Sequence of Return Risk

Discussion in 'Share Investing Strategies, Theories & Education' started by dunno, 2nd Sep, 2017.

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  1. Nodrog

    Nodrog Well-Known Member

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    At last, Yippy:).

    B4901CA5-A32D-4636-B0EB-883F3E9967E8.jpeg
     
  2. Nodrog

    Nodrog Well-Known Member

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    Welcome back mate:cool::).

    Points 1 & 3 are generally covered by favouring equities over the long term which from memory is your view also. Assuming one is investing in the broad market (eg Index ETFs) I would love to hear your view on point 2?

    We as retirees are in the peak SOR zone and hence I’m holding a lot more cash than usual which eventually I’d like to mostly invest in Global Developed Equities. As you know Simpliciity is important for us now with VGS being a cheap way achieve this.

    But on a few valuation measures the US in particular (60% of VGS) appears overvalued. Hence for those approaching / or currently in the earlier stage of retirement perhaps it could be suggested that some caution be exercised.

    Of course there many variables with all this stuff including one’s level of wealth especially relative to mandatory expenses in particular. In our case SOR risk isn’t as great as most given our level of wealth but I’m aiming to protect our lifestyle well above that of just mandatory expenses. Life’s too short to be drinking cheap beer especially nowadays with a huge variety of craft beer available:).

    Would love to hear your thoughts?

    PS: Oops I just saw your subsequent post where you covered some of this:oops:.
     
  3. Nodrog

    Nodrog Well-Known Member

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    This is what annoys me with the media and even some so called expert commentary. They assume all investors dump their saving into the market at its peak where in the majority of cases investors would have been beneficiaries of the years of exceptional wealth creation leading up to the peak / crash. There are always a very small number of unlucky / overly greedy market participants who end up in a mess but most should have done well despite the inevetible Crash.
     
  4. HomePage

    HomePage Well-Known Member

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    Way to ruin a good myth with facts! :D
     
  5. Nodrog

    Nodrog Well-Known Member

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    Some that do suffer in such circumstances are often those who again due to behavioural issues sell at the worst time out of fear and swear they’ll never invest in equities again choosing to place what’s left of their wealth permanently in cash / bonds. Wealth destroyed and no / minimal future growth to protect against inflation. Although confidence to try equities again may resurface just in time for the next crash when they get envious of waiting and watching others do well whilst they’ve stayed for years in cash / bonds.
     
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  6. asw1

    asw1 Well-Known Member

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  7. Befuddled

    Befuddled Well-Known Member

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    Thanks @dunno for the kind words. You and the other stalwarts on these forums have opened my eyes to the potential of investing in the stock market (something a little inconceivable a few years ago), so it's nice to give some value back.

    With regards to Japan and the fact that it's gone no where for decades, an explanation as good as any is simply "it was crazy overvalued" and refer to point 2 earlier - starting valuations matter
    [​IMG]

    On the above chart, it appears the CAPE in Japan exceeded 90 around 1990. No wonder it's done diddly squat for the next 30 odd years.

    To put things into perspective, the CAPE of the S&P 500, widely regarded as being overvalued in recent times, peaked at around 32 at the beginning of 2018
     
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  8. Nodrog

    Nodrog Well-Known Member

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    We’re very fortunate actually to have historical knowledge of Japan and other real world case studies. That is, beneficiaries of other’s misery sad to say. Even something as simple as when the price chart is near vertical can be useful. As they say a picture paints a thousand words.

    Hence one would need a kick up the butt if a Japan type valuation scenario arose and someone in the SOR zone didn’t sensibly adjust their portfolio accordingly.
     
  9. Nodrog

    Nodrog Well-Known Member

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    See Peter T. commenting in response with a familiar theme:

     
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  10. Zenith Chaos

    Zenith Chaos Well-Known Member

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    Japan's run since 1990 is a perfect example of why international diversification is important. It doesn't mean the whole world's markets couldn't go into a 30 year decline but the likelihood is much less. Diversifying into infrastructure, REITs and bonds etc reduces volatility even further.
     
  11. willair

    willair Well-Known Member Premium Member

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    quote..
    we remain 100% in equities which is where we want to be. It also gave us huge leverage during the GFC as we were able to pick up those bargain rights issues and share purchase plans which was a huge enhancement to the subsequent cash flow and portfolio value..

    Good to see how others invest..

    This link is a bit dated ..

    https://www.incrementum.li/wp-conte...old-we-Trust-2017-Compact-Version-english.pdf
     
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  12. The Falcon

    The Falcon Well-Known Member

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    Ah, the what about Japan! Your points are spot on, the bear case on this is that someone tipped their entire fortune into the Nikkei at the all time high, January 1990. If they did, then that is indeed an ordinary outcome.....

    Jan 1990 - August 2018 inflation adjusted total return -0.96% pa....

    But what if that investor had different start dates......below are inflation adjusted returns ending August 2018...

    Jan 1950 8.04%
    Jan 1960 4.54%
    Jan 1970 3.73%
    Jan 1980 3.53%
    Jan 1990 -0.96%
    Jan 2000 2.16%
    Jan 2010 11.15%

    So, these are the worst case adjusted inflation returns, the infamous "what about Japan?". Gee whiz, doesnt look too bad to me. A rebalanced stock and bond portfolio looks a lot better going back 40 years... In any case, my take away is diversification matters.
     
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  13. Nodrog

    Nodrog Well-Known Member

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  14. Redwing

    Redwing Well-Known Member

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  15. dunno

    dunno Well-Known Member

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    Based on the historical record if you retired at the end of 2007 and implemented a conservative safe withdrawal rate of 3% and indexed that amount in the future for inflation you have a very low chance of running out of money in retirement.


    As of the end of 2008 with the big falls in the market and increasing the initial withdrawal amount by the CPI increase of 3.7%. your 2008 withdrawal would represent 5.4% of your current balance.


    To anybody that thinks a static safe withdrawal rate for all occasions is the way to plan for how much you can withdraw in retirement, my question is; why is a 5.4% withdrawal rate for a 2008 retiree not as safe as a 3% withdrawal rate for a 2007 retiree?


    Just talking about a static 3% or 4% SWR figure for all occasions misses the big picture that valuations at retirement matter. Being inflexible on attaining a 3% withdrawal rate in a depressed market when current 5.4% SWR can be demonstrated to be as safe as 3% the previous year (as in the above example) could see you waste years extra working in the prime of your life because valuation is not being considered in SWR thinking.


    Just a thought after reading some Blogs that are pleasingly thinking about SOR risks but unfortunately seem to be very much stuck on a single SWR figure for all occasions.
     
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  16. Nodrog

    Nodrog Well-Known Member

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    Yes, dynamic withdrawal strategies based on such things seem to be slow to catch on. I suppose too an often mentioned strategy is if one has been fortunate enough to win the game based on target amount then perhaps protecting some of those gains whilst in the SOR zone might be worthwhile. But depends on many factors.

    For anyone keen on some bedtime reading this enthusiastic blogger has 28 Parts on the subject linked at the end of this first part:

    The Ultimate Guide to Safe Withdrawal Rates – Part 1: Introduction
     
  17. Nodrog

    Nodrog Well-Known Member

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  18. Big A

    Big A Well-Known Member

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    Good read. Thanks for the link.
    I looked at the last graph with the 1% risk tolerance. Went down to the 100% capital preservation for 50 or 60 years if I make it that far. 3.8% safe withdraw rate. Now I am assuming your withdraw rate is pre tax? I’m looking at this from an outside super so apply 30% tax as average.

    So being me I go 3.8% is safe. I want to aim for 2% to be extra safe. You can never be too safe. Now from what you have said previously @Nodrog i would guess you would be thinking the same thing.

    Where do others fall in that chart and are you within your safe zone?
     
  19. Nodrog

    Nodrog Well-Known Member

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    I like around a 2% burn rate as you’re likely living off distributions alone leaving capital intact. It means that across ASX and International equities assuming a low allocation to fixed interest you’re getting near bulletproof. Not an option for many investors though as it requires a higher level of wealth.
     
  20. Big A

    Big A Well-Known Member

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    I’m 100 equities and plan on always being 100% equities. Will only hold 3 or so years of living expenses in high interest savings accounts. Everything else all in.

    I still don’t see the benefit of bonds. Every graph I look at with regards to asset allocation and safe withdraw rates shows being 100% equities is your best bet in getting to the end with capital preserved.

    If I was to retire today and go into withdrawal mode I would need to withdraw 2.5%-3% gross to cover annual expenses. Want to get that down to 2%-2.5% in the next few years. This is factoring a high living expenses with 2 young kids as part of the equation. In my later years, once kids are older I’m hoping that comes down and a max 2% withdraw should be more than enough to cover expenses.

    This is giving no consideration to super at this stage. Though I am starting to focus on super as that’s probably behind where it should be.