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Why is it so difficult to understand that any plan based on historical data is worthless now. We are in uncharted waters. All this talk about what happened for the past 100 to 150 years or so has no relevance today.
Quote:
Originally Posted by Giesela
This. What happened 20 years ago barely has relevance to the new global world.
O.K., you folks who sneer at historical data, what basis do you propose for planning? Was not the future always uncharted waters? What crystal ball allows you the knowledge to make statements about how things will be going forward, i.e., that things will be different from the past? Are there not many pasts, each different from the other?
O.K., you folks who sneer at historical data, what basis do you propose for planning? Was not the future always uncharted waters? What crystal ball allows you the knowledge to make statements about how things will be going forward, i.e., that things will be different from the past? Are there not many pasts, each different from the other?
Especially calculations based on the worst of the worst conditions.
Conditions already so bad that they have never been duplicated to date.
As soon as someone says what do i care about markets 50 years ago you know they don't understand what the numbers and data represent.
If they did they would understand times today right up until today are far better then those numbers represent.
Some of the explanations i have seen posted as to what the 4% safe withdrawal rate represents are just about on par with fairy tales
Why is it so difficult to understand that any plan based on historical data is worthless now. We are in uncharted waters. All this talk about what happened for the past 100 to 150 years or so has no relevance today.
You could say this about any given time in history. Hey we're in uncharted waters with this world war, this oil crisis, this S&L collapse, this rise of Asian industrialization, this collapse of the Soviet Union, this dotcombust or great recession, etc.
All those times in the past where we were in uncharted waters is the very historical data being used to analyze worst case scenarios of past returns.
What is your plan? Work until you drop since it is impossible to make a reasonable guess at a safe withdrawal rate?
O.K., you folks who sneer at historical data, what basis do you propose for planning? Was not the future always uncharted waters? What crystal ball allows you the knowledge to make statements about how things will be going forward, i.e., that things will be different from the past? Are there not many pasts, each different from the other?
It's a delicate subject. Human life necessarily involves planning, and planning is predicated on the future having some semblance to existing experience (that is, the past). But planning also carries the danger of misapprehending risk, overestimating our powers and getting blindsided by something tragic and unexpected. Paradoxically, not-planning means a greater mental elasticity. Having no particular expectations, means less shock and terror at the unexpected.
We've spent the entire 21st century wondering to what extent it's a reprisal of the 1970s, when will the 80s/90s-style bull market return, when will we see reversion to the mean - whatever the "mean" means - of equity performance. But the mean itself drifts. Historical expectations would have been very different in 1982, than 10 or 20 or any years after. The very nature of planning changes, upon accumulation of new experience.
The problem with "rules" - even merely casual rules of thumb - is their invidious lulling effect. We're told that if we stay sober, wear our seat belts, obey traffic rules, yield the right of way, stay awake and maintain our vehicles properly, then we'll be safe. Surely, following these rules much reduces our chance of dying in a car accident. But just as surely, thousands of people each year are killed or maimed on the road, despite scrupulously following these rules. Does this mean that we should give up, indulging in reckless or drunk driving? No. But it does imply more humility, more hedging of bets, more cognizance of the rule of luck.
Given what's happened in worldwide stock markets in the past 5 weeks, I am grateful to be some (perhaps many) years away from retirement. And yet, the greater the number of years, the more imperative it becomes to have some sort of plan... or to make peace with the impossibility of planning.
It's a delicate subject. Human life necessarily involves planning, and planning is predicated on the future having some semblance to existing experience (that is, the past). But planning also carries the danger of misapprehending risk, overestimating our powers and getting blindsided by something tragic and unexpected. Paradoxically, not-planning means a greater mental elasticity. Having no particular expectations, means less shock and terror at the unexpected.
We've spent the entire 21st century wondering to what extent it's a reprisal of the 1970s, when will the 80s/90s-style bull market return, when will we see reversion to the mean - whatever the "mean" means - of equity performance. But the mean itself drifts. Historical expectations would have been very different in 1982, than 10 or 20 or any years after. The very nature of planning changes, upon accumulation of new experience.
The problem with "rules" - even merely casual rules of thumb - is their invidious lulling effect. We're told that if we stay sober, wear our seat belts, obey traffic rules, yield the right of way, stay awake and maintain our vehicles properly, then we'll be safe. Surely, following these rules much reduces our chance of dying in a car accident. But just as surely, thousands of people each year are killed or maimed on the road, despite scrupulously following these rules. Does this mean that we should give up, indulging in reckless or drunk driving? No. But it does imply more humility, more hedging of bets, more cognizance of the rule of luck.
Given what's happened in worldwide stock markets in the past 5 weeks, I am grateful to be some (perhaps many) years away from retirement. And yet, the greater the number of years, the more imperative it becomes to have some sort of plan... or to make peace with the impossibility of planning.
The problem with rules is we make rules out of things that should not be rules. We like to do things on the cheap or free and there are things we are not versed enough in to do on our own.
We saw this happen with those heart rate monitors for exercising.
The two doctors who were experimenting with the relationship between heart rate and age were shocked when an entire industry grabbed on to their math and started a multi billion dollar industry on unfinished work.
Folks were self diagnosing their hearts based on what the little monitors told them.
There are lots of ways to deal with the uncertainty of retirement planning.
Today you have various ways using insurance products in the mix, you have what is called a rising glide path method as well as concepts like the permanent portfolio using assets that can profit under any outcomes.
You also have various ways of utilizing risk managment stratagy's built in to portfolio's.
Today low cost insurance products can play a big role both locking in your income as well as money for heirs while smaller portions of your own investing provide growth and inflation protecting.
Unconventional times may call for unconventional investing.
Even something as simple as the fidelity insight income and capital preservation model may be fine. It is a conservative 25% equity model that is 75% less volatile then the s&p. It is only down about 1 years interest right now.
While it is a bit to light for a 4% draw forever you can pull 3% likely with no problems. Or season to taste mixing in a bit of a growth and income model
Last edited by mathjak107; 02-08-2016 at 05:23 AM..
O.K., you folks who sneer at historical data, what basis do you propose for planning? Was not the future always uncharted waters? What crystal ball allows you the knowledge to make statements about how things will be going forward, i.e., that things will be different from the past? Are there not many pasts, each different from the other?
You plan on the basis of what exists today. While making an educated guess about what might take place a bit down the road (like 5 years max - after 5 years - all bets are off). Because current trends tend to continue. This is of course easier in some areas than others. Like fixed income. It is utter nonsense to plan on the basis of historical fixed income returns in today's interest rate environment. Note that "fixed income" is what it says it is. A way to "fix your income". For various lengths of time (often more than 5 years). I can to some extent tell you what our income will be 5+ years down the road - because a fair % of our fixed income investments don't mature/can't be called in < 5 years.
The biggest wild card for most people is trying to plan for future equity returns. When my husband and I retired - we took a very pragmatic approach to that issue. Namely that we had no way of knowing what future equity returns would be. So we looked at what kind of fixed income we could generate off our investment portfolio - and we planned our lifestyle/spending around that. We did - from time to time - put relatively small parts of our portfolio into equities. But we never took that money into account in terms of figuring out what we could spend.
It is probably the same type of analysis that people who have other fixed income sources - pensions - social security - annuities - do. They look at their relatively steady sources of income when they plan for their non-discretionary fixed living expenses. It's exactly what you'd do if you were still working and collecting a pay check.
FWIW - it was very easy for us to adopt this approach. Because - when we were working - our incomes were very uncertain. They could vary by a factor of 5 from year to year (one big lawsuit could change things from so-so to fantastic). The thought of living like this - and possibly having to recalibrate every year or couple of years (how do you do that???) - especially as we got older - wasn't acceptable (when we were young - we lived way under our means because of our income uncertainty).
Note that to the extent that I read about these issues - I pay the most attention to articles about things like asset allocation in pension funds. And the concept of matching cash flows to liabilities. A fair amount of the (relatively dense) writing in this area these days strongly suggests that pension funds should have a lot more in fixed income than they do now. And companies/public entities should be making much larger contributions to the funds as well. Because what they have to do down the road is pay out relatively certain amounts of money to plan beneficiaries. You don't want to fund relatively certain liabilities with totally uncertain cash flows. It is basically the same issue retirees face when figuring how to pay their non-discretionary expenses (albeit on a much larger scale).
Note that peoples' individual situations can vary a lot. For example - a person whose certain income streams from pensions/social security/etc. cover all their fixed non-discretionary expenses can - theoretically - afford to take more risks in an investment portfolio. Someone whose certain income streams doesn't cover those expenses can't afford to take the risks. Also - even if one can afford to take the risks - why would he/she want to? Assuming even a modest fixed income portfolio return would provide a particular person with all the (little) discretionary luxuries/indulgences he/she wants? Robyn
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