Sequence of Return Risk

Hi Eryan


Don’t try to read too much into my post. I’m not really sure what I am trying to say other than when **** really hits the fan there is no good solution.

So what’s the answer to sequence risk?

Timing – sidestepping the carnage by swapping between risk and riskless assets at the right time is theoretically a solution - But theory and reality can tend to differ and I can’t time the market now, let alone when I’m senile.


Which leaves

Maximise savings in the good times

Maximise Real Returns over your entire life.

Maximise spending flexibility if you find yourself in de-accumulation.


Accept the randomness of retirement outcomes with humility and flexibility.

 

This sentence stood out and another reason why we invest Globally. A potential Shorten lead Labor Govt supported by Unions and the Greens comes to mind:

 

Or there’s Inflation Protected Govt Bonds but again is the huge cost of insurance worth it? Then again will these get a haircut if conditions are severe. What you suggest is more practical.

 

Source of data in this case is just my spreadsheet where I have collected historical data over the years. Original source data (which I have never been diligent enough to note) has been your usual suspects, ABS RBA, various research papers etc.

Inflation data and market data should be easy enough for you to re-locate - wage data that far back may have come from a harder to locate research paper. I’m not sure if the numbers I have for wage data may predate the easily available ABS average wage series.


This is what I have for early wage data

 

You can play around with different dates and see returns including inflation adjusted.

S&P 500 Dividend Re-investment Calculator

Another one

S&P 500 Dividend Re-investment and Periodic investment Calculator

Cheers,
Oracle.

 

Nice calculator you linked to there @oracle. I wish we had some of the tools for our market and economy that the Americans have.



Here's the American experience for the period. Annualized negative 3%-real return after reinvestment of dividends for the decade.

My interpretation of the local data I have been able to hobble together is that Australia did it even harder because we had higher inflation during the period which seems to be backed up by the devaluation of our currency against the US$ that occurred during the period.

 

Who wins? Australia versus US in local shares - Cuffelinks

 

I liked the sequel even better. Who wins? Australians investing in US shares - Cuffelinks

 

Yes, I was about to post that also when the wife arrived home with groceries. I like some of Owen’s analysis as he focuses on real returns. Can make a big difference. It’s been awhile since I read these.

 

@dunno not sure if you’ve had a look at this retirement calculator from Jim Otar who’s a big name in this area. There’s a trial version of the software available but I haven’t gotten around to looking at it. From memory I think it has US, UK, Japan, Canada and All Ords data from 1901? I think I may have mentioned this in the past. Apologies if this is the case. Senility setting in.

otar retirement calculator

 

Nice analysis, thanks @Nodrog for posting.

Couple of things that strike me from reading the article

I understand it's getting bit off topic but one of the things I consider very important is to not assume past returns will be repeated unless you have good reasons to believe factors leading to the past returns are still intact and therefore expectation of past returns in future is justified.

So the million dollar question is what are the chances the returns from US and Australian stock market to be similar over the next 114 years?

Cheers,
Oracle.

 

Yes given an unknown future I think the best we can do to protect ourselves is to own a widely diversified Global Portfolio. Unhedged is probably best from an Insurance viewpoint. That along with a dose of optimism might also help. Australia still has a lot going for it despite stupid politicians not helping at times. Then again Trump as president of the US is a worry at times.

 

Hi all.

First post, joined recently after lurking for a month or so. Originally found the site while researching LICs. And that's how I ended up on a property forum!

Can I say that I am blown away at the knowledge and wisdom imparted by the regulars in the Other Assets threads, even in a few weeks I've learned an enormous amount.

Anyway, though retirement is a good 15 to 20 years away for me, I thought this was interesting reading -

The myth of outliving your retirement savings

It seems that retirees are far more frugal than they probably need to be -

 

Welcome. Given most share forums are dominated by “I want to get rich quick” Traders us long term focused share “investors” hide out here on a property forum.

 

Welcome. Interesting about retirement savings balances, would need to investigate it over different time frames to see how things stack up in different environments and it is important to remember that retirees don't have the plan b of human capital, you don't want to be walking by the edge in retirement.

 

Just having a look at the below article, bear in mind it's US centric and looking at the SWR

Destitute at 80: Retiring in Secular Cycles’.

There has never been a thirty-year period for the stock market when investors have lost money;
yet there have quite a few thirty-year periods that have bankrupted senior citizens who were relying upon their stock portfolios for retirement income.

Crestmont Research site

 

PE Ratio, useful or not as a defence against SWR / sequence risk?

 

Valuation of the market near time of retirement is the crucial factor.

P/E based on “current earnings” though is not necessarily a good valuation tool. Some sort of holistic/cyclical view of earnings will give you a better valuation model.

One thing that is lost with all these historical studies is that they assume the same starting capital. Reality is your starting capital is probably greater at the end of a bull run.

If you started your retirement just prior to the 1987 crash with a 4% withdrawal rate (implying 25x withdrawal rate as your capital base) history will show you are toast. However, if you had 25x capital base just 1 year prior – then you would have nearly 50x capital just prior to 1987 crash and a 2% withdrawal rate would be the same amount as 4% on 25 and you’re your survival rate starting in 1987 at 2% withdrawal is fine.

Moral of the story – If you haven’t got **** loads of capital at the end of a bull run – you have stuffed up the accumulation phase (probably by being too conservative) and you had better start worrying about future sequence of returns because you don’t have enough capital to compensate for lower expected future returns arising from current high valuations.

 

Some who specialise in this area would also suggest that if you have a lucky run where you’ve finally “won the game” for crying out loud take some risk off the table! Leading up to and in the early stages of retirement are the most dangerous. For those with sufficient wealth and the intesinal fortitude to stay invested when the fires of hell descend upon them none of this really matters. For others taking some risk off the table when sequence risk is at its highest could mean a world of difference between a great vs miserable retirement.

 

Anyone using Ray Dalio's all season portfolio? Apparently it's been back tested and produced decent returns with little drawdown in the bad times.

It's US centric. Would anything similar work here ?

30% in U.S. stocks
40% in Long-term U.S. Treasury Bonds
15% in Intermediate-Term U.S. Treasury Bonds
7.50% in Gold
7.50% in broad Commodity basket

The End of the Bull Market • Ray Dalio | Tony Robbins