Sequence of Return Risk

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

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  1. PeterT

    PeterT Active Member

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    What you have done is brilliant (and for thirty minutes of effort, no less!) and puts a lot of the academic literature on "glidepath modelling" in the shade. You've taken (and given foundation to) the 4% rule of thumb, and then expanded it to a "rule of hand" to allow for the SWR's sensitivity to each of four "fingers": (1) the current market level, (2) the market all-time-high, (3) the portfolio's percentage allocation to equities and (4) the life expectancy horizon. Really impressive stuff Dunno.
     
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  2. oracle

    oracle Well-Known Member

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    You mean

    L = Invest in LICs
    U = Resist Urge to trade
    C = Stay the Course
    K = Know your limitations

    Cheers,
    Oracle.
     
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  3. Anne11

    Anne11 Well-Known Member

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    I plugged my figure in and i think i need to work a bit more and invest more into shares to reach the ideal income.

    Thanks @dunno!
     
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  4. blob2004

    blob2004 Well-Known Member

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    @dunno

    Is this the one you were after from ordinary dollar?
     

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  5. dunno

    dunno Well-Known Member

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    Thank you, but you’re too kind.

    It only took thirty minutes because I have been an avid reader of all that academic literature you mentioned, and I knew the concepts I wanted to address.

    You clearly understand the drivers of safe withdrawal. The model is nothing more than a starting point so that the SWR topic can be simplified a bit and the important drivers considered more directly. I’m sure in time much better calculators will be available to make better estimates.

    Decisions on rate of spending is something self-funded retires can’t avoid and there is going to be more of them as the superannuation system matures, many of them won’t necessarily have a financial inclination or education at retirement. In Australia, living off dividends has been a viable solution to date – not so much in the USA, I suspect leading edge SWR research will continue to come out of the USA and their Bogglehead type communities for a while yet.

    Don’t forget Ann – the assumption behind Safe Withdrawal Rates is that you survive the historically worst possible sequence of returns. Reality is you will on average probably not run out using higher withdrawal rates and Australia has a fall-back pension safety net. Don’t get discouraged if the calculator numbers seem hard to reach. It really is the upper aspiration level – after which sequence risk shouldn’t impact you (except perhaps psychologically) if you have a diversified portfolio.


    No, that seems to be a retirement calculator. A safe withdrawal calculator would address what is the correct number to put in the bottom of that retirement calculator – “Desired withdrawal rate”
     
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  6. Nodrog

    Nodrog Well-Known Member

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    Spot the flaws in this. Think I’ve posted this before and it was perhaps discussed but such is the memory of a senior.
    Safe withdrawal rates for Australian retirees - Cuffelinks
    https://www.morningstar.com.au/s/documents/3SafeWithdrawal.pdf
     
    Last edited: 5th Jun, 2019
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  7. Intrigued_again

    Intrigued_again Well-Known Member

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    @dunno, wondering if you can spend thirty minutes on this and work it out. (page 5)
     

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  8. blob2004

    blob2004 Well-Known Member

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    Seems to me that their equity allocation is low and hence the lower SWR (They used 50% in their recommendation). This is presumably due to SORR but perhaps if one did an equity glidepath (reduce equity allocation at retirement then slowly increase) it would drastically change the outcome. I don't see the need of a static allocation all through retirement.

    They also used 1% in their portfolio management fees which seems high (or maybe I'm used to DIY).

    Just my 2c. @dunno should be the master at picking this apart.
     
  9. dunno

    dunno Well-Known Member

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    I can give you 10 Minutes at the moment.

    I think this should be a replication of the fear index. Does it look right?
    upload_2019-6-5_14-46-22.png
    I'll have a bit more of a look at adding the bands around the index when I get some more time.
     
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  10. dunno

    dunno Well-Known Member

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    You trying to wind me up again @Nodrog. Lucky, I don't have time for a tirade at the moment. 2.5% doesn't even pass the common-sense check (0% real return cash ammortised over 30years gives 3.3%) and yet they are obviously blinded enough to publish it.

    The two big errors I see straight up:

    Valuation adjustment is a one off - not 2% off historical returns forever into the future.
    Monte-Carlo on serially correlated data?????? Oblivious to statistical rigor.

    Only somebody selling financially services would build in 1% expenses – then again,
    some people pay it without realising the true costs.
     
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  11. Intrigued_again

    Intrigued_again Well-Known Member

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    Cheers looks great, you obviously know your way around a spreadsheet, is this excel if so would love to see the sheet.
    Many thanks
     
  12. Nodrog

    Nodrog Well-Known Member

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    He he, no not trying to wind you up. Stumbled upon it earlier and I thought to myself well most of these so called experts being paid professionally to analyse this stuff look pretty useless when compared to your analysis:cool:.

    Do you always think I’m being mischievous:).
     
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  13. Intrigued_again

    Intrigued_again Well-Known Member

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    my apologizes for being off track here, and @Nodrog stop wasting his time
     
  14. Nodrog

    Nodrog Well-Known Member

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    I had a look at this quite some time ago. From memory I thought Owens used a 10 year moving average (represents a cycle?) with STD Dev bands? Must go back and reread these reports to refresh.

    I was quite interested in this also hence it would be great to have a working model of this.

    So lucky to have you here @dunno.
     
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  15. Nodrog

    Nodrog Well-Known Member

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    Why? I’m retired, I’m allowed to be a nuisance:p.
     
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  16. Anne11

    Anne11 Well-Known Member

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    My exact thought! Lucky to have ‘met’ you guys! A wealth of knowledge and generosity.

    Does drinking make us smarter? :)
     
  17. dunno

    dunno Well-Known Member

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    The Fear & Greed chart with a couple of the Std Deviation bands included.

    upload_2019-6-12_10-9-13.png

    I have used the 17% he gave as the std deviation for simplicity. The std dev could vary slightly in the future. His method for calculation could be reproduced if I added accumulated return data, but considering the accuracy of historical return data and that this is a macro valuation indicator, applying 17% consistently is rough enough.

    Sheet attached.

    Cheers
     

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    • FG.xlsx
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  18. Nodrog

    Nodrog Well-Known Member

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    Thanks for that @dunno. I also found Ashley Owen’s earlier articles and fear / greed index interesting. So it’s great that you could replicate it. @Intrigued_again will be thrilled also I’m sure.
     
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  19. dunno

    dunno Well-Known Member

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    I just hope no one tries to use these sort of charts as timing tools.

    As seductive as an initial glance of the fear and greed chart looks for timing the market, reality is any systematic appraoch; like buy & sell at 2 Std dev's etc; will either have you whipsawed into underperformance or incur too much oppertunity cost whilst being sidelined for too long.

    Once in your life time around retirement starting and your peak sensitivity to sequence of return it "might" make sense to act in light of overall market valuation. Otherwise just invest what you can as soon as you can and you will finish up with the best defence against SORR - Maximised wealth.
     
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  20. dunno

    dunno Well-Known Member

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