Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

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Hyperborea
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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by Hyperborea » Mon Sep 10, 2018 12:43 pm

R2D2 wrote:
Mon Sep 10, 2018 12:23 pm
KyleAAA wrote:
Sat Sep 08, 2018 3:08 pm
You are using unrealistically pessimistic assumptions. People have been predicting low equity returns over the next decade for well over a decade. I haven't seen a compelling argument to expect less than 8-10% going forward, maybe a bit more for a heavily tilted portfolio.The pessimistic predictions mostly seem to be bases on bad logic, and i invest globally, besides. I think you're being similarly too pessimistic about long term bond returns.

But then, I also think 50/50 is a reckless asset allocation if you plan yo live 50 years.
Can you elaborate? Are you saying that I should have at least 60% equities?
For longer retirements, once you've passed the SOR window of the first 10 years or so (or start with a really low WR - sub 3% or so) then you need more equities. There's a plateau of roughly equal maximum probability of success from a low figure at minimum of 50% and staying equally likely of success to around 100% equity. That bottom number is about 50% with a 3% WR and it rises as the WR rises so that at 4% WR it's about 75%. So, one has a plateau of roughly equal success from 50% equities to 100% at a 3% WR and a plateau from 75% equities to 100% at a 4% WR and something in between for WRs in between 3% and 4%.

If there are cases that are worse than historical then it's likely that the edges of that plateau would suffer more than in the middle of the plateau. It's likely that the mid-point of that maximal success plateau is the safest choice. So for a 3% WR over 50 years that would be about 75% equities and for a 4% WR over 50 years that would be about 85-90% equities. A better estimate of the plateau could be made with finer gradations in the equity percentage but the equity mid-point would likely only move by 5 to 10%.

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targetconfusion
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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by targetconfusion » Mon Sep 10, 2018 1:45 pm

marcopolo wrote:
Fri Aug 31, 2018 6:19 pm
You seem to be trying to use math to eliminate uncertainty. I think that is a bit of a fools errand.
marcopolo has come the closest to saying what many seem to be tap-dancing around: Monte Carlo is a mere algorithm, and it has nothing whatsoever to do with assumptions about how much the future resembles the past. Monte Carlo may be seductive because it sort of feels like it saves us from committing to assumptions we're not confident in. After all, aren't we just looking at every reasonable possibility, on repeat, and seeing where things land? But to get answers like "x% equities fails y% of the time after Z years" we must decide how to weight inputs. What's the mean? Variance? Is there autocorrelation? if you didn't provide those type of assumptions, someone else did.

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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by R2D2 » Mon Sep 10, 2018 1:53 pm

Hyperborea wrote:
Mon Sep 10, 2018 12:43 pm
For longer retirements, once you've passed the SOR window of the first 10 years or so...
Thanks for explaining!

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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by tennisplyr » Mon Sep 10, 2018 5:16 pm

protagonist wrote:
Wed Sep 05, 2018 6:28 pm
R2D2 wrote:
Wed Sep 05, 2018 2:19 pm
[
This is a good point, and it really makes me wonder if the early retirement people are taking a much bigger risk than they believe. It's tough to plan for a 50-year (for example) retirement when the world can change so radically in just 20 years.

What is often ignored here is that "risk" is a double edged sword.

I had a heart attack at 62, despite being in excellent shape with no risk factors at all other than being male. I am currently 66 and healthy, having retired at 55.

I would have a lot more money now if I was still working, and by definition a more secure retirement, but would that have been the less "risky" choice?

I could have died at 62- I almost did- and "risked" spending the last seven years of my life (55 to 62) working for my retirement until the day I was rushed into the intensive care unit. I would have died with a pile of money I never got to enjoy. Instead I spent it windsurfing, playing and honing my skills at an instrument, cementing tight relationships with family and friends (difficult when you have little free time), sharing quality time with my partner, and living life to its fullest. At 66 I'm happier than I have ever been.

If you retire early you run greater risk of running out of money. If you retire late (or never) you run greater risk of never getting to enjoy your money. Either way, you are taking risk against undefinable odds in an undefinable future. That's called "life". He who dies with the most toys does not necessarily win the game.

The bottom line is , to paraphrase Shakespeare, all the world is a play.

(By the way, your point about the 18% - hitting them all at once- is a good one. I would still ignore the result, however, and just hope for the best in an uncertain world. Life is too short to climb a wall of worry.)
Agree completely, live your life. With some common sense and intelligence, you will not run out of money before you die.
Those who move forward with a happy spirit will find that things always work out.

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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by KyleAAA » Mon Sep 10, 2018 5:23 pm

R2D2 wrote:
Mon Sep 10, 2018 12:23 pm
KyleAAA wrote:
Sat Sep 08, 2018 3:08 pm
You are using unrealistically pessimistic assumptions. People have been predicting low equity returns over the next decade for well over a decade. I haven't seen a compelling argument to expect less than 8-10% going forward, maybe a bit more for a heavily tilted portfolio.The pessimistic predictions mostly seem to be bases on bad logic, and i invest globally, besides. I think you're being similarly too pessimistic about long term bond returns.

But then, I also think 50/50 is a reckless asset allocation if you plan yo live 50 years.
Can you elaborate? Are you saying that I should have at least 60% equities?
For a 50 year retirement? I probably wouldn't be comfortable with anything less than 70% equities unless you have enough for a 2% withdrawal rate or something unreasonably low. 50 years is a long time.

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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by Ron Scott » Mon Sep 10, 2018 6:56 pm

R2D2 wrote:
Wed Aug 29, 2018 2:34 pm

So I went to PortfolioVisualizer.com and punched in (to keep it simple) 0% inflation, 3% returns (normally distributed), and 7.5% volatility.

A 4% withdrawal rate for 30 years only works about 82% of the time. I need to drop down to 3.4% withdrawal rate to get the success rate up to 95%.

Does this sound right to people?
It doesn't surprise me that 4% is off because that's just not a conservative number to begin with, but I don't understand the rest of it.

At 0% real and 30 years the WR is about 3.33% with straight math, no modeling. For example:

Nest egg = $1m
No Inflation Effect
$1m/30 years = $33,333 per year in constant dollars, or about 3.33%


So that's for 0% real, and you get about the same with 3% real???

It appears there's a potent volatility effect in the portfolio-visualizer algorithm and I'm not sure how to calculate it or explain it logically.

Maybe someone can explain this.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by willthrill81 » Mon Sep 10, 2018 7:34 pm

Ron Scott wrote:
Mon Sep 10, 2018 6:56 pm
R2D2 wrote:
Wed Aug 29, 2018 2:34 pm

So I went to PortfolioVisualizer.com and punched in (to keep it simple) 0% inflation, 3% returns (normally distributed), and 7.5% volatility.

A 4% withdrawal rate for 30 years only works about 82% of the time. I need to drop down to 3.4% withdrawal rate to get the success rate up to 95%.

Does this sound right to people?
It doesn't surprise me that 4% is off because that's just not a conservative number to begin with,
I am thoroughly confused by this statement. Historically, there has only been one 30 year cohort where the '4% rule' didn't work, 1966, and I believe that depending on the bonds used and the specific AA that that may have worked as well. In all of the other instances, it worked out fine. Yes, there were many scenarios where the starting capital was largely exhausted, but (1) apart from bequest purposes, that's alright and (2) most of those retiring around age 65 won't survive to age 95.

Now you might argue that 4% isn't conservative enough, but I see no valid way to say that 4% isn't conservative at all. Apart from sequence of returns risk, IIRC only a 1.2% real return is needed to make it work.

R2D2's analysis is purely mathematical and not historical. It produces a well known and documented problem in that it does not incorporate mean reversion, which can make a very big difference in the outcome.
“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: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by jmk » Mon Sep 10, 2018 7:51 pm

willthrill81 wrote:
Mon Sep 10, 2018 7:34 pm

R2D2's analysis is purely mathematical and not historical. It produces a well known and documented problem in that it does not incorporate mean reversion, which can make a very big difference in the outcome.
You can set Portfolio Visualizer to use blocks of n years in doing the bootstrapping. This allow one to tailor as much reversion-to-mean as one wants. The trade off, of course, is smaller number of distinct samples in the historical record. More of an issue if one doesn't start the data at 1871 of course.

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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by willthrill81 » Mon Sep 10, 2018 8:15 pm

jmk wrote:
Mon Sep 10, 2018 7:51 pm
willthrill81 wrote:
Mon Sep 10, 2018 7:34 pm

R2D2's analysis is purely mathematical and not historical. It produces a well known and documented problem in that it does not incorporate mean reversion, which can make a very big difference in the outcome.
You can set Portfolio Visualizer to use blocks of n years in doing the bootstrapping. This allow one to tailor as much reversion-to-mean as one wants. The trade off, of course, is smaller number of distinct samples in the historical record. More of an issue if one doesn't start the data at 1871 of course.
Yes, but that's not what R2D2 did.
“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: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by randomguy » Mon Sep 10, 2018 10:24 pm

Ron Scott wrote:
Mon Sep 10, 2018 6:56 pm
R2D2 wrote:
Wed Aug 29, 2018 2:34 pm

So I went to PortfolioVisualizer.com and punched in (to keep it simple) 0% inflation, 3% returns (normally distributed), and 7.5% volatility.

A 4% withdrawal rate for 30 years only works about 82% of the time. I need to drop down to 3.4% withdrawal rate to get the success rate up to 95%.

Does this sound right to people?
It doesn't surprise me that 4% is off because that's just not a conservative number to begin with, but I don't understand the rest of it.

At 0% real and 30 years the WR is about 3.33% with straight math, no modeling. For example:

Nest egg = $1m
No Inflation Effect
$1m/30 years = $33,333 per year in constant dollars, or about 3.33%


So that's for 0% real, and you get about the same with 3% real???

It appears there's a potent volatility effect in the portfolio-visualizer algorithm and I'm not sure how to calculate it or explain it logically.

Maybe someone can explain this.
The volatility/sequence explains it. That 1966 time period that was the worse every had a 6.5% real CAGR. But the problem was it was roughly 15 years of 0% followed by 15 years of 13%. Reverse the order and your cruise through retirement.

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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by Ron Scott » Tue Sep 11, 2018 3:01 am

willthrill81 wrote:
Mon Sep 10, 2018 7:34 pm
Ron Scott wrote:
Mon Sep 10, 2018 6:56 pm
R2D2 wrote:
Wed Aug 29, 2018 2:34 pm

So I went to PortfolioVisualizer.com and punched in (to keep it simple) 0% inflation, 3% returns (normally distributed), and 7.5% volatility.

A 4% withdrawal rate for 30 years only works about 82% of the time. I need to drop down to 3.4% withdrawal rate to get the success rate up to 95%.

Does this sound right to people?
It doesn't surprise me that 4% is off because that's just not a conservative number to begin with,
I am thoroughly confused by this statement. Historically, there has only been one 30 year cohort where the '4% rule' didn't work, 1966, and I believe that depending on the bonds used and the specific AA that that may have worked as well. In all of the other instances, it worked out fine. Yes, there were many scenarios where the starting capital was largely exhausted, but (1) apart from bequest purposes, that's alright and (2) most of those retiring around age 65 won't survive to age 95.

Now you might argue that 4% isn't conservative enough, but I see no valid way to say that 4% isn't conservative at all. Apart from sequence of returns risk, IIRC only a 1.2% real return is needed to make it work.

R2D2's analysis is purely mathematical and not historical. It produces a well known and documented problem in that it does not incorporate mean reversion, which can make a very big difference in the outcome.
You’re confused because the argument you rely on is fundamentally flawed. It relies on faith that historical US market returns, during most of the 20th century, define the boundaries within which future returns over a specific 30-year period will be realized. I have no such faith.

The 4% rule argument is worse than the observational approach leading to the black swan trap: “I have seen 10,000 swans. All were white, none were black. Therefore black swans do not exist.” And that is with 10,000 observations. The Trinity study relied on fewer than 100 annual observations and doesn’t need anything so dramatic as a black swan to fail catastrophically.

The telling quote from the Trinity publication begins “If history is any guide for the future...” What a crazy inference! Forget for a minute that their “history” is biased as coming from one single country during the exact period of time when it was transformed into the most successful and dominant country in the history of the world. (That alone is surely disqualifying.) More importantly, market history itself is temporally confined and should not be used to predict the future.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by ignition » Tue Sep 11, 2018 3:50 am

It seems we are all doomed then. Or have to use a 1% withdrawal rate to be sure.

Pfau did some research on international SWR's. He used a 50/50 globally diversified portfolio across 20 developed countries. Apparently the 4% rule worked 78% of the time.

Unfortunately he only checked a 50/50 allocation. Would have been interesting to see the results for 60/40, 70/30 and so on. He also didn't hedge currency risk for the bond part unfortunately.

Most of the worst SWR's seemed to occur around the world wars which isn't too surprising.
willthrill81 wrote:
Mon Sep 10, 2018 7:34 pm
I am thoroughly confused by this statement. Historically, there has only been one 30 year cohort where the '4% rule' didn't work, 1966, and I believe that depending on the bonds used and the specific AA that that may have worked as well.
A globally diversified portfolio would have improved results as well in 1966.

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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by willthrill81 » Tue Sep 11, 2018 10:25 am

Ron Scott wrote:
Tue Sep 11, 2018 3:01 am
willthrill81 wrote:
Mon Sep 10, 2018 7:34 pm
Ron Scott wrote:
Mon Sep 10, 2018 6:56 pm
R2D2 wrote:
Wed Aug 29, 2018 2:34 pm

So I went to PortfolioVisualizer.com and punched in (to keep it simple) 0% inflation, 3% returns (normally distributed), and 7.5% volatility.

A 4% withdrawal rate for 30 years only works about 82% of the time. I need to drop down to 3.4% withdrawal rate to get the success rate up to 95%.

Does this sound right to people?
It doesn't surprise me that 4% is off because that's just not a conservative number to begin with,
I am thoroughly confused by this statement. Historically, there has only been one 30 year cohort where the '4% rule' didn't work, 1966, and I believe that depending on the bonds used and the specific AA that that may have worked as well. In all of the other instances, it worked out fine. Yes, there were many scenarios where the starting capital was largely exhausted, but (1) apart from bequest purposes, that's alright and (2) most of those retiring around age 65 won't survive to age 95.

Now you might argue that 4% isn't conservative enough, but I see no valid way to say that 4% isn't conservative at all. Apart from sequence of returns risk, IIRC only a 1.2% real return is needed to make it work.

R2D2's analysis is purely mathematical and not historical. It produces a well known and documented problem in that it does not incorporate mean reversion, which can make a very big difference in the outcome.
You’re confused because the argument you rely on is fundamentally flawed. It relies on faith that historical US market returns, during most of the 20th century, define the boundaries within which future returns over a specific 30-year period will be realized. I have no such faith.

The 4% rule argument is worse than the observational approach leading to the black swan trap: “I have seen 10,000 swans. All were white, none were black. Therefore black swans do not exist.” And that is with 10,000 observations. The Trinity study relied on fewer than 100 annual observations and doesn’t need anything so dramatic as a black swan to fail catastrophically.

The telling quote from the Trinity publication begins “If history is any guide for the future...” What a crazy inference! Forget for a minute that their “history” is biased as coming from one single country during the exact period of time when it was transformed into the most successful and dominant country in the history of the world. (That alone is surely disqualifying.) More importantly, market history itself is temporally confined and should not be used to predict the future.
As ignition has pointed out, if you put no faith at all in historical results, then you have greatly limited your ability to make investment decisions. I'm not sure how one would even begin to tackle something like determining what AA would be appropriate if historic data were ignored. Since you're starting from a completely different perspective than myself and most Bogleheads, I won't argue with you about it. But I'll leave you with this quote.

"History doesn't repeat itself, but it often rhymes."
- Mark Twain
“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

Ron Scott
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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by Ron Scott » Tue Sep 11, 2018 11:33 am

willthrill81 wrote:
Tue Sep 11, 2018 10:25 am
Ron Scott wrote:
Tue Sep 11, 2018 3:01 am
willthrill81 wrote:
Mon Sep 10, 2018 7:34 pm
Ron Scott wrote:
Mon Sep 10, 2018 6:56 pm
R2D2 wrote:
Wed Aug 29, 2018 2:34 pm

So I went to PortfolioVisualizer.com and punched in (to keep it simple) 0% inflation, 3% returns (normally distributed), and 7.5% volatility.

A 4% withdrawal rate for 30 years only works about 82% of the time. I need to drop down to 3.4% withdrawal rate to get the success rate up to 95%.

Does this sound right to people?
It doesn't surprise me that 4% is off because that's just not a conservative number to begin with,
I am thoroughly confused by this statement. Historically, there has only been one 30 year cohort where the '4% rule' didn't work, 1966, and I believe that depending on the bonds used and the specific AA that that may have worked as well. In all of the other instances, it worked out fine. Yes, there were many scenarios where the starting capital was largely exhausted, but (1) apart from bequest purposes, that's alright and (2) most of those retiring around age 65 won't survive to age 95.

Now you might argue that 4% isn't conservative enough, but I see no valid way to say that 4% isn't conservative at all. Apart from sequence of returns risk, IIRC only a 1.2% real return is needed to make it work.

R2D2's analysis is purely mathematical and not historical. It produces a well known and documented problem in that it does not incorporate mean reversion, which can make a very big difference in the outcome.
You’re confused because the argument you rely on is fundamentally flawed. It relies on faith that historical US market returns, during most of the 20th century, define the boundaries within which future returns over a specific 30-year period will be realized. I have no such faith.

The 4% rule argument is worse than the observational approach leading to the black swan trap: “I have seen 10,000 swans. All were white, none were black. Therefore black swans do not exist.” And that is with 10,000 observations. The Trinity study relied on fewer than 100 annual observations and doesn’t need anything so dramatic as a black swan to fail catastrophically.

The telling quote from the Trinity publication begins “If history is any guide for the future...” What a crazy inference! Forget for a minute that their “history” is biased as coming from one single country during the exact period of time when it was transformed into the most successful and dominant country in the history of the world. (That alone is surely disqualifying.) More importantly, market history itself is temporally confined and should not be used to predict the future.
As ignition has pointed out, if you put no faith at all in historical results, then you have greatly limited your ability to make investment decisions. I'm not sure how one would even begin to tackle something like determining what AA would be appropriate if historic data were ignored. Since you're starting from a completely different perspective than myself and most Bogleheads, I won't argue with you about it. But I'll leave you with this quote.

"History doesn't repeat itself, but it often rhymes."
- Mark Twain
Adopting a set of beliefs commonly held by an in-group, using them to make major decisions, and refusing to engage in a discussion that challenges them because the challenge comes from someone with a different perspective is an increasingly popular approach to discourse in America. I do not think it advances understanding but I respect your decision.

I'll see your quote and raise you one:

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."
- Mark Twain
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by marcopolo » Tue Sep 11, 2018 11:43 am

Ron Scott wrote:
Tue Sep 11, 2018 11:33 am
willthrill81 wrote:
Tue Sep 11, 2018 10:25 am
Ron Scott wrote:
Tue Sep 11, 2018 3:01 am
willthrill81 wrote:
Mon Sep 10, 2018 7:34 pm
Ron Scott wrote:
Mon Sep 10, 2018 6:56 pm


It doesn't surprise me that 4% is off because that's just not a conservative number to begin with,
I am thoroughly confused by this statement. Historically, there has only been one 30 year cohort where the '4% rule' didn't work, 1966, and I believe that depending on the bonds used and the specific AA that that may have worked as well. In all of the other instances, it worked out fine. Yes, there were many scenarios where the starting capital was largely exhausted, but (1) apart from bequest purposes, that's alright and (2) most of those retiring around age 65 won't survive to age 95.

Now you might argue that 4% isn't conservative enough, but I see no valid way to say that 4% isn't conservative at all. Apart from sequence of returns risk, IIRC only a 1.2% real return is needed to make it work.

R2D2's analysis is purely mathematical and not historical. It produces a well known and documented problem in that it does not incorporate mean reversion, which can make a very big difference in the outcome.
You’re confused because the argument you rely on is fundamentally flawed. It relies on faith that historical US market returns, during most of the 20th century, define the boundaries within which future returns over a specific 30-year period will be realized. I have no such faith.

The 4% rule argument is worse than the observational approach leading to the black swan trap: “I have seen 10,000 swans. All were white, none were black. Therefore black swans do not exist.” And that is with 10,000 observations. The Trinity study relied on fewer than 100 annual observations and doesn’t need anything so dramatic as a black swan to fail catastrophically.

The telling quote from the Trinity publication begins “If history is any guide for the future...” What a crazy inference! Forget for a minute that their “history” is biased as coming from one single country during the exact period of time when it was transformed into the most successful and dominant country in the history of the world. (That alone is surely disqualifying.) More importantly, market history itself is temporally confined and should not be used to predict the future.
As ignition has pointed out, if you put no faith at all in historical results, then you have greatly limited your ability to make investment decisions. I'm not sure how one would even begin to tackle something like determining what AA would be appropriate if historic data were ignored. Since you're starting from a completely different perspective than myself and most Bogleheads, I won't argue with you about it. But I'll leave you with this quote.

"History doesn't repeat itself, but it often rhymes."
- Mark Twain
Adopting a set of beliefs commonly held by an in-group, using them to make major decisions, and refusing to engage in a discussion that challenges them because the challenge comes from someone with a different perspective is an increasingly popular approach to discourse in America. I do not think it advances understanding but I respect your decision.

I'll see your quote and raise you one:

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."
- Mark Twain
I will bite.

I have kind of had this exchange with you before. If you don't rely on history, then it is still not at all clear to me what it is that you rely on to plan. I recall from a previous discussion you stated that you simply assume that your investments will keep pace with inflation. But, on what do you place that faith? Sure, historically that has been the case in many, but not all situations. What if we become another Zimbabwe, with runaway inflation? What makes you believe 0% real is reliable, but people relying on 3% real are basing it on fundamentally flawed assumptions. Your assumption are certainly more conservative, and that is a good thing. But, i don't see how that is any more fundamentally sound. There are no laws of physics entitling you to 0% real either. The only thing you really have is that historically, that has been a conservative assumption.
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: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by willthrill81 » Tue Sep 11, 2018 11:54 am

Ron Scott wrote:
Tue Sep 11, 2018 11:33 am
willthrill81 wrote:
Tue Sep 11, 2018 10:25 am
Ron Scott wrote:
Tue Sep 11, 2018 3:01 am
willthrill81 wrote:
Mon Sep 10, 2018 7:34 pm
Ron Scott wrote:
Mon Sep 10, 2018 6:56 pm


It doesn't surprise me that 4% is off because that's just not a conservative number to begin with,
I am thoroughly confused by this statement. Historically, there has only been one 30 year cohort where the '4% rule' didn't work, 1966, and I believe that depending on the bonds used and the specific AA that that may have worked as well. In all of the other instances, it worked out fine. Yes, there were many scenarios where the starting capital was largely exhausted, but (1) apart from bequest purposes, that's alright and (2) most of those retiring around age 65 won't survive to age 95.

Now you might argue that 4% isn't conservative enough, but I see no valid way to say that 4% isn't conservative at all. Apart from sequence of returns risk, IIRC only a 1.2% real return is needed to make it work.

R2D2's analysis is purely mathematical and not historical. It produces a well known and documented problem in that it does not incorporate mean reversion, which can make a very big difference in the outcome.
You’re confused because the argument you rely on is fundamentally flawed. It relies on faith that historical US market returns, during most of the 20th century, define the boundaries within which future returns over a specific 30-year period will be realized. I have no such faith.

The 4% rule argument is worse than the observational approach leading to the black swan trap: “I have seen 10,000 swans. All were white, none were black. Therefore black swans do not exist.” And that is with 10,000 observations. The Trinity study relied on fewer than 100 annual observations and doesn’t need anything so dramatic as a black swan to fail catastrophically.

The telling quote from the Trinity publication begins “If history is any guide for the future...” What a crazy inference! Forget for a minute that their “history” is biased as coming from one single country during the exact period of time when it was transformed into the most successful and dominant country in the history of the world. (That alone is surely disqualifying.) More importantly, market history itself is temporally confined and should not be used to predict the future.
As ignition has pointed out, if you put no faith at all in historical results, then you have greatly limited your ability to make investment decisions. I'm not sure how one would even begin to tackle something like determining what AA would be appropriate if historic data were ignored. Since you're starting from a completely different perspective than myself and most Bogleheads, I won't argue with you about it. But I'll leave you with this quote.

"History doesn't repeat itself, but it often rhymes."
- Mark Twain
Adopting a set of beliefs commonly held by an in-group, using them to make major decisions, and refusing to engage in a discussion that challenges them because the challenge comes from someone with a different perspective is an increasingly popular approach to discourse in America. I do not think it advances understanding but I respect your decision.

I'll see your quote and raise you one:

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."
- Mark Twain
I will not get embroiled in an argument over this because if you reject historical data for all purposes, then there is no way that I will convince you otherwise. Our 'worldviews' when it comes to investing are so diametrically different that there's virtually no common ground on which to even begin a discussion. It's a futile effort.

And I see no point in using such a broad based argument about "discourse in America" for trying to justify your position. But clearly you 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

edgeagg
Posts: 105
Joined: Tue Jan 23, 2018 1:27 pm
Location: WA-US

Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by edgeagg » Tue Sep 11, 2018 5:26 pm

I agree with the earlier comments on history informing decision making. Else, I've no idea on what to do for an SWR.

(1) I liked the earlyretirementnow paper - PDF version here. I thought that the analysis by using CAPE ratios to deflate future returns looked conservative but I prefer that to being overly optimistic.
(2) I also downloaded and played with the spreadsheet for my retirement numbers - 45 years of retirement.

All I can say is that I found it useful. YMMV.

Ron Scott
Posts: 1090
Joined: Tue Apr 05, 2016 5:38 am

Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by Ron Scott » Tue Sep 11, 2018 6:08 pm

marcopolo wrote:
Tue Sep 11, 2018 11:43 am
Ron Scott wrote:
Tue Sep 11, 2018 11:33 am
willthrill81 wrote:
Tue Sep 11, 2018 10:25 am
Ron Scott wrote:
Tue Sep 11, 2018 3:01 am
willthrill81 wrote:
Mon Sep 10, 2018 7:34 pm


I am thoroughly confused by this statement. Historically, there has only been one 30 year cohort where the '4% rule' didn't work, 1966, and I believe that depending on the bonds used and the specific AA that that may have worked as well. In all of the other instances, it worked out fine. Yes, there were many scenarios where the starting capital was largely exhausted, but (1) apart from bequest purposes, that's alright and (2) most of those retiring around age 65 won't survive to age 95.

Now you might argue that 4% isn't conservative enough, but I see no valid way to say that 4% isn't conservative at all. Apart from sequence of returns risk, IIRC only a 1.2% real return is needed to make it work.

R2D2's analysis is purely mathematical and not historical. It produces a well known and documented problem in that it does not incorporate mean reversion, which can make a very big difference in the outcome.
You’re confused because the argument you rely on is fundamentally flawed. It relies on faith that historical US market returns, during most of the 20th century, define the boundaries within which future returns over a specific 30-year period will be realized. I have no such faith.

The 4% rule argument is worse than the observational approach leading to the black swan trap: “I have seen 10,000 swans. All were white, none were black. Therefore black swans do not exist.” And that is with 10,000 observations. The Trinity study relied on fewer than 100 annual observations and doesn’t need anything so dramatic as a black swan to fail catastrophically.

The telling quote from the Trinity publication begins “If history is any guide for the future...” What a crazy inference! Forget for a minute that their “history” is biased as coming from one single country during the exact period of time when it was transformed into the most successful and dominant country in the history of the world. (That alone is surely disqualifying.) More importantly, market history itself is temporally confined and should not be used to predict the future.
As ignition has pointed out, if you put no faith at all in historical results, then you have greatly limited your ability to make investment decisions. I'm not sure how one would even begin to tackle something like determining what AA would be appropriate if historic data were ignored. Since you're starting from a completely different perspective than myself and most Bogleheads, I won't argue with you about it. But I'll leave you with this quote.

"History doesn't repeat itself, but it often rhymes."
- Mark Twain
Adopting a set of beliefs commonly held by an in-group, using them to make major decisions, and refusing to engage in a discussion that challenges them because the challenge comes from someone with a different perspective is an increasingly popular approach to discourse in America. I do not think it advances understanding but I respect your decision.

I'll see your quote and raise you one:

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."
- Mark Twain
I will bite.

I have kind of had this exchange with you before. If you don't rely on history, then it is still not at all clear to me what it is that you rely on to plan. I recall from a previous discussion you stated that you simply assume that your investments will keep pace with inflation. But, on what do you place that faith? Sure, historically that has been the case in many, but not all situations. What if we become another Zimbabwe, with runaway inflation? What makes you believe 0% real is reliable, but people relying on 3% real are basing it on fundamentally flawed assumptions. Your assumption are certainly more conservative, and that is a good thing. But, i don't see how that is any more fundamentally sound. There are no laws of physics entitling you to 0% real either. The only thing you really have is that historically, that has been a conservative assumption.
I would first say this: My failure to produce a magic bullet does not validate the use of 20th century American market data to predict returns for specific 30-year periods in the 21st century. "For every complex problem there is a simple solution, and it is wrong."

What I use to plan is a combination of healthy skepticism that we can expect returns to be as high as they've been in the past and a conservative approach to preparing for retirement (saving more and/or working longer). Assuming 0% real, even in a capitalist democracy in which corporations are strongly incented to produce returns above inflation, is not a panacea and the future can certainly do worse, but US fundamentals appear reasonably strong and I can sleep with that assumption. (If I were to bet you, I'd say 2-3% real over 30 years with lower returns in the beginning, but this exercise is about retirement planning, not gambling.)

Another part of my plan involves 40-60 strategy at the beginning of retirement and leaving stocks to heirs (or, if you prefer, not placing myself in a position of having to sell stock to live). This is both expensive and may well result in underspending, if returns are higher than planned. And since it may result in living below my means it is decidedly un-American. 'cest la vie: better safe than sorry.

Finally, that fact that you and I might see my approach as conservative does not mean that we won't both go broke, or that anyone should rely on that old market data for anything but a history lesson. Don't look back.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

TxInjun
Posts: 67
Joined: Fri May 29, 2015 12:05 pm

Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by TxInjun » Tue Sep 11, 2018 6:36 pm

jmk wrote:
Mon Sep 10, 2018 7:51 pm
You can set Portfolio Visualizer to use blocks of n years in doing the bootstrapping. This allow one to tailor as much reversion-to-mean as one wants. The trade off, of course, is smaller number of distinct samples in the historical record. More of an issue if one doesn't start the data at 1871 of course.
Thank you for pointing this out, I had been glossing over this option in PV in the past.

TxIn

marcopolo
Posts: 1193
Joined: Sat Dec 03, 2016 10:22 am

Re: Historical SWR vs. Monte Carlo on PortfolioVisualizer.com

Post by marcopolo » Tue Sep 11, 2018 8:26 pm

Ron Scott wrote:
Tue Sep 11, 2018 6:08 pm
marcopolo wrote:
Tue Sep 11, 2018 11:43 am
Ron Scott wrote:
Tue Sep 11, 2018 11:33 am
willthrill81 wrote:
Tue Sep 11, 2018 10:25 am
Ron Scott wrote:
Tue Sep 11, 2018 3:01 am


You’re confused because the argument you rely on is fundamentally flawed. It relies on faith that historical US market returns, during most of the 20th century, define the boundaries within which future returns over a specific 30-year period will be realized. I have no such faith.

The 4% rule argument is worse than the observational approach leading to the black swan trap: “I have seen 10,000 swans. All were white, none were black. Therefore black swans do not exist.” And that is with 10,000 observations. The Trinity study relied on fewer than 100 annual observations and doesn’t need anything so dramatic as a black swan to fail catastrophically.

The telling quote from the Trinity publication begins “If history is any guide for the future...” What a crazy inference! Forget for a minute that their “history” is biased as coming from one single country during the exact period of time when it was transformed into the most successful and dominant country in the history of the world. (That alone is surely disqualifying.) More importantly, market history itself is temporally confined and should not be used to predict the future.
As ignition has pointed out, if you put no faith at all in historical results, then you have greatly limited your ability to make investment decisions. I'm not sure how one would even begin to tackle something like determining what AA would be appropriate if historic data were ignored. Since you're starting from a completely different perspective than myself and most Bogleheads, I won't argue with you about it. But I'll leave you with this quote.

"History doesn't repeat itself, but it often rhymes."
- Mark Twain
Adopting a set of beliefs commonly held by an in-group, using them to make major decisions, and refusing to engage in a discussion that challenges them because the challenge comes from someone with a different perspective is an increasingly popular approach to discourse in America. I do not think it advances understanding but I respect your decision.

I'll see your quote and raise you one:

"Whenever you find yourself on the side of the majority, it is time to pause and reflect."
- Mark Twain
I will bite.

I have kind of had this exchange with you before. If you don't rely on history, then it is still not at all clear to me what it is that you rely on to plan. I recall from a previous discussion you stated that you simply assume that your investments will keep pace with inflation. But, on what do you place that faith? Sure, historically that has been the case in many, but not all situations. What if we become another Zimbabwe, with runaway inflation? What makes you believe 0% real is reliable, but people relying on 3% real are basing it on fundamentally flawed assumptions. Your assumption are certainly more conservative, and that is a good thing. But, i don't see how that is any more fundamentally sound. There are no laws of physics entitling you to 0% real either. The only thing you really have is that historically, that has been a conservative assumption.
I would first say this: My failure to produce a magic bullet does not validate the use of 20th century American market data to predict returns for specific 30-year periods in the 21st century. "For every complex problem there is a simple solution, and it is wrong."

What I use to plan is a combination of healthy skepticism that we can expect returns to be as high as they've been in the past and a conservative approach to preparing for retirement (saving more and/or working longer). Assuming 0% real, even in a capitalist democracy in which corporations are strongly incented to produce returns above inflation, is not a panacea and the future can certainly do worse, but US fundamentals appear reasonably strong and I can sleep with that assumption. (If I were to bet you, I'd say 2-3% real over 30 years with lower returns in the beginning, but this exercise is about retirement planning, not gambling.)

Another part of my plan involves 40-60 strategy at the beginning of retirement and leaving stocks to heirs (or, if you prefer, not placing myself in a position of having to sell stock to live). This is both expensive and may well result in underspending, if returns are higher than planned. And since it may result in living below my means it is decidedly un-American. 'cest la vie: better safe than sorry.

Finally, that fact that you and I might see my approach as conservative does not mean that we won't both go broke, or that anyone should rely on that old market data for anything but a history lesson. Don't look back.
I feel like we are kind of talking past each other. I actually have no qualms with your assumptions, i tend to be very conservative with my planning as well (planned on 3% WR, but ended up well below that). But, i still do not understand your insistence on saying don't look back at historical data. Where does your notion that capitalist democracy should provide returns that beat inflation come form? The only way to have arrived at that is to have looked at the history of capitalist democracies and observed that to be the case.

Anyway, I am not sure this is worth quibbling over. Each person has to be comfortable with their own reasoning for their plans.

Best of luck.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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