OP won't change too much even with more data. If anything, the spread in PWRs between the most consistent portfolio and most volatile portfolio will likely get even wider as the volatile options have more opportunities to set new lows. But I also wouldn't necessarily bet my life savings on the precise reported 18-year PWR number. Be smart about it. It's a guidepost, not a safety rail.

AlohaJoe wrote:
Mon Jun 10, 2019 2:42 am
How do we know that a different asset allocation didn't have a slightly worse PWR (which means, in practice, that it took 19 years to recover instead of 18 years) but the overall drawdown was shallower? (Maybe the peak drawdown was only -25% not -42%.)
That one is easy. There's an entire website dedicated to studying those types of portfolio tradeoffs. ;)

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by Tyler Aspect » Mon Jun 10, 2019 2:48 pm

I feel more comfortable with safe withdrawal calculators. In my mind the possibility of economic recessions is a given. Although recessions are uncomfortable events, it is better to deal with them using conventional means. That is to keep asset allocation in the normal range of 60% stock to 40% stock, and keeping 2 year supply of cash in hand. You have taken a beating in a recession, but the economy will eventually recover.

To bend your portfolio extremely out of shape just to have a chance to deny the reality of a recession is unlikely to work. Back-tested data tells historical results, but they have no implications moving forward.
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by klaus14 » Mon Jun 10, 2019 2:58 pm

Tyler9000 wrote:
Mon Jun 10, 2019 11:21 am
I appreciate your attention to detail. :sharebeer

I'm going to assume you used Simba's backtesting spreadsheet to find your PWR numbers back to 1871. Good! I encourage others to do the same.

A common tradeoff in investing research is the depth (number of years) vs. breadth (number of assets) of the historical data, and both choices introduce error in the results. For example, using broad data since 1970 crops out a handful of particularly poor older periods that would lower the calculated WR. And using deep data back to 1871 ignores the many different investing options that exist today beyond large-cap US stocks, 10-year treasuries, and T-bills. You can't simply assume that the percentage of stocks drives the WR for all portfolios, as not all stocks and bonds are created equal. Using different tools to study investing performance from multiple perspectives is always more informative than blindly trusting the first one you see. The PC tools are my offering to expand the conversation and apply the same calculation methodologies to diverse portfolio ideas, and I'll happily add more history as I find it.

For reference, I provide examples calibrating the Portfolio Charts SWR data since 1970 to identical portfolios since 1871 from several independent sources, and the difference over 30-year retirements is only about 0.3%. Long-term PWRs should have a similar amount of error. But you're absolutely correct that the error gets higher as you study shorter retirement timeframes, and I'll look into adding another FAQ topic to cover that point just so there's no confusion.

In any case, I would argue the numbers are still quite valuable for general portfolio comparison purposes. Because withdrawal rates heavily depend on portfolio consistency, I anticipate the rank of the list in the OP won't change too much even with more data. If anything, the spread in PWRs between the most consistent portfolio and most volatile portfolio will likely get even wider as the volatile options have more opportunities to set new lows. But I also wouldn't necessarily bet my life savings on the precise reported 18-year PWR number. Be smart about it. It's a guidepost, not a safety rail.
Thank you Tyler for your hard work, I am a big fan!
Your visualizations are better than long articles to convey a complex idea.

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by klaus14 » Mon Jun 10, 2019 3:25 pm

Tyler Aspect wrote:
Mon Jun 10, 2019 2:48 pm
I feel more comfortable with safe withdrawal calculators. In my mind the possibility of economic recessions is a given. Although recessions are uncomfortable events, it is better to deal with them using conventional means. That is to keep asset allocation in the normal range of 60% stock to 40% stock, and keeping 2 year supply of cash in hand. You have taken a beating in a recession, but the economy will eventually recover.

To bend your portfolio extremely out of shape just to have a chance to deny the reality of a recession is unlikely to work. Back-tested data tells historical results, but they have no implications moving forward.
no implications? really? Why do you invest in 60/40 then?
In reality, past behavior informs our portfolio construction a lot. Especially volatility and correlations are somewhat persistent.

What would be a mistake is to overfit.
So instead of copying the top performing portfolios, we should look into why they over-performed and adopt the ideas that has potential of working in the future. Compared to simple 60/40, top performing portfolios have
- At least 10% gold. I think this idea will persist. people will buy gold when they feel unsafe with stocks AND bonds.
- SCV tilt. Was this only because 2001 tech bubble? i think it will persist. There are behavioral & risk reasons for its outperformance
- EM tilt. Should persist. It's the highest growing part of world GDP. It's very volatile, hence low valuation. so risk explanation for high expected return.
- REIT tilt. I think this is overfitting. It may not persist. Especially with high valuations & low dividends as of now.
- Long term Treasury tilt. Will persist. Negative correlation to Stocks and high volatility reduces total risk of portfolio.
- Cash/Short Term Bonds. I am not convinced here more than a 1 year emergency fund.

Also keep in mind that we have now new tools that none of these portfolios had
- Multifactor funds. They improve SCV tilts with quality & momentum exposure
- TIPS. If you need inflation protection.
- Treasury Futures & Leverage. Funds like NTSX allow you to utilize treasury futures cheaply to obtain better risk parity.
- Emerging Debt. This has different (and arguably better) risk/return profile compared to EM equities.
- Alternatives. like reinsurance. can give you a new uncorrelated source of risk/return.

From this 5, I adopted all except the last one (due to high cost)
Last edited by klaus14 on Mon Jun 10, 2019 3:36 pm, edited 7 times in total.

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by willthrill81 » Mon Jun 10, 2019 3:28 pm

klaus14 wrote:
Mon Jun 10, 2019 3:25 pm
Tyler Aspect wrote:
Mon Jun 10, 2019 2:48 pm
I feel more comfortable with safe withdrawal calculators. In my mind the possibility of economic recessions is a given. Although recessions are uncomfortable events, it is better to deal with them using conventional means. That is to keep asset allocation in the normal range of 60% stock to 40% stock, and keeping 2 year supply of cash in hand. You have taken a beating in a recession, but the economy will eventually recover.

To bend your portfolio extremely out of shape just to have a chance to deny the reality of a recession is unlikely to work. Back-tested data tells historical results, but they have no implications moving forward.
no implications? really? Why do you invest in 60/40 then?
In reality, past behavior informs our portfolio construction a lot. Especially volatility and correlations are somewhat persistent.
Yes, historic data certainly have implications for strategy. How strong those implications are is debatable, but at a bare minimum, historical data indicates what is at least plausible going forward.
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by Elric » Mon Jun 10, 2019 4:10 pm

typical.investor wrote:
Mon Jun 10, 2019 2:22 am
Image
Clearly I'm missing something important. Why is the PWR a function of retirement age in this chart, and tend to zero if you die the minute you retire? I thought the whole idea was you preserved principal in perpetuity (at least according to whatever data set and time period the analysis was based on). What am I missing?
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by pkcrafter » Mon Jun 10, 2019 4:25 pm

Interesting work, Klaus. Now I wonder what do your portfolios look like in these two periods posted by John Norstad?

“The 16 years from 1966 through 1981 were indeed a period when stocks went nowhere (actually less than nowhere – they went backwards). Using the “Fama/French Factors” data at Ken French’s web site for the total stock market (not just large caps), the total return in excess of the risk-free rate over that 16 year period was -7.69%, and the total “real” return in excess of inflation as measured by the CPI was -5.54%.”

“ Interesting to compare this period to the Great Depression. The total real return for the 16 years from 1929 through 1944 was 20.58%. This isn’t a very handsome total return for 16 years of investing, but it’s lots better than -5.54%. We usually think of the Great Depression as a bad time for investors (and it was), but that 66-81 period was actually quite a bit worse.“

“So in the last 83 years we have 2 examples of 16 year periods when stocks didn’t do well at all. 16 years is a long time. In both cases investors who stayed the course happened to end up being well rewarded eventually. But was this guaranteed? Will this pattern always repeat in the future? It’s not a sure bet, IMHO, and the fact that it happened twice is no kind of proof that this kind of recovery is some kind of immutable law of nature.” – John Norstad, 2011, Bogleheads

“If you take the full 18 years from the end of 1999 to the end of 2017, the S&P 500 has only risen 82%, which works out to only 3.4% per year, annualized.” – Louis Navellier

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by Tyler9000 » Mon Jun 10, 2019 4:37 pm

Elric wrote:
Mon Jun 10, 2019 4:10 pm
Clearly I'm missing something important. Why is the PWR a function of retirement age in this chart, and tend to zero if you die the minute you retire? I thought the whole idea was you preserved principal in perpetuity (at least according to whatever data set and time period the analysis was based on). What am I missing?
The x-axis is the length of retirement, not the age at retirement. So as the retirement timeframe gets longer, the safe withdrawal rate approaches the perpetual withdrawal rate. This article explains how the chart works in more depth.

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by Elric » Mon Jun 10, 2019 5:01 pm

Tyler9000 wrote:
Mon Jun 10, 2019 4:37 pm
So as the retirement timeframe gets longer, the safe withdrawal rate approaches the perpetual withdrawal rate. This article explains how the chart works in more depth.
Thanks! So as I understand it, if your retirement timeframe is 0 - 10 or so years, then the PWR is 0% or negative (not shown on the graph), because you could lose value in your investments right away, with no time to recover. But if you'll be pulling for 20+ years, the ups and downs start to balance out, and the PWR trends upwards (unlike the SWR, which trends downwards). At infinity, the two will intersect (a safe withdrawal rate for infinite time is essentially the same as the perpetual rate).
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by Tyler9000 » Mon Jun 10, 2019 5:12 pm

Elric wrote:
Mon Jun 10, 2019 5:01 pm
Thanks! So as I understand it, if your retirement timeframe is 0 - 10 or so years, then the PWR is 0% or negative (not shown on the graph), because you could lose value in your investments right away, with no time to recover. But if you'll be pulling for 20+ years, the ups and downs start to balance out, and the PWR trends upwards (unlike the SWR, which trends downwards). At infinity, the two will intersect (a safe withdrawal rate for infinite time is essentially the same as the perpetual rate).
Yep! That sums it up nicely.

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by FlyingMoose » Tue Jun 11, 2019 1:14 am

There are lots of posts about staying the course, but:

I think there is a general assumption here that a portfolio that works well during accumulation will also work well during drawdown, merely by changing the stock/bond ratio.

I think I've seen some recognition that this may not be true, specifically with the talk about bond tents and sequence-of-returns risk. But we just need to look above to see how poorly even 100% stock or 60/40 portfolios perform during retirement.

It's widely recognized that a downturn in the market is a good buying opportunity while you're still working but can be the kiss of death during retirement. I am pretty sure that my state of mind will change when I start taking money out instead of putting it in, and I may not be able to stick to even a bond-heavy portfolio, out of fear of inflation as much as fear of a stock market crash. I remember what it felt like leading up to 2009, it seemed like the dollar was going to crash.

Perhaps it's time for the Bogleheads to shift strategy a bit, and for example, have an accumulation portfolio (3-fund, for example) but starting 10 years from retirement, slowly transition to a drawdown portfolio (perhaps a blend of some of the above).

I think a lot of the objections to this type of "drawdown" portfolio is that it's far from optimal during accumulation. I think we must consider that an "accumulation" portfolio is just as ill-suited to drawdown.

What say y'all?

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by willthrill81 » Tue Jun 11, 2019 10:17 am

FlyingMoose wrote:
Tue Jun 11, 2019 1:14 am
There are lots of posts about staying the course, but:

I think there is a general assumption here that a portfolio that works well during accumulation will also work well during drawdown, merely by changing the stock/bond ratio.

I think I've seen some recognition that this may not be true, specifically with the talk about bond tents and sequence-of-returns risk. But we just need to look above to see how poorly even 100% stock or 60/40 portfolios perform during retirement.

It's widely recognized that a downturn in the market is a good buying opportunity while you're still working but can be the kiss of death during retirement. I am pretty sure that my state of mind will change when I start taking money out instead of putting it in, and I may not be able to stick to even a bond-heavy portfolio, out of fear of inflation as much as fear of a stock market crash. I remember what it felt like leading up to 2009, it seemed like the dollar was going to crash.

Perhaps it's time for the Bogleheads to shift strategy a bit, and for example, have an accumulation portfolio (3-fund, for example) but starting 10 years from retirement, slowly transition to a drawdown portfolio (perhaps a blend of some of the above).

I think a lot of the objections to this type of "drawdown" portfolio is that it's far from optimal during accumulation. I think we must consider that an "accumulation" portfolio is just as ill-suited to drawdown.

What say y'all?
What you seem to be insinuating is that sequence of returns risk (SRR) is only a danger to retirees. That is false. SRR can also kick accumulators in the teeth; the consequences just seem to be less for them as long as they can continue working. For instance, a very poor sequence of returns for an accumulator would have them earning good returns for the first 20-30 years of accumulation, when they don't have much saved, and then have them earn very poor returns for the last 10-15 years of accumulation, when they have the most dollars invested.

For instance, let's look at a hypothetical investor starting with a $10k portfolio comprised of 60% TSM and 40% TBM, investing $1k annually, with 30 years of accumulation left. From 1990-2019, where the last decade had very strong returns, their inflation-adjusted final portfolio would have been worth $119k. But if the period was 1980-2009, where the last decade had poor returns, their inflation-adjusted final portfolio would have been worth $73k, almost 40% less than in the other sequence.

Whether you're an accumulator or a retiree, you want SRR to be as small as possible.
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by deikel » Tue Jun 11, 2019 11:18 am

Tyler9000 wrote:
Mon Jun 10, 2019 5:12 pm
Elric wrote:
Mon Jun 10, 2019 5:01 pm
Thanks! So as I understand it, if your retirement timeframe is 0 - 10 or so years, then the PWR is 0% or negative (not shown on the graph), because you could lose value in your investments right away, with no time to recover. But if you'll be pulling for 20+ years, the ups and downs start to balance out, and the PWR trends upwards (unlike the SWR, which trends downwards). At infinity, the two will intersect (a safe withdrawal rate for infinite time is essentially the same as the perpetual rate).
Yep! That sums it up nicely.
OK, so if I look at the picture, then the message seems to be that a 4% withdrawal rate seems a reasonable target since they both converge to it ? Which makes sense since Trinity looked at 30 year and came out slightly above 4 % in worst case scenarios

And the original data for the various portfolios in their worst 18 year period would suggest something between 2.4 and 5.1 % with many of them around 3.x percent, which is slightly less then Trinity suggested, which makes sense since the time frame is shorter and the preservation of principle were the side restrictions.

So, Trinity study confirmed again, 4% withdrawal rate is a good number to go by, even at worst case market scenarios and under some fairly wide asset allocations.

Is that too simple a summary ?
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by willthrill81 » Tue Jun 11, 2019 2:14 pm

deikel wrote:
Tue Jun 11, 2019 11:18 am
Tyler9000 wrote:
Mon Jun 10, 2019 5:12 pm
Elric wrote:
Mon Jun 10, 2019 5:01 pm
Thanks! So as I understand it, if your retirement timeframe is 0 - 10 or so years, then the PWR is 0% or negative (not shown on the graph), because you could lose value in your investments right away, with no time to recover. But if you'll be pulling for 20+ years, the ups and downs start to balance out, and the PWR trends upwards (unlike the SWR, which trends downwards). At infinity, the two will intersect (a safe withdrawal rate for infinite time is essentially the same as the perpetual rate).
Yep! That sums it up nicely.
OK, so if I look at the picture, then the message seems to be that a 4% withdrawal rate seems a reasonable target since they both converge to it ? Which makes sense since Trinity looked at 30 year and came out slightly above 4 % in worst case scenarios

And the original data for the various portfolios in their worst 18 year period would suggest something between 2.4 and 5.1 % with many of them around 3.x percent, which is slightly less then Trinity suggested, which makes sense since the time frame is shorter and the preservation of principle were the side restrictions.

So, Trinity study confirmed again, 4% withdrawal rate is a good number to go by, even at worst case market scenarios and under some fairly wide asset allocations.

Is that too simple a summary ?
4% is a reasonable starting point. However, if you look at the portfolio balance in many of these scenarios, it would take...nerves...of steel to have not reduced this withdrawal rate. Consider year 2000 retirees, whose inflation-adjusted portfolio balance would have been down 51% by March of 2009 if they had a 60/40 portfolio and used 4% fixed real withdrawals. Hence, it seems very prudent to incorporate some kind of flexibility to one's withdrawals. The retirement spending chart at Portfolio Charts is a great tool to see how adding flexibility, both with regard to increasing and decreasing withdrawals, would have worked in the past.
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by deikel » Tue Jun 11, 2019 4:00 pm

willthrill81 wrote:
Tue Jun 11, 2019 2:14 pm
deikel wrote:
Tue Jun 11, 2019 11:18 am
Tyler9000 wrote:
Mon Jun 10, 2019 5:12 pm
Elric wrote:
Mon Jun 10, 2019 5:01 pm
Thanks! So as I understand it, if your retirement timeframe is 0 - 10 or so years, then the PWR is 0% or negative (not shown on the graph), because you could lose value in your investments right away, with no time to recover. But if you'll be pulling for 20+ years, the ups and downs start to balance out, and the PWR trends upwards (unlike the SWR, which trends downwards). At infinity, the two will intersect (a safe withdrawal rate for infinite time is essentially the same as the perpetual rate).
Yep! That sums it up nicely.
OK, so if I look at the picture, then the message seems to be that a 4% withdrawal rate seems a reasonable target since they both converge to it ? Which makes sense since Trinity looked at 30 year and came out slightly above 4 % in worst case scenarios

And the original data for the various portfolios in their worst 18 year period would suggest something between 2.4 and 5.1 % with many of them around 3.x percent, which is slightly less then Trinity suggested, which makes sense since the time frame is shorter and the preservation of principle were the side restrictions.

So, Trinity study confirmed again, 4% withdrawal rate is a good number to go by, even at worst case market scenarios and under some fairly wide asset allocations.

Is that too simple a summary ?
4% is a reasonable starting point. However, if you look at the portfolio balance in many of these scenarios, it would take...nerves...of steel to have not reduced this withdrawal rate. Consider year 2000 retirees, whose inflation-adjusted portfolio balance would have been down 51% by March of 2009 if they had a 60/40 portfolio and used 4% fixed real withdrawals. Hence, it seems very prudent to incorporate some kind of flexibility to one's withdrawals. The retirement spending chart at Portfolio Charts is a great tool to see how adding flexibility, both with regard to increasing and decreasing withdrawals, would have worked in the past.
Not disagreeing with you in principle - spending flexibility is probably your biggest 'asset' in retirement.

But, 2000-2009 retirees had a good run of bond yields in that time frame, could have spent their bonds during the recession and enjoy the stock (re)gains afterwards.

What I was really getting at is that a lot of folks lately cry about the '4 % rule' being too aggressive, especially for early retirees, when in reality the Trinity Study (and its follow up studies) already considered bad market conditions - so 4% was actually conservative then and a very reasonable number now.

I thought is was interesting to see the OPs data to kind of confirm a number around 3.6 as a valid number for really bad times, over a large range of portfolios (with some interesting outliers up and down) with a side limitation of preserving principal....based on that, all the calls for a lower SWR seem overly conservative to me.

There is nothing wrong with that per se (better safe then sorry), but you would have to work longer to get there or consider a leaner retirement - both options that come with their own cost.
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by willthrill81 » Tue Jun 11, 2019 4:04 pm

deikel wrote:
Tue Jun 11, 2019 4:00 pm
willthrill81 wrote:
Tue Jun 11, 2019 2:14 pm
deikel wrote:
Tue Jun 11, 2019 11:18 am
Tyler9000 wrote:
Mon Jun 10, 2019 5:12 pm
Elric wrote:
Mon Jun 10, 2019 5:01 pm
Thanks! So as I understand it, if your retirement timeframe is 0 - 10 or so years, then the PWR is 0% or negative (not shown on the graph), because you could lose value in your investments right away, with no time to recover. But if you'll be pulling for 20+ years, the ups and downs start to balance out, and the PWR trends upwards (unlike the SWR, which trends downwards). At infinity, the two will intersect (a safe withdrawal rate for infinite time is essentially the same as the perpetual rate).
Yep! That sums it up nicely.
OK, so if I look at the picture, then the message seems to be that a 4% withdrawal rate seems a reasonable target since they both converge to it ? Which makes sense since Trinity looked at 30 year and came out slightly above 4 % in worst case scenarios

And the original data for the various portfolios in their worst 18 year period would suggest something between 2.4 and 5.1 % with many of them around 3.x percent, which is slightly less then Trinity suggested, which makes sense since the time frame is shorter and the preservation of principle were the side restrictions.

So, Trinity study confirmed again, 4% withdrawal rate is a good number to go by, even at worst case market scenarios and under some fairly wide asset allocations.

Is that too simple a summary ?
4% is a reasonable starting point. However, if you look at the portfolio balance in many of these scenarios, it would take...nerves...of steel to have not reduced this withdrawal rate. Consider year 2000 retirees, whose inflation-adjusted portfolio balance would have been down 51% by March of 2009 if they had a 60/40 portfolio and used 4% fixed real withdrawals. Hence, it seems very prudent to incorporate some kind of flexibility to one's withdrawals. The retirement spending chart at Portfolio Charts is a great tool to see how adding flexibility, both with regard to increasing and decreasing withdrawals, would have worked in the past.
Not disagreeing with you in principle - spending flexibility is probably your biggest 'asset' in retirement.

But, 2000-2009 retirees had a good run of bond yields in that time frame, could have spent their bonds during the recession and enjoy the stock (re)gains afterwards.

What I was really getting at is that a lot of folks lately cry about the '4 % rule' being too aggressive, especially for early retirees, when in reality the Trinity Study (and its follow up studies) already considered bad market conditions - so 4% was actually conservative then and a very reasonable number now.

I thought is was interesting to see the OPs data to kind of confirm a number around 3.6 as a valid number for really bad times, over a large range of portfolios (with some interesting outliers up and down) with a side limitation of preserving principal....based on that, all the calls for a lower SWR seem overly conservative to me.

There is nothing wrong with that per se (better safe then sorry), but you would have to work longer to get there or consider a leaner retirement - both options that come with their own cost.
I entirely agree that 4% is a conservative starting point and that going significantly lower has substantial opportunity costs. Prior analysis of mine indicated that for a retiree with a 20% savings rate, it would take about 5 additional years to go from a 25x portfolio to 33x (i.e. 4% withdrawals to 3%) with 5% real returns and 10 years with 2% real returns.

At the same time, I don't believe that it's prudent for anyone to realistically believe that they won't feel compelled to reduce their withdrawals at some point, especially if they encounter a bear market during the first crucial decade of retirement. Making advance plans for how to do so methodically seems more prudent than 'winging it'.
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by longinvest » Tue Jun 11, 2019 4:48 pm

When I'll reach age 65 with my all-in-one globally-diversified balanced portfolio (60/40 stocks bonds), I'll withdraw 5% of my portfolio without any guilt whatsoever, as dictated by the VPW Table.

I'm sad for those who'll spend 20%, 30%, 40%, or even 60% less than me (4% is 20% less than 5%, 3.5% is 30% less, 3% is 40% less, and we've recently had a recent 2% SWR thread! :oops:) just because of fear. I think that living in fear is no way to live.

I definitely have no intention whatsoever to die as the richest person in the graveyard, but I don't want to take undue risk, either. I'll combine VPW withdrawals with stable lifelong income (like Social Security delayed to age 70) and, if necessary, I'll consider using part of my residual portfolio at age 80 (no earlier) to buy an inflation-indexed SPIA* to dampen the financial risk of long life. It doesn't have to be more difficult than this.

* Single-Premium Immediate Annuity.
Last edited by longinvest on Tue Jun 11, 2019 7:08 pm, edited 1 time in total.
Bogleheads investment philosophy | single-ETF balanced portfolio | VBAL

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Tyler Aspect
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by Tyler Aspect » Tue Jun 11, 2019 4:57 pm

klaus14 wrote:
Mon Jun 10, 2019 3:25 pm
Tyler Aspect wrote:
Mon Jun 10, 2019 2:48 pm
I feel more comfortable with safe withdrawal calculators. In my mind the possibility of economic recessions is a given. Although recessions are uncomfortable events, it is better to deal with them using conventional means. That is to keep asset allocation in the normal range of 60% stock to 40% stock, and keeping 2 year supply of cash in hand. You have taken a beating in a recession, but the economy will eventually recover.

To bend your portfolio extremely out of shape just to have a chance to deny the reality of a recession is unlikely to work. Back-tested data tells historical results, but they have no implications moving forward.
no implications? really? Why do you invest in 60/40 then?
In reality, past behavior informs our portfolio construction a lot. Especially volatility and correlations are somewhat persistent.

What would be a mistake is to overfit.
So instead of copying the top performing portfolios, we should look into why they over-performed and adopt the ideas that has potential of working in the future. Compared to simple 60/40, top performing portfolios have
- At least 10% gold. I think this idea will persist. people will buy gold when they feel unsafe with stocks AND bonds.
- SCV tilt. Was this only because 2001 tech bubble? i think it will persist. There are behavioral & risk reasons for its outperformance
- EM tilt. Should persist. It's the highest growing part of world GDP. It's very volatile, hence low valuation. so risk explanation for high expected return.
- REIT tilt. I think this is overfitting. It may not persist. Especially with high valuations & low dividends as of now.
- Long term Treasury tilt. Will persist. Negative correlation to Stocks and high volatility reduces total risk of portfolio.
- Cash/Short Term Bonds. I am not convinced here more than a 1 year emergency fund.

Also keep in mind that we have now new tools that none of these portfolios had
- Multifactor funds. They improve SCV tilts with quality & momentum exposure
- TIPS. If you need inflation protection.
- Treasury Futures & Leverage. Funds like NTSX allow you to utilize treasury futures cheaply to obtain better risk parity.
- Emerging Debt. This has different (and arguably better) risk/return profile compared to EM equities.
- Alternatives. like reinsurance. can give you a new uncorrelated source of risk/return.

From this 5, I adopted all except the last one (due to high cost)
I guess you picked these tilts because they produced a successful result in the past. Given that the force known as "reversion to the means" should be in effect. A truly attractive asset should have an inflow of buyers until its price is increased to a point where it is no longer attractive. I would argue that to have a good chance of producing above average result it is better to search for a typical diversification strategy with recent below average performance. Reversion to the means would have a higher chance of bumping up the performance of that asset class. (Don't pick winners - pick losers instead)

International stocks have under-performed US stocks for a number of years. I would have thought international stocks as a more attractive target compared to gold or emerging market bonds. The trade-war just means international stock valuation is looking even better at this point.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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klaus14
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by klaus14 » Tue Jun 11, 2019 5:02 pm

willthrill81 wrote:
Tue Jun 11, 2019 4:04 pm

I entirely agree that 4% is a conservative starting point and that going significantly lower has substantial opportunity costs. Prior analysis of mine indicated that for a retiree with a 20% savings rate, it would take about 5 additional years to go from a 25x portfolio to 33x (i.e. 4% withdrawals to 3%) with 5% real returns and 10 years with 2% real returns.

At the same time, I don't believe that it's prudent for anyone to realistically believe that they won't feel compelled to reduce their withdrawals at some point, especially if they encounter a bear market during the first crucial decade of retirement. Making advance plans for how to do so methodically seems more prudent than 'winging it'.
I definitely agree. Fixed WRs are bad.
My own portfolio has 4.0% 18YR PWR. My plan is to retire with 4% flexible:
- Move 4% of my portfolio to my checking account (Fidelity money market) at the start of my retirement.
- Every month, whatever the value of my portfolio is, move 4%/12 of that amount (so i have 1 year "buffer")

My portfolio has 25% deepest drawdown. So i am fine with cutting my expenses 25% if 2001 or 2008 happens again.
Last edited by klaus14 on Tue Jun 11, 2019 6:00 pm, edited 4 times in total.

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klaus14
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by klaus14 » Tue Jun 11, 2019 5:04 pm

Tyler Aspect wrote:
Tue Jun 11, 2019 4:57 pm
klaus14 wrote:
Mon Jun 10, 2019 3:25 pm
no implications? really? Why do you invest in 60/40 then?
In reality, past behavior informs our portfolio construction a lot. Especially volatility and correlations are somewhat persistent.

What would be a mistake is to overfit.
So instead of copying the top performing portfolios, we should look into why they over-performed and adopt the ideas that has potential of working in the future. Compared to simple 60/40, top performing portfolios have
- At least 10% gold. I think this idea will persist. people will buy gold when they feel unsafe with stocks AND bonds.
- SCV tilt. Was this only because 2001 tech bubble? i think it will persist. There are behavioral & risk reasons for its outperformance
- EM tilt. Should persist. It's the highest growing part of world GDP. It's very volatile, hence low valuation. so risk explanation for high expected return.
- REIT tilt. I think this is overfitting. It may not persist. Especially with high valuations & low dividends as of now.
- Long term Treasury tilt. Will persist. Negative correlation to Stocks and high volatility reduces total risk of portfolio.
- Cash/Short Term Bonds. I am not convinced here more than a 1 year emergency fund.

Also keep in mind that we have now new tools that none of these portfolios had
- Multifactor funds. They improve SCV tilts with quality & momentum exposure
- TIPS. If you need inflation protection.
- Treasury Futures & Leverage. Funds like NTSX allow you to utilize treasury futures cheaply to obtain better risk parity.
- Emerging Debt. This has different (and arguably better) risk/return profile compared to EM equities.
- Alternatives. like reinsurance. can give you a new uncorrelated source of risk/return.

From this 5, I adopted all except the last one (due to high cost)
I guess you picked these tilts because they produced a successful result in the past. Given that the force known as "reversion to the means" should be in effect. A truly attractive asset should have an inflow of buyers until its price is increased to a point where it is no longer attractive. I would argue that to have a good chance of producing above average result it is better to search for a typical diversification strategy with recent below average performance. Reversion to the means would have a higher chance of bumping up the performance of that asset class. (Don't pick winners - pick losers instead)

International stocks have under-performed US stocks for a number of years. I would have thought international stocks as a more attractive target compared to gold or emerging market bonds. The trade-war just means international stock valuation is looking even better at this point.
agreed.
i do 50/50 US/INT. Within INT, i do 60/40 DEV/EM. Mostly multifactor.
None of my tilts were performing well recently, when i adopted them. EM Debt, gold and Treasury futures/EDV did well after i bought. I am keeping them. Still waiting on multifactors and EM Equity :)

visualguy
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by visualguy » Tue Jun 11, 2019 5:14 pm

willthrill81 wrote:
Tue Jun 11, 2019 4:04 pm
I entirely agree that 4% is a conservative starting point
True for the US market based on its history, but not true for ex-US. What if the US starts performing like ex-US has performed? Is that really so unlikely that we can reasonably ignore it? Also, what about the people who have a large percentage in ex-US?

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klaus14
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by klaus14 » Tue Jun 11, 2019 5:17 pm

visualguy wrote:
Tue Jun 11, 2019 5:14 pm
willthrill81 wrote:
Tue Jun 11, 2019 4:04 pm
I entirely agree that 4% is a conservative starting point
True for the US market based on its history, but not true for ex-US. What if the US starts performing like ex-US has performed? Is that really so unlikely that we can reasonably ignore it? Also, what about the people who have a large percentage in ex-US?
That's why it's a bad idea to concentrate on US. You can have your home bias with bonds, but for equities i think everyone should start from global market cap. This reduces risk and improves WR.

visualguy
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by visualguy » Tue Jun 11, 2019 5:21 pm

klaus14 wrote:
Tue Jun 11, 2019 5:17 pm
visualguy wrote:
Tue Jun 11, 2019 5:14 pm
willthrill81 wrote:
Tue Jun 11, 2019 4:04 pm
I entirely agree that 4% is a conservative starting point
True for the US market based on its history, but not true for ex-US. What if the US starts performing like ex-US has performed? Is that really so unlikely that we can reasonably ignore it? Also, what about the people who have a large percentage in ex-US?
That's why it's a bad idea to concentrate on US. You can have your home bias with bonds, but for equities i think everyone should start from global market cap. This reduces risk and improves WR.
The vast majority of the studies that we rely on have been done on US-only, and the results can't be applied to global market cap. This includes the often-cited 4% for 30 years.

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klaus14
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by klaus14 » Tue Jun 11, 2019 5:24 pm

visualguy wrote:
Tue Jun 11, 2019 5:21 pm

The vast majority of the studies that we rely on have been done on US-only, and the results can't be applied to global market cap. This includes the often-cited 4% for 30 years.
Portfolio charts has data for INT since 1970. You can study SWRs for portfolios containing significant INT. They are not very different than US dominant portfolios.

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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by willthrill81 » Tue Jun 11, 2019 7:05 pm

visualguy wrote:
Tue Jun 11, 2019 5:21 pm
klaus14 wrote:
Tue Jun 11, 2019 5:17 pm
visualguy wrote:
Tue Jun 11, 2019 5:14 pm
willthrill81 wrote:
Tue Jun 11, 2019 4:04 pm
I entirely agree that 4% is a conservative starting point
True for the US market based on its history, but not true for ex-US. What if the US starts performing like ex-US has performed? Is that really so unlikely that we can reasonably ignore it? Also, what about the people who have a large percentage in ex-US?
That's why it's a bad idea to concentrate on US. You can have your home bias with bonds, but for equities i think everyone should start from global market cap. This reduces risk and improves WR.
The vast majority of the studies that we rely on have been done on US-only, and the results can't be applied to global market cap. This includes the often-cited 4% for 30 years.
Since 1970, the 30 year safe withdrawal rate for a 60% U.S. TSM and 40% intermediate-term Treasuries was 4.5%. If you instead split the equities between U.S. and international, the SWR was actually higher at 4.7%. Had all of the equities been in international equities, the SWR still would have been 4.7%. So no, 4% is not an overly aggressive starting point, particularly for those that incorporate flexibility to their withdrawals, which the SWR does not do.
“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

elainet7
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by elainet7 » Tue Jun 11, 2019 7:08 pm

how many retirees 65-70 have 60% in equities, really?

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willthrill81
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Re: Perpetual Withdrawal Rates for 18 Portfolios

Post by willthrill81 » Tue Jun 11, 2019 7:22 pm

Tyler Aspect wrote:
Tue Jun 11, 2019 4:57 pm
klaus14 wrote:
Mon Jun 10, 2019 3:25 pm
Tyler Aspect wrote:
Mon Jun 10, 2019 2:48 pm
I feel more comfortable with safe withdrawal calculators. In my mind the possibility of economic recessions is a given. Although recessions are uncomfortable events, it is better to deal with them using conventional means. That is to keep asset allocation in the normal range of 60% stock to 40% stock, and keeping 2 year supply of cash in hand. You have taken a beating in a recession, but the economy will eventually recover.

To bend your portfolio extremely out of shape just to have a chance to deny the reality of a recession is unlikely to work. Back-tested data tells historical results, but they have no implications moving forward.
no implications? really? Why do you invest in 60/40 then?
In reality, past behavior informs our portfolio construction a lot. Especially volatility and correlations are somewhat persistent.

What would be a mistake is to overfit.
So instead of copying the top performing portfolios, we should look into why they over-performed and adopt the ideas that has potential of working in the future. Compared to simple 60/40, top performing portfolios have
- At least 10% gold. I think this idea will persist. people will buy gold when they feel unsafe with stocks AND bonds.
- SCV tilt. Was this only because 2001 tech bubble? i think it will persist. There are behavioral & risk reasons for its outperformance
- EM tilt. Should persist. It's the highest growing part of world GDP. It's very volatile, hence low valuation. so risk explanation for high expected return.
- REIT tilt. I think this is overfitting. It may not persist. Especially with high valuations & low dividends as of now.
- Long term Treasury tilt. Will persist. Negative correlation to Stocks and high volatility reduces total risk of portfolio.
- Cash/Short Term Bonds. I am not convinced here more than a 1 year emergency fund.

Also keep in mind that we have now new tools that none of these portfolios had
- Multifactor funds. They improve SCV tilts with quality & momentum exposure
- TIPS. If you need inflation protection.
- Treasury Futures & Leverage. Funds like NTSX allow you to utilize treasury futures cheaply to obtain better risk parity.
- Emerging Debt. This has different (and arguably better) risk/return profile compared to EM equities.
- Alternatives. like reinsurance. can give you a new uncorrelated source of risk/return.

From this 5, I adopted all except the last one (due to high cost)
I guess you picked these tilts because they produced a successful result in the past. Given that the force known as "reversion to the means" should be in effect. A truly attractive asset should have an inflow of buyers until its price is increased to a point where it is no longer attractive. I would argue that to have a good chance of producing above average result it is better to search for a typical diversification strategy with recent below average performance. Reversion to the means would have a higher chance of bumping up the performance of that asset class. (Don't pick winners - pick losers instead)

International stocks have under-performed US stocks for a number of years. I would have thought international stocks as a more attractive target compared to gold or emerging market bonds. The trade-war just means international stock valuation is looking even better at this point.
You didn't have to go crazy with tilts to see significant improvement in historic safe withdrawal rates compared to the 3-fund portfolio. For instance, a 3-fund portfolio with the same equity exposure but 30% in ITT, akin to TBM, which had a 4.7% 30 year SWR since 1970. Compare that to a portfolio with 35% U.S. TSM/35% ex-U.S./20% LTT/10% gold had a 5.3% SWR since 1970. And if you moved 5% of your U.S. to SCV and 5% of your ex-U.S. to EM, the SWR increased to 5.5%. With such a portfolio, only 20% would have been in 'non-3-fund' options, yet the SWR would have been 17% better. And the reason why such changes worked well is simply because they offered greater diversification than the 3-fund portfolio. Of course, the future could look very different from the past, but the point is that there is evidence that relatively small portfolio changes can be made that would have helped significantly in the past.
“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: Perpetual Withdrawal Rates for 18 Portfolios

Post by willthrill81 » Tue Jun 11, 2019 7:22 pm

elainet7 wrote:
Tue Jun 11, 2019 7:08 pm
how many retirees 65-70 have 60% in equities, really?
My father is 100%.
“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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