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I get tired of news sources trying to scare me. I feel like I'm saving as much as I reasonably can. Point being, news of a "black swan" is nothing beyond what I'm already trying to plan for, but the more unusual the event, the less weight I will give it. I can plan for poor health (but still not be able to afford living with it for 20 years!) but I absolutely will not include any planning for nuclear war, meteorites, global epidemics, or a zombie apocalypse.
I CAN'T control some things so I don't want to be bothered with them. If something REALLY REALLY bad happens that I can't do anything about and that I don't want to live through then I guess I won't force myself too....morbid but I don't really have to do anything I don't want to so that's comforting to me.
All you can do is diversify and try to have multiple income streams, and a reasonable amount of cash to carry you through short term disasters. We have pensions, real estate, investments of multiple types (stocks, mutual funds, bonds, reit), and someday we'll have SS. If one fails we fall back on others. If the world is hit by an asteroid or Krakatoa erupts and puts us all into a "nuclear winter" scenario, I guess it's all moot. Meh.
All those articles about safe withdrawal rates that have been x% success historically? They include black swan events.
Obviously nobody can predict the future, but yes retirement planners discuss black swan events. Without those events the 4% rule would be a higher percentage rule.
RIP tools do not account for black swans. They cannot account for something that is unknown, which is the definition of a black swan. Because some RIP tools use historical data and some historical data contain previous black swans, there is an indirect inclusion of how a black swan affects, for instance, equity returns. But that is just one type of black swan, and even so, not all of those are captured and used by the tool.
For instance the 2000 crash is widely recognized as being a black swan for someone who retired in the year 1999. It is particularly bad to have a BS event in the early years of retirement. But the FireCalc tool uses 30-year sequences of actual data to do its analysis. The sequence that started in 1999 cannot br 30 years long (not until the year 2019) so it never gets included in the analysis. So the 2000 Black Swan is missing.
The main way we defend against a black swan is to not do what many experts tell you to do, which is go super conservative once you retire. "When you have won the game, stop playing" is what you will often hear.
To me that does not give you enough wiggle room in case something comes up. The black swan I most fear is a catastrophic medical event that requires years of nursing care which would sap our savings. LTC insurance is pretty useless according to most people. So we continue with a 60/40 asset allocation and keep our withdrawal rate down around 3% (it will be 2.6% once I start collecting SS at 70). Hopefully this will give us the cushion we need. If we don't need it, a couple of charities are going to get a big pay-out when we die.
The concept of a "black swan", and really all of the notions popularized by Nicholas Nassim Taleb, is overhyped. It implies some subtle reasoning or deft preparation, lost upon the ignorant masses. Really?
The 2007-2009 crash was stunning and enormous. But it was not unprecedented. Investors who didn't panic, and who didn't delve into speculative ventures, did quite alright. Far more deleterious has been the long-term stagnation, 2000-2016. The whole point of retirement-planning, is avoiding the running out of money throughout a long post-employment life. We can't prepare for the truly stunning; and if we try, quite likely the cost of preparation will outweigh any potential benefit.
There is a way to attempt to survive possible tragedies; it's called "insurance". We buy insurance against our houses burning down, against getting creamed in traffic-accident, against all sorts of vicissitudes and knocks of life. Mostly what this means, is that we spend a regular stream of money (insurance payments) in exchange for protection against possibly losing a vast chunk of money. But insurance can be costly. What is the expected-value of the payout, relative to the accumulated premiums? It's a pecuniary calculation. But not all issues devolve to mere money.
What about "insurance" against say pancreatic cancer? Health insurance might pay for the treatments, but what do the treatments accomplish? Do I even wish to survive such a contingency? Or maybe the better form of preparation, involves the eventual use of 115 grains of lead?
Taleb has it exactly backwards. It's the slow and grinding decades of no particularly memorable events, where year after year things ever so slightly but relentlessly go against us, that really hurts in the long term. It wasn't the bear-market of 1973-1974 that really hurt retirees; it was the entire decade of the 1970s. Worry more about the white swans.
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Over the year or so I've posted here, I don't think I've seen one post, even from some of the more sophisticated and frequent posters on here, post on how they hope to preserve assets, wealth, and basic functionality if a "black swan" event occurs. ............
You need to spend a few minutes looking at the Economics or Investing forums. A very high percentage of the posts are about gloom and doom. This includes long term negative predictions about ideas such as robots taking over the workplace and entire world. This includes countless and endless predictions of sudden catastrophes of all sorts. Many of the gloom and doom scenarios seem to involve a lot of finger pointing, conspiracy theories and often bizarre economic theories.
So how do people hope to cope? A huge number of people will not invest and keep their money in bank accounts or CDs earning nothing. A few others think gold has some sort of intrinsic value and they put some money in gold.
Aside from foolishness, how do wise investors and financial advisors hope to cope? The ideas are so universal and so old, they are almost not discussed. Every advisor recommends diversification. Advisors recommend establishing allocations across those diversified investments. Most also recommend rebalancing periodically to maintain those allocations. Next and at least as important is to avoid trying to second guess or time the market. The mantra is stay the course. In actuality this is extremely hard to do. In the 2008 recession lots and lots of investors panicked and sold low. Look at Brexit. The market had a huge drop because the outcome was not expected. The market prices are set by the actions of major institutional investors so clearly they don't act wisely and stupid moves are not just restricted to the small, inexperienced investor. I avoid being mislead by human nature by having a major portion of my portfolio on automatic rebalancing.
You need to spend a few minutes looking at the Economics or Investing forums. A very high percentage of the posts are about gloom and doom. This includes long term negative predictions about ideas such as robots taking over the workplace and entire world. This includes countless and endless predictions of sudden catastrophes of all sorts. Many of the gloom and doom scenarios seem to involve a lot of finger pointing, conspiracy theories and often bizarre economic theories.
I think that's the difference between that forum and this one. Most retirees have lived through numerous downturns and recoveries in the economy and know that "this too shall pass". I follow my mantra as always... "Plan for the worst and hope for the best, always have a strategy in your back pocket to mitigate damages". Usually I'm pleasantly surprised.
All those articles about safe withdrawal rates that have been x% success historically? They include black swan events.
Obviously nobody can predict the future, but yes retirement planners discuss black swan events. Without those events the 4% rule would be a higher percentage rule.
Exactly, every 20 year period and 30 year period for the S&P 500 has had median annualized returns around 11% that includes black swans like Black Monday, Gulf War, Asian crisis, LTCM crisis, dotcom bust, financial crisis.
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