Education Ashley Ormond (aka Owen) newsletters

SB Talks: US rate increases, Impact of Ukraine on markets & Australian Federal Election!

 

S&P500 fear and greed index peaked November 2021. It has backed off since them - particularly so since the end of April 2022 and is now around Sept 2020 / July 2019 F&G levels. Was the future any more or less certain then than it is now?

The SP500 index would need to drop another ~17% from here to reach Mar 2020 / Jan 2016 / May 2013 F&G levels. Not inconceviable by any stretch, but given just how scary things seemed in March 2020 it does make me wonder what sort of terrible future the market would need to price in to reach those levels in the short term - although May 2013 might give some significant hints....... On the flip side others would still argue the SP500 would be overvalued even at those levels.

I suppose the only thing to do is to Just keep buying

 

Based on the F&G method, ASX300 is at roughly an historical average, S&P500 still about 20% over, and NASDAQ100 about 30% over.

To get to the F&G equivalent 2009 lows the ASX300 would need to drop about 30% from here (or 50% for 1974 lows)

To get to the F&G equivalent 2003 lows the S&P500 would need to drop about 40% from here (or 60% for 2009 lows)

To get to the F&G equivalent 2002/2008/2009 lows the NASDAQ100 would need to drop about 60% from here.

All of this says absolutely nothing about what will actually happen in the future though.

 

Here is a chart that decomposes return components of the Fear and Greed chart over 30 year periods.

The blue area chart is the actual future 30 year(price only) total annual compound return from the starting date on the X axis.

The red area chart shows the annualized return over 30 years to get from the starting valuation back to the fair value according to the Fear and Greed calcs.

The green line shows the annualized return over 30 years to get from the then fair value to the eventual ending valuation.

Historically, facing a negative starting valuation contribution is no reason to delay investing. its a one time adjustment that is overwhelmed by compound economic growth (not to mention additional dividend yield compound - not shown) and its impossible to know if you will get a positive or negative ending valuation component 30 years in advance, but it too is one off in nature and nothing to fret about at the end of thirty year investment horizon.

Looking at where we are now and how far to a previous low valuations is a mugs game. It will happen at some stage - but its a point to point exercise that is meaningless unless you are in the game of trading in and out of the market with your entire capital. If you are not in that game then it makes more sense to think about what sliver you put in today might return over thirty or so years and even if that doesn't turn out great for this sliver than think about the sliver you will put in next month and the one after etc. A lot of those slivers will work out just fine.

Invest into diversified equity cheaply what you can when you can. Repeat.....it will maximize your lifetime consumption ability without needing luck or even skill. Just need to see the big picture in slivers saved and spent 'over time' and the temperament to not continuously count your money or if you do then the ability to ignore big mark to market swings.

 

@dunno, that's cool.
I take away: Invest what you have when you can according to your asset allocation, DCA works, diversification helps, minimising costs helps. If I'm honest with myself there is a small part of me thinks about "macro timing/tweaking" - I think I do pretty well to keep him in the box.

You say "Looking at where we are now and how far to a previous low valuations is a mugs game" ... and .... "the .... ability to ignore big mark to market swings.". I guess we're all different - for me - my ability to ingore the big market swings doesn't involve not looking, but appreciating and reminding myself where things *could* go and being comfortable with that - a form of mental preparation/training I suppose. Weirdly I sometimes feel a strange sense of calm when the market is dropping - I'm not sure what's going on there.... For me, I suspect being in accumulation mode helps. I'd imagine there are different emotions to tackle when retired or approaching retirement particularly with respect to initial drawdowns.

 

Hi @ChrisP73

I don't disagree that knowledge is power over your own actions. That is the mantra I too live my investing life by.

I guess my point about what I called a mugs game is that watching mark to market moves is not a good way of understanding wealth. But I get that if someone does count their wealth regularly in terms of mark to market then bracing for inevitable large but normal swings through mental preparation makes good sense.

To me, slivers of cash flows in and out over time is a much better way of understanding lifetime consumption and how little volatility actually effects this measure. Lifetime consumption 'potential' is to me the true measure of investment success.

There is lots of inefficient distortions introduced by some dividend focused investors, but viewing equities for income generating potential is not one of them. Equities are about their cashflow producing ability not their day to day or even year to year MTM value.

I automatically update my portfolio control spreadsheet each fortnight because that is the withdrawal frequency I want when I start taking withdrawals. The only number of real interest to me is the calculated withdrawal amount. Its the number I remember and hence soaks up a lot of my anchoring bias - Its much more stable than mark to market. Total mark to market wealth is just an insignificant number among many others for calculating the withdrawal rate, If I don't go looking for it I don't know what it is and it doesn't anchor so loosing large amounts of money on a MTM basis isn't an issue for me.

What I mentally train for is spending power reducing not wealth dropping. That involves understanding not just price fluctuations but total return after inflation. So the below historical is much more important to me than the previous ones posted.

This is USA TOTAL(including dividends) REAL(after inflation) return data decomposed.


Historically not one 30 year sliver has ever turned out to be a bad time to invest. Not in depressions, not in wars, not in in pandemics, not even in 1902 when you finished with ~70% nominal draw down during the great depression at the end of that 30 year sliver. But then again countries losing wars would show a different history.

 

@dunno as usual, you’ve got me thinking and it has taken me a full week to get back to you on this.

BLUF: I’m interested in your statement that your calculated withdrawal rate is much more stable than mark to market and what the significant assumptions you make regarding your calculated withdrawal rate are – including assumptions regarding portfolio “current day” valuation?

Your description of slivers of cash flows, lifetime consumption, long term focus on cashflow producing ability of equities (vs short term MTM price volatility) are excellent – I’m on board that train. And I completely agree with your point that watching market moves is not a good way of understanding wealth.

I (most probably just like anyone actually reading this thread) also forecast my future withdrawal amount (I’ll just refer to it ‘retirement income’ here from now on) in my spreadsheet. I take a total portfolio view of financial assets and debts across all ownership and beneficiary structures and my forecast retirement income is based upon this total portfolio view (as well as other existing or expected income sources).

My calculated withdrawal rate based on the total portfolio view is very simplistic.
- constant 8% p/a nominal total return across the portfolio and 3% loss of purchasing power. So, a constant real return of 5%
- 4% withdraw rate.

In my case, I use MTM for my portfolio current day valuation so my forecast ‘retirement income’ amount will be dependent on current day MTM.

(I actually only update my spreadsheet quarterly and stopped reviewing forecast retirement income a couple of years ago now when it was obvious to me everything would be more than fine – although I do revisit it all at least once a year still).

As you can see above my calculated withdrawal rate is dependent on current year MTM as I honestly can’t think of a better way of determining starting valuation in the context of my other assumptions (as simplistic as they probably are). Please challenge me on this.

If I perform a sensitivity analysis based on current day MTM, over the period of my forecast (let’s say it’s 15 years), and say my financial assets MTM valuation drop significantly tomorrow (let’s say by 90%), then whilst my forecast starting retirement income drops significantly (let’s say 50%) even then I’m still completely fine. There’s probably an element of this that is specific to my circumstances (solid and reliable employment income, good savings rate that would help to replenish assets, some additional reliable real property cash flow income that would help with the retirement income, and an underlying flexible attitude to retirement income needs) but, hey, everyone’s got their own situation to contend with….

 

Hi @ChrisP73

I'm going to break my response into parts. Everything I'm talking about relates to our SMSF which will be our sole source of funding ourselves after age 60.

I'm not projecting the ending capital forward - I am calculating what the current withdrawal amount is. If I was going to project anything it would be projecting the withdrawal amount at the real return estimate calculated today. Maybe specific to me and not applicable to you. We're 8.5 years away from making withdrawals. We no longer add to the fund. The funds are just compounding at this stage, I don't expect the withdrawal amount to change massively in real terms. I watch the withdrawal calculation closely to see how livable its volatility is as a forward test. Its crafted to be historically comfortable and balance not hoarding too much and not be too exposed to risk either.

As I said above I don't forecast forward because it's just too noisy. So I'm no help to you there, but I do want to make the point that if you do have to forecast then think in distributions not point estimates.

Here is Engaging Data's fire calculator with fixed percentage projection method.

It calculates what you tell it but the result is meaningless really. Everything comes down to the accuracy of your guess on return.

Here is the same calculator but with historical(American, but it serve the purpose of showing typical equity variance) cycles selected. Way more information provided here about the possibilities when projecting forward.


Here is the link to Engaging Data.
FIRE Calculator: When can I retire early? - Engaging Data

 

The basics still hold from this very first pass at a variable withdrawal estimate.
Sequence of Return Risk

Maybe give that and some of the following posts on that thread a review at this point.

 

@ChrisP73

When you're ready I have some ideas on how to incorporate the F&G method together with variable withdrawal approach. It's not exactly what I do but I suspect it would be as robust. Not sure if you want to be involved in knocking up a model or not.

 

Dunno, thanks for your thoughtful replies. Ok, I understand.

I guess in my situation (still actively adding savings from employment and business income to the haystack), I'm certainly projecting capital forward (at least until the point that we pull up stumps on employment).

The projection is simply the current day portfolio valuation + expected additional savings over the forward period + expected real returns across both.

Your point about thinking in terms of distributions for projecting forward makes sense. I've effectively achieved this with sensitivity analysis on my simple model. Basically just test combinations of limits (mostly on the downside) - key variables being: current day portfolio valuation, expected additional savings, and expected real returns.

So the crux of my curiosity has been around determining some limits on current day portfolio valuation. As I mentioned in my previous post - for my point estimate I just use MTM and in my sensitivity analysis I use -30%, -50% and -90%.

Thanks for the link back to the SWR calculator. I'd forgotten about that discussion!
Sequence of Return Risk

I think I can see where you might be heading with respect to using the F&G index as an alternative to MTM - effectively using the index as a means of moderating current day portfolio valuation - feels like that could be a useful rule of thumb. And the option of dynamic spending upon retirement has always been a card I was happy to play so I'm definately currious to hear your thoughts on incorporating that into a model.

 

I've not previously spent that much time thinking about variable withrawal strategies but clearly many have. A couple of shares:
FI Calc thanks @Realist35 Safe withdrawal rate [ETF]
Episode 201: The Relevance of Dividend Irrelevance — Rational Reminder from about 51mins

Just one of the more interesting parts of the FI calc is the library of withdrawal strategies.


..... with detailed explainations of each strategy "Learn about this stategy"

 

Would someone be kind enough to see where we sit on the fear and greed index (standard deviation above/below).

 

Australia.


USA

 

Page 8 of the latest report

On the chart we also list the major events each year that probably scared off many investors at the time. Even when the whole world was caught up in catastrophic, destructive events like the World Wars, they turned out to be little more than temporary hiccups in the long upward march of share markets.

You can play 'Spot the War', or 'Spot the Depression', or 'Spot the stock market crash', etc. with this chart. They are all there, but often the impact on share markets was so minor and/or temporary, they are hard to find on the chart.

For example, Australia's sharpest and deepest stock market crash was in October 1987, when the broad market index fell by 50% in just 19 trading days. Can you find it on the chart? It will probably take you longer than you might have expected.

Can you find the two hyper-inflation spikes when Australian CPI inflation soared to more than 20%? (No, neither were in the 1970s). Can you find when the Australian government defaulted on its entire stock of domestic debt in a Greek-style default and restructure? Or the constitutional crisis with the sacking of Whitlam? Or the Japanese bombing of Australia (including Sydney Harbour). These were tremendously traumatic and disruptive events for economic and political life in Australia, but good luck finding them on the share price chart!

Turning to traumatic global events- can you find the two 'World Wars’? or the September 2001 terrorist attacks (in which Wall Street was literally blown up), or Pearl Harbour, or the fall of the Berlin Wall, or the 1973 oil shock, or Nixon abandoning the USD/gold standard? Those sudden events triggered deep and fundamental changes in the world order, but good luck finding them on the share returns chart!

We are not intending to make light of massive human tragedies like World Wars that killed tens of millions of people, and other catastrophic events. Our point is that the engine of corporate profitability is remarkably robust through all sorts of major crises.

Individual companies come and go of course, but if you own widely diversified portfolios of companies, or own the whole market using passive index funds, even the most serious crises and catastrophes have turned out to be little more than temporary setbacks for long term investors, at least for Australian and US share markets so far

 

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