Sequence of Return Risk

At 100% equities (except for few years living expenses cash buffer) and a 2% SWR the only obstacle left is behavioural. Sounds easy but not to be underestimated. Even the GFC locally was a walk in the park compared to what could happen based on history. A tight scissor bone and adult nappies is advisable as a backup.

I suppose at this stage age has its perks. Between income splitting, personal tax free thresholds, tax free Super Pensions, Super accumulation capped at 15% and if desired throw in a company beneficiary there’s a generous no / low tax income to live a pretty good life.

 

This guy is Good .... Very Very Good....



He seems to already know the "historical" safe withdrawal rates right up to present.

No matter how hard I try, If I want a 30 year historical safe withdrawal rate I can't work it out for any earlier than 1988. I must be stupid...

 

He he.

On a more serious note (I think) why are you even bothering to try unless it’s out of academic interest? Surely like a few of us here your SWR will be so low it doesn’t matter!

 

Just making note of what seems to be a glaringly obvious error.

Weirdly I have a fascination with Sequence of Return and its implications. Incredibly important in real life and largely not understood. Very few have ever played with Australian data for themselves.

I do think this guy is doing a great job. I also know the size of the data he is trying to deal with. There’s a real risk of garbage in garbage out if he stuffs up some of his assumptions or data handling.

Might have to drop him a blog comment – perhaps he’s just got the wrong date labelling on his chart or maybe his whole findings are GIGO. The reader really can’t tell.

Anyrate – don’t give me a hard time, this passive investing thing is boring as bat ****. Got to have something mentally stimulating to exercise the grey matter.

 

Truth be told so do I as you can probably tell by my posts. However given I’m hopeless with data I tend to enjoy reading more about the various research and strategies.

Just because some of us mightn’t really need to worry as much about SOR risk doesn’t mean it’s not important. Perhaps I’m greedy but I want to be in a position to live “very well” even if severe SOR risk event strikes. I want to be in a position to take advantage of such an event. At the heart of my interest in hedged vs unhedged global equities is in large part SOR. I want a smoother ride but not by taking the usual Bonds path, given my love of equities. I’m a natural born worrier so SOR gives me something to worry about.

He’s a great guy who appears very grateful of feedback. I commented on his previous Net Worth Update blog post about his 50% VAS / 50% VGAD as I couldn’t understand why a young guy even with FIRE aspirations would be 100% hedged Global equities? He hadn’t considered the implications but is keen to learn more about it and is very keen on backtesting. He would enjoy your comments in particular as like you he appears to love data but doesn’t have your level of expertise. And I think it’s great that he’s having a crack at this stuff.

 

Is this an issue of the over-analysis loop? Not saying it's good or bad but I've been told by those with greater expertise than myself it does have an effect of too many What if's. What, what what towards if, if, if.

Probably not when it comes to placing a buy order.

It may not apply to me because each day I age, the less I seem to care.

 

He he, the worry comment was in part joking in relation to SORR. Greater priorities than that if needing something to worry about. E.g. are we out of beer. Or how did I manage to accidentally buy a birthday card for the wife instead of a Valentine card.

Over-analysis, you bet. But need something to stimulate my mind in retirement. It’s my hobby but unlike those who analyse and invest in direct shares my interest is more in the bigger picture stuff. And seldom does any of this have much impact on the portfolio. If need be I could forget about it all tomorrow and it would make bugger all difference. The portfolio could simply be left alone other than meet rule requirements of SMSF.

After hours of hard yakka in the yard this morning relaxing back having a read and checking out forums etc is welcome. Balance of physical and mental stimulation. A 30 minute swim in the pool this afternoon followed by a couple of beers should rounds things off nicely. Then I’m cooking a pasta dish tonite served with champagne or something similar for my Valentine ... .

I do have a bad habit of drifting off topic.

 

My guess is that is a backwards looking calculation otherwise that entire graph is tainted - it may as well be me trying to draw a straight line after downing too much wine.

 

That would probably improve my ability to draw a straight line. It'll give some thought about trying the experiment.

 

In one of his earlier blog posts he mentions that the more recent values are simulations based on a low forecast earnings environment similar to how Big ERN does his. Take them with a grain of salt.

I do like his work, the 50/50 Oz/US portfolio does seem the way to go based on logic and his results.

 

@dunno

Had the same observation and commented on the swr part six post. Didn't get a response immediately but you prompted me to check again and there's a response now. I need to read the reference but the gist is as above per @Ross36 comments. See attached screenshot.

It's really impressive work though.

 

The Ultimate Guide to Safe Withdrawal Rates – Part 16: Early Retirement in a Low-Return World (and why we don’t worry about Jack Bogle’s return prediction)

Tldr; @2017 current Shiller CAPE is about 30, real returns over the subsequent 10-12 years could be below average, and they could take anywhich way to get there. Depending on the order of the anywhich way and what happens next the swr could vary.

 

If I understand this correctly the large part of the risk comes from withdraw during the bear runs. Especially if this is experienced just before and right after accumulation has ceased.

Is this risk mitigated significantly if you hold x years worth of cash?Use cash and stop withdraw in the event of bear market. Withstanding the fact that the cash supply and bear run might not match directly up for run time you could assume that you avoid a good chunk of the bear.

Come bull time you restock the cash bucket in wait for the next bear.

 

Thanks that's a good read,and one of Warrens quotes..


“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs.” Warren Buffett in 2016 letter to Berkshire Hathaway shareholders.

 

We have only recently moved to retirement mode albeit we still have super in accumulation too. Our plan is as you described - use our cash stash if necessary to ride out the down turn. Although we probably will not need to do this as the income from our investments is significantly greater than the mandated 4% we are required to withdraw from our super accounts

 

The Elimination of Risk

Earlier this week I moderated a session at Inside ETFs called “How to capture out-performance and manage risk.”

Before tackling the challenges of outperformance, I wanted to ask everybody how they think about the amorphous concept of risk. The responses ran the gamut from “the chance of permanent loss of capital” to “the chance of running out of money” and everything in between. Risk is a gargantuan force that can’t be wrestled into one sentence or even a singular idea, but if you’ll allow me to channel my inner Charlie Munger via Tren Griffin for a moment- I think risk is best thought of through the prism of inversion; Risk is the opposite of risk-free. Risk-free however is a bit or a misnomer because risk rules everything around us....continues on link

 

The Extraordinary Upside Potential Of Sequence Of Return Risk

 

The article makes a valid point, however I suggest that more people retire at the end of good market run, simply because that's what shoots them over the FI line, than at the end of a bad run. As a result, more retirees are likely to experience poor initial sequence of returns because a downturn is usually what comes next.

 

LDI Misapplied
Income Portfolios and Liability-Driven Investing

https://78462f86-a-abffd188-s-sites...W22YBilE9XPVxbScWNNpzzEb7WRuI=&attredirects=0

 

Seems Early Retirement Now is having a punch up with the yield shield crowd.

The Yield Illusion: How Can a High-Dividend Portfolio Exacerbate Sequence Risk? (SWR Series Part 29)

The Yield Illusion Follow-Up (SWR Series Part 30)

The Yield Illusion (or Delusion?): Another Follow-Up! (SWR Series Part 31)