What is your trigger point to start spending from cash buffer?? + QE, Does it change the game?

zagfles

Thrugelmir said:

zagfles said:

kinger101 said:

michaels said:

zagfles said:

Thrugelmir said:

zagfles said:

Thrugelmir said:

zagfles said:

Anonymous101 said:

michaels said:

I find this thread really interesting in that almost everyone:
a) thinks they can time the markets (change asset mix depending on current equity valuations) and
b) don't seem to understand the theory behind SWR

The latter does reveal a flaw in SWR - many of the lowest scenarios (the ones that determine the historical SWR) have seen situations where the pot shrinks to some low multiple of the annual withdrawal amount quite early in the historical period and then recovers, fine with hindsight but had you 'lived' that series of returns I can guarantee you that everyone would have reduced withdrawals when they saw their pot fall to such a low multiple so early and would thus have had some years where they actually drew less than what turned out to be safe.

I think I understand the theory behind SWR's but what you've hit on is THE flaw in SWR. They work in theory but no-one in their right mind would continue to sell assets and spend as they set out once you get to the extremes of the cases which turned out ok.

If you're portfolio drops 50,60,70% of course you're going to alter spending habits, the SWR theory swims against the tide of human nature there. That's why threads like this are so interesting because what starts as a 5-10% drop and market timing ends up being panic selling. As the falls get bigger eventually everyone develops the fear of running out of money.

Emotions asides, drawing a static "SWR" probably doesn't make financial sense either, using a dynamic withdrawal rate would likely deliver better results overall, see link I posted earlier. Obviously assuming you can cope with swings in income.

But whatever, you need a plan which you stick to and which is designed to cope with big market swings, far bigger than those of the last 3 months, if you go changing your plan because of fairly normal markets movements eg Nov to now, how are you going to cope with a 40% drop? 

Fairly normal movements. That's an interesting take.   Worst fall in the S&P in January ever........

Yes. Up 19% since a year ago. A bit of froth came off, that's all. So far anyway, I make no prediction on the future, just in case you incorrectly read between the lines again.

Not reading between the lines. Markets are driven by differing opinions. Usefull in weighing up the moves one should take with ones own portfolio. 

I don't try to time the market. Certainly not short term anyway. I'm not arrogant enough to think I know better than the collective market opinion, ie that which sets the current market prices. Anyone who thinks they do know better and hasn't got their own private island is deluded.

AS soon as you start saying something like 'the market is low so I will spend from cash rather than shares' you are timing the market in that you are expressing an opinion that in the future the shares portion of your portfolio will be worth more in comparison to the cash part. 

If share prices are a random walk then this is wrong. 

If they show some sort of 'reversion to mean' then there is a guaranteed winning strategy that an efficient market will arbitrage away by definition.

Isn't that assumption always there?  Otherwise, there's no point investing in equites.

The working assumption is on average stock markets will outperform other assets over the long term.  If this year's returns are -3 standard deviations from average, the probability of next year's returns being -3 SD from the average are the same as being +3 standard deviations from the average.  If it is truly random, a bad year this year doesn't make a bad year next year any less likely.  

I think it's a mistake to think of the stockmarket as random. In some ways it would make it much easier if it was random. If you buy £50k of premium bonds, you can pretty much guarantee an annual expected rate of return in quite a narrow range from all those random events every month, with anything deviating substantially being incredibly unlikely. True randomness actually leads to greater predictability over the long term.

The stock market moves by cause and effect, lots of different causes and effects, but not necessarily unlinked to its history. For instance, the current worry about Russia invading Ukraine. If that threat goes away, the history of the markets may be relevant as the issue they were worrying about has gone so it may revert to what it was, all other things being equal. OTOH if they invade then markets could go down further as something that was just a worry becomes a reality. Similarly the COVID dip, the recovery from the drop certainly wasn't random.

Stock markets are driven by future Corporate profitability. That's a totally random outcome with no certainty. 

For a start, the stockmarket is driven by other factors, not just future profitability. For instance how much investors have to invest, what the alternative investment possibilities are, and the risk/reward equation. For instance, if interest rates were 10%, I wouldn't bother with equities at all and just keep it all in cash getting 10% interest. Thus reducing demand for equities. Whereas now with interest rates below inflation, the opposite happens.

Also you don't seem to understand the difference between being random and being unpredictable. The premium bonds, a roulette table, a toss of a coin is random. Each event is completely unpredictable, but a combination of thousands of such random events eg coin tosses, holding premium bonds for a several years etc is entirely predictable within a fairly narrow range with a high degree of confidence. Whereas eg who will win the premier league or Eurovision might be unpredictable, but it's not random.

Stock markets move every second of the day while the market is open. If those movements were random, then the outcome even over relatively short periods eg a month would be entirely predictable with a very high degree of confidence. You wouldn't get bull or bear markets lasting years as happened. But as the stockmarket is not random, it's far less predictable!

I'm sure you'll reply with your usual dismissive one liner...

[Deleted User]

Anonymous101 said:

Deleted_User said:

michaels said:

zagfles said:

Thrugelmir said:

zagfles said:

Thrugelmir said:

zagfles said:

Anonymous101 said:

michaels said:

I find this thread really interesting in that almost everyone:
a) thinks they can time the markets (change asset mix depending on current equity valuations) and
b) don't seem to understand the theory behind SWR

The latter does reveal a flaw in SWR - many of the lowest scenarios (the ones that determine the historical SWR) have seen situations where the pot shrinks to some low multiple of the annual withdrawal amount quite early in the historical period and then recovers, fine with hindsight but had you 'lived' that series of returns I can guarantee you that everyone would have reduced withdrawals when they saw their pot fall to such a low multiple so early and would thus have had some years where they actually drew less than what turned out to be safe.

I think I understand the theory behind SWR's but what you've hit on is THE flaw in SWR. They work in theory but no-one in their right mind would continue to sell assets and spend as they set out once you get to the extremes of the cases which turned out ok.

If you're portfolio drops 50,60,70% of course you're going to alter spending habits, the SWR theory swims against the tide of human nature there. That's why threads like this are so interesting because what starts as a 5-10% drop and market timing ends up being panic selling. As the falls get bigger eventually everyone develops the fear of running out of money.

Emotions asides, drawing a static "SWR" probably doesn't make financial sense either, using a dynamic withdrawal rate would likely deliver better results overall, see link I posted earlier. Obviously assuming you can cope with swings in income.

But whatever, you need a plan which you stick to and which is designed to cope with big market swings, far bigger than those of the last 3 months, if you go changing your plan because of fairly normal markets movements eg Nov to now, how are you going to cope with a 40% drop? 

Fairly normal movements. That's an interesting take.   Worst fall in the S&P in January ever........

Yes. Up 19% since a year ago. A bit of froth came off, that's all. So far anyway, I make no prediction on the future, just in case you incorrectly read between the lines again.

Not reading between the lines. Markets are driven by differing opinions. Usefull in weighing up the moves one should take with ones own portfolio. 

I don't try to time the market. Certainly not short term anyway. I'm not arrogant enough to think I know better than the collective market opinion, ie that which sets the current market prices. Anyone who thinks they do know better and hasn't got their own private island is deluded.

AS soon as you start saying something like 'the market is low so I will spend from cash rather than shares' you are timing the market in that you are expressing an opinion that in the future the shares portion of your portfolio will be worth more in comparison to the cash part. 

If share prices are a random walk then this is wrong. 

If they show some sort of 'reversion to mean' then it is a wining strategy but if shares always 'revert to mean' then there is a guaranteed winning strategy that an efficient market will arbitrage away by definition.

Absolutely.

To me "Variable withdrawal"  means varying amounts but keeping allocation steady.  

I agree. However, playing devils advocate, it could be argued that if your strategy is to say be 70/30 within your investments and then have a cash pot on top of that which you spend from; and vary the amount you withdraw to the cash pot every year. There's not much difference between that and being 65/25/10 and amending the percentages slightly depending on your view of markets.

I like everything you say except for the last few words.  “Your view of the markets” = bringing human emotion into investment.  For people who are normal and mentally healthy this translates to bad decisions.  Our psychology evolved before the stock-markets and was not designed for this purpose.  Minimizing human decision making in managing investments, rules-based investing is how one improves outcomes. 

So, accounting for “your view” is bad. As a general rule.  Except for some “crazy” people like Buffett. 

Thrugelmir

zagfles said:

Thrugelmir said:

zagfles said:

kinger101 said:

michaels said:

zagfles said:

Thrugelmir said:

zagfles said:

Thrugelmir said:

zagfles said:

Anonymous101 said:

michaels said:

I find this thread really interesting in that almost everyone:
a) thinks they can time the markets (change asset mix depending on current equity valuations) and
b) don't seem to understand the theory behind SWR

The latter does reveal a flaw in SWR - many of the lowest scenarios (the ones that determine the historical SWR) have seen situations where the pot shrinks to some low multiple of the annual withdrawal amount quite early in the historical period and then recovers, fine with hindsight but had you 'lived' that series of returns I can guarantee you that everyone would have reduced withdrawals when they saw their pot fall to such a low multiple so early and would thus have had some years where they actually drew less than what turned out to be safe.

I think I understand the theory behind SWR's but what you've hit on is THE flaw in SWR. They work in theory but no-one in their right mind would continue to sell assets and spend as they set out once you get to the extremes of the cases which turned out ok.

If you're portfolio drops 50,60,70% of course you're going to alter spending habits, the SWR theory swims against the tide of human nature there. That's why threads like this are so interesting because what starts as a 5-10% drop and market timing ends up being panic selling. As the falls get bigger eventually everyone develops the fear of running out of money.

Emotions asides, drawing a static "SWR" probably doesn't make financial sense either, using a dynamic withdrawal rate would likely deliver better results overall, see link I posted earlier. Obviously assuming you can cope with swings in income.

But whatever, you need a plan which you stick to and which is designed to cope with big market swings, far bigger than those of the last 3 months, if you go changing your plan because of fairly normal markets movements eg Nov to now, how are you going to cope with a 40% drop? 

Fairly normal movements. That's an interesting take.   Worst fall in the S&P in January ever........

Yes. Up 19% since a year ago. A bit of froth came off, that's all. So far anyway, I make no prediction on the future, just in case you incorrectly read between the lines again.

Not reading between the lines. Markets are driven by differing opinions. Usefull in weighing up the moves one should take with ones own portfolio. 

I don't try to time the market. Certainly not short term anyway. I'm not arrogant enough to think I know better than the collective market opinion, ie that which sets the current market prices. Anyone who thinks they do know better and hasn't got their own private island is deluded.

AS soon as you start saying something like 'the market is low so I will spend from cash rather than shares' you are timing the market in that you are expressing an opinion that in the future the shares portion of your portfolio will be worth more in comparison to the cash part. 

If share prices are a random walk then this is wrong. 

If they show some sort of 'reversion to mean' then there is a guaranteed winning strategy that an efficient market will arbitrage away by definition.

Isn't that assumption always there?  Otherwise, there's no point investing in equites.

The working assumption is on average stock markets will outperform other assets over the long term.  If this year's returns are -3 standard deviations from average, the probability of next year's returns being -3 SD from the average are the same as being +3 standard deviations from the average.  If it is truly random, a bad year this year doesn't make a bad year next year any less likely.  

I think it's a mistake to think of the stockmarket as random. In some ways it would make it much easier if it was random. If you buy £50k of premium bonds, you can pretty much guarantee an annual expected rate of return in quite a narrow range from all those random events every month, with anything deviating substantially being incredibly unlikely. True randomness actually leads to greater predictability over the long term.

The stock market moves by cause and effect, lots of different causes and effects, but not necessarily unlinked to its history. For instance, the current worry about Russia invading Ukraine. If that threat goes away, the history of the markets may be relevant as the issue they were worrying about has gone so it may revert to what it was, all other things being equal. OTOH if they invade then markets could go down further as something that was just a worry becomes a reality. Similarly the COVID dip, the recovery from the drop certainly wasn't random.

Stock markets are driven by future Corporate profitability. That's a totally random outcome with no certainty. 

For a start, the stockmarket is driven by other factors, not just future profitability. For instance how much investors have to invest, what the alternative investment possibilities are, and the risk/reward equation. For instance, if interest rates were 10%, I wouldn't bother with equities at all and just keep it all in cash getting 10% interest. Thus reducing demand for equities. Whereas now with interest rates below inflation, the opposite happens.

Also you don't seem to understand the difference between being random and being unpredictable. The premium bonds, a roulette table, a toss of a coin is random. Each event is completely unpredictable, but a combination of thousands of such random events eg coin tosses, holding premium bonds for a several years etc is entirely predictable within a fairly narrow range with a high degree of confidence. Whereas eg who will win the premier league or Eurovision might be unpredictable, but it's not random.

Stock markets move every second of the day while the market is open. If those movements were random, then the outcome even over relatively short periods eg a month would be entirely predictable with a very high degree of confidence. You wouldn't get bull or bear markets lasting years as happened. But as the stockmarket is not random, it's far less predictable!

I'm sure you'll reply with your usual dismissive one liner...

In no way being dismissive in my response. Ever heard of Random Walk Theory?  That's why many investors are content to hold Passive Index Tracking investments as their core holding. For novices passive broad based diversified portfolios are the best place to start. Though I'm a contrarian investor myself at heart, not a day trader either. As often investing requires patience before the real rewards are reaped at an individual share level. 

As an aside. With the major markets become more and more dominated by passive vehicles. Who is going to set a fair price for individual stocks?  Herd investors beware. Volatility could be become greater. 

zagfles

Thrugelmir said:

zagfles said:

Thrugelmir said:

zagfles said:

kinger101 said:

michaels said:

zagfles said:

Thrugelmir said:

zagfles said:

Thrugelmir said:

zagfles said:

Anonymous101 said:

michaels said:

I find this thread really interesting in that almost everyone:
a) thinks they can time the markets (change asset mix depending on current equity valuations) and
b) don't seem to understand the theory behind SWR

The latter does reveal a flaw in SWR - many of the lowest scenarios (the ones that determine the historical SWR) have seen situations where the pot shrinks to some low multiple of the annual withdrawal amount quite early in the historical period and then recovers, fine with hindsight but had you 'lived' that series of returns I can guarantee you that everyone would have reduced withdrawals when they saw their pot fall to such a low multiple so early and would thus have had some years where they actually drew less than what turned out to be safe.

I think I understand the theory behind SWR's but what you've hit on is THE flaw in SWR. They work in theory but no-one in their right mind would continue to sell assets and spend as they set out once you get to the extremes of the cases which turned out ok.

If you're portfolio drops 50,60,70% of course you're going to alter spending habits, the SWR theory swims against the tide of human nature there. That's why threads like this are so interesting because what starts as a 5-10% drop and market timing ends up being panic selling. As the falls get bigger eventually everyone develops the fear of running out of money.

Emotions asides, drawing a static "SWR" probably doesn't make financial sense either, using a dynamic withdrawal rate would likely deliver better results overall, see link I posted earlier. Obviously assuming you can cope with swings in income.

But whatever, you need a plan which you stick to and which is designed to cope with big market swings, far bigger than those of the last 3 months, if you go changing your plan because of fairly normal markets movements eg Nov to now, how are you going to cope with a 40% drop? 

Fairly normal movements. That's an interesting take.   Worst fall in the S&P in January ever........

Yes. Up 19% since a year ago. A bit of froth came off, that's all. So far anyway, I make no prediction on the future, just in case you incorrectly read between the lines again.

Not reading between the lines. Markets are driven by differing opinions. Usefull in weighing up the moves one should take with ones own portfolio. 

I don't try to time the market. Certainly not short term anyway. I'm not arrogant enough to think I know better than the collective market opinion, ie that which sets the current market prices. Anyone who thinks they do know better and hasn't got their own private island is deluded.

AS soon as you start saying something like 'the market is low so I will spend from cash rather than shares' you are timing the market in that you are expressing an opinion that in the future the shares portion of your portfolio will be worth more in comparison to the cash part. 

If share prices are a random walk then this is wrong. 

If they show some sort of 'reversion to mean' then there is a guaranteed winning strategy that an efficient market will arbitrage away by definition.

Isn't that assumption always there?  Otherwise, there's no point investing in equites.

The working assumption is on average stock markets will outperform other assets over the long term.  If this year's returns are -3 standard deviations from average, the probability of next year's returns being -3 SD from the average are the same as being +3 standard deviations from the average.  If it is truly random, a bad year this year doesn't make a bad year next year any less likely.  

I think it's a mistake to think of the stockmarket as random. In some ways it would make it much easier if it was random. If you buy £50k of premium bonds, you can pretty much guarantee an annual expected rate of return in quite a narrow range from all those random events every month, with anything deviating substantially being incredibly unlikely. True randomness actually leads to greater predictability over the long term.

The stock market moves by cause and effect, lots of different causes and effects, but not necessarily unlinked to its history. For instance, the current worry about Russia invading Ukraine. If that threat goes away, the history of the markets may be relevant as the issue they were worrying about has gone so it may revert to what it was, all other things being equal. OTOH if they invade then markets could go down further as something that was just a worry becomes a reality. Similarly the COVID dip, the recovery from the drop certainly wasn't random.

Stock markets are driven by future Corporate profitability. That's a totally random outcome with no certainty. 

For a start, the stockmarket is driven by other factors, not just future profitability. For instance how much investors have to invest, what the alternative investment possibilities are, and the risk/reward equation. For instance, if interest rates were 10%, I wouldn't bother with equities at all and just keep it all in cash getting 10% interest. Thus reducing demand for equities. Whereas now with interest rates below inflation, the opposite happens.

Also you don't seem to understand the difference between being random and being unpredictable. The premium bonds, a roulette table, a toss of a coin is random. Each event is completely unpredictable, but a combination of thousands of such random events eg coin tosses, holding premium bonds for a several years etc is entirely predictable within a fairly narrow range with a high degree of confidence. Whereas eg who will win the premier league or Eurovision might be unpredictable, but it's not random.

Stock markets move every second of the day while the market is open. If those movements were random, then the outcome even over relatively short periods eg a month would be entirely predictable with a very high degree of confidence. You wouldn't get bull or bear markets lasting years as happened. But as the stockmarket is not random, it's far less predictable!

I'm sure you'll reply with your usual dismissive one liner...

In no way being dismissive in my response. Ever heard of Random Walk Theory?  That's why many investors are content to hold Passive Index Tracking investments as their core holding. For novices passive broad based diversified portfolios are the best place to start. Though I'm a contrarian investor myself at heart, not a day trader either. As often investing requires patience before the real rewards are reaped at an individual share level. 

As an aside. With the major markets become more and more dominated by passive vehicles. Who is going to set a fair price for individual stocks?  Herd investors beware. Volatility could be become greater. 

Personally I agree with Peter Lynch (last paragraph here): https://en.wikipedia.org/wiki/Random_walk_hypothesis

"Random Walk Theory" contradicts the "Efficient Market" theory. If the market is indeed efficient, the next move in the market is not going to be random. It might be unpredictable, but as above that's not the same as random.

In any case all the debates and discussions of both theories tend to centre around the question of "can you outperform the market", rather than the question of whether market movements are random. Both theories would agree on this point and say you can't outperform the market, ie it answers the active vs passive debate. So they agree on this point.

But that's not what we're discussing here. The question we're discussing is around SWRs, which are based on long term movements in the market. If RWT is correct, then long term (eg 3 year+) movements should be entirely predictable within a few %. Just like if you tossed a coin 10,000 times, it's virtually certain that you'd get heads within 3% or so of 5,000 times.

But long term market movements aren't that predictable. Nobody knows where the market will be in 5 years time. Any statistician will tell you historic trends suggest the market will be up in 5 years time, but as has been proved several times in the past, that won't always be the case. If market movements varied randomly around the historic trend, then it would always be the case, you could be virtually certain that the market will be up in 5 years. But you can't be, therefore the stock market is not random.

kinger101

zagfles said:

kinger101 said:

michaels said:

zagfles said:

Thrugelmir said:

zagfles said:

Thrugelmir said:

zagfles said:

Anonymous101 said:

michaels said:

I find this thread really interesting in that almost everyone:
a) thinks they can time the markets (change asset mix depending on current equity valuations) and
b) don't seem to understand the theory behind SWR

The latter does reveal a flaw in SWR - many of the lowest scenarios (the ones that determine the historical SWR) have seen situations where the pot shrinks to some low multiple of the annual withdrawal amount quite early in the historical period and then recovers, fine with hindsight but had you 'lived' that series of returns I can guarantee you that everyone would have reduced withdrawals when they saw their pot fall to such a low multiple so early and would thus have had some years where they actually drew less than what turned out to be safe.

I think I understand the theory behind SWR's but what you've hit on is THE flaw in SWR. They work in theory but no-one in their right mind would continue to sell assets and spend as they set out once you get to the extremes of the cases which turned out ok.

If you're portfolio drops 50,60,70% of course you're going to alter spending habits, the SWR theory swims against the tide of human nature there. That's why threads like this are so interesting because what starts as a 5-10% drop and market timing ends up being panic selling. As the falls get bigger eventually everyone develops the fear of running out of money.

Emotions asides, drawing a static "SWR" probably doesn't make financial sense either, using a dynamic withdrawal rate would likely deliver better results overall, see link I posted earlier. Obviously assuming you can cope with swings in income.

But whatever, you need a plan which you stick to and which is designed to cope with big market swings, far bigger than those of the last 3 months, if you go changing your plan because of fairly normal markets movements eg Nov to now, how are you going to cope with a 40% drop? 

Fairly normal movements. That's an interesting take.   Worst fall in the S&P in January ever........

Yes. Up 19% since a year ago. A bit of froth came off, that's all. So far anyway, I make no prediction on the future, just in case you incorrectly read between the lines again.

Not reading between the lines. Markets are driven by differing opinions. Usefull in weighing up the moves one should take with ones own portfolio. 

I don't try to time the market. Certainly not short term anyway. I'm not arrogant enough to think I know better than the collective market opinion, ie that which sets the current market prices. Anyone who thinks they do know better and hasn't got their own private island is deluded.

AS soon as you start saying something like 'the market is low so I will spend from cash rather than shares' you are timing the market in that you are expressing an opinion that in the future the shares portion of your portfolio will be worth more in comparison to the cash part. 

If share prices are a random walk then this is wrong. 

If they show some sort of 'reversion to mean' then there is a guaranteed winning strategy that an efficient market will arbitrage away by definition.

Isn't that assumption always there?  Otherwise, there's no point investing in equites.

The working assumption is on average stock markets will outperform other assets over the long term.  If this year's returns are -3 standard deviations from average, the probability of next year's returns being -3 SD from the average are the same as being +3 standard deviations from the average.  If it is truly random, a bad year this year doesn't make a bad year next year any less likely.  

I think it's a mistake to think of the stockmarket as random. In some ways it would make it much easier if it was random. If you buy £50k of premium bonds, you can pretty much guarantee an annual expected rate of return in quite a narrow range from all those random events every month, with anything deviating substantially being incredibly unlikely. True randomness actually leads to greater predictability over the long term.

The stock market moves by cause and effect, lots of different causes and effects, but not necessarily unlinked to its history. For instance, the current worry about Russia invading Ukraine. If that threat goes away, the history of the markets may be relevant as the issue they were worrying about has gone so it may revert to what it was, all other things being equal. OTOH if they invade then markets could go down further as something that was just a worry becomes a reality. Similarly the COVID dip, the recovery from the drop certainly wasn't random.

I'm not sure it is a mistake, although the example I've given assumes a normal distribution which might well be.  The historic year-on-year data suggests fat tails.

But I disagree with the point you make later than random is not the same as unpredictable.  I think your assumption is that randomness means following a certain distribution. 

I'd say for all practical purposes we can treat stock market returns as being random as while they might be influenced by other events, be it geopolitical (war) or biological (pandemic), these events are also largely unpredictable.  None of us know whether Putin will invade Ukraine, or for that matter could have predicted when a virus might cross species boundaries from bats to humans as mutation itself is a random process.  I'd say the recovery from the Covid dip was pretty random, as most people did not expect it to happen so soon.  

A stong indicator of them not being random (i.e. predictable) is that fund managers would be capable of beating index trackers.  On average, they don't.  
 

BritishInvestor

kinger101 said:

zagfles said:

kinger101 said:

michaels said:

zagfles said:

Thrugelmir said:

zagfles said:

Thrugelmir said:

zagfles said:

Anonymous101 said:

michaels said:

I find this thread really interesting in that almost everyone:
a) thinks they can time the markets (change asset mix depending on current equity valuations) and
b) don't seem to understand the theory behind SWR

The latter does reveal a flaw in SWR - many of the lowest scenarios (the ones that determine the historical SWR) have seen situations where the pot shrinks to some low multiple of the annual withdrawal amount quite early in the historical period and then recovers, fine with hindsight but had you 'lived' that series of returns I can guarantee you that everyone would have reduced withdrawals when they saw their pot fall to such a low multiple so early and would thus have had some years where they actually drew less than what turned out to be safe.

I think I understand the theory behind SWR's but what you've hit on is THE flaw in SWR. They work in theory but no-one in their right mind would continue to sell assets and spend as they set out once you get to the extremes of the cases which turned out ok.

If you're portfolio drops 50,60,70% of course you're going to alter spending habits, the SWR theory swims against the tide of human nature there. That's why threads like this are so interesting because what starts as a 5-10% drop and market timing ends up being panic selling. As the falls get bigger eventually everyone develops the fear of running out of money.

Emotions asides, drawing a static "SWR" probably doesn't make financial sense either, using a dynamic withdrawal rate would likely deliver better results overall, see link I posted earlier. Obviously assuming you can cope with swings in income.

But whatever, you need a plan which you stick to and which is designed to cope with big market swings, far bigger than those of the last 3 months, if you go changing your plan because of fairly normal markets movements eg Nov to now, how are you going to cope with a 40% drop? 

Fairly normal movements. That's an interesting take.   Worst fall in the S&P in January ever........

Yes. Up 19% since a year ago. A bit of froth came off, that's all. So far anyway, I make no prediction on the future, just in case you incorrectly read between the lines again.

Not reading between the lines. Markets are driven by differing opinions. Usefull in weighing up the moves one should take with ones own portfolio. 

I don't try to time the market. Certainly not short term anyway. I'm not arrogant enough to think I know better than the collective market opinion, ie that which sets the current market prices. Anyone who thinks they do know better and hasn't got their own private island is deluded.

AS soon as you start saying something like 'the market is low so I will spend from cash rather than shares' you are timing the market in that you are expressing an opinion that in the future the shares portion of your portfolio will be worth more in comparison to the cash part. 

If share prices are a random walk then this is wrong. 

If they show some sort of 'reversion to mean' then there is a guaranteed winning strategy that an efficient market will arbitrage away by definition.

Isn't that assumption always there?  Otherwise, there's no point investing in equites.

The working assumption is on average stock markets will outperform other assets over the long term.  If this year's returns are -3 standard deviations from average, the probability of next year's returns being -3 SD from the average are the same as being +3 standard deviations from the average.  If it is truly random, a bad year this year doesn't make a bad year next year any less likely.  

I think it's a mistake to think of the stockmarket as random. In some ways it would make it much easier if it was random. If you buy £50k of premium bonds, you can pretty much guarantee an annual expected rate of return in quite a narrow range from all those random events every month, with anything deviating substantially being incredibly unlikely. True randomness actually leads to greater predictability over the long term.

The stock market moves by cause and effect, lots of different causes and effects, but not necessarily unlinked to its history. For instance, the current worry about Russia invading Ukraine. If that threat goes away, the history of the markets may be relevant as the issue they were worrying about has gone so it may revert to what it was, all other things being equal. OTOH if they invade then markets could go down further as something that was just a worry becomes a reality. Similarly the COVID dip, the recovery from the drop certainly wasn't random.

I'm not sure it is a mistake, although the example I've given assumes a normal distribution which might well be.  The historic year-on-year data suggests fat tails.

But I disagree with the point you make later than random is not the same as unpredictable.  I think your assumption is that randomness means following a certain distribution. 

I'd say for all practical purposes we can treat stock market returns as being random as while they might be influenced by other events, be it geopolitical (war) or biological (pandemic), these events are also largely unpredictable.  None of us know whether Putin will invade Ukraine, or for that matter could have predicted when a virus might cross species boundaries from bats to humans as mutation itself is a random process.  I'd say the recovery from the Covid dip was pretty random, as most people did not expect it to happen so soon.  

A stong indicator of them not being random (i.e. predictable) is that fund managers would be capable of beating index trackers.  On average, they don't.  
 

"A stong indicator of them not being random (i.e. predictable) is that fund managers would be capable of beating index trackers."

They are way down the pecking order when it comes to the ability to exploit market inefficiencies.

zagfles

kinger101 said:

zagfles said:

kinger101 said:

michaels said:

zagfles said:

Thrugelmir said:

zagfles said:

Thrugelmir said:

zagfles said:

Anonymous101 said:

michaels said:

I find this thread really interesting in that almost everyone:
a) thinks they can time the markets (change asset mix depending on current equity valuations) and
b) don't seem to understand the theory behind SWR

The latter does reveal a flaw in SWR - many of the lowest scenarios (the ones that determine the historical SWR) have seen situations where the pot shrinks to some low multiple of the annual withdrawal amount quite early in the historical period and then recovers, fine with hindsight but had you 'lived' that series of returns I can guarantee you that everyone would have reduced withdrawals when they saw their pot fall to such a low multiple so early and would thus have had some years where they actually drew less than what turned out to be safe.

I think I understand the theory behind SWR's but what you've hit on is THE flaw in SWR. They work in theory but no-one in their right mind would continue to sell assets and spend as they set out once you get to the extremes of the cases which turned out ok.

If you're portfolio drops 50,60,70% of course you're going to alter spending habits, the SWR theory swims against the tide of human nature there. That's why threads like this are so interesting because what starts as a 5-10% drop and market timing ends up being panic selling. As the falls get bigger eventually everyone develops the fear of running out of money.

Emotions asides, drawing a static "SWR" probably doesn't make financial sense either, using a dynamic withdrawal rate would likely deliver better results overall, see link I posted earlier. Obviously assuming you can cope with swings in income.

But whatever, you need a plan which you stick to and which is designed to cope with big market swings, far bigger than those of the last 3 months, if you go changing your plan because of fairly normal markets movements eg Nov to now, how are you going to cope with a 40% drop? 

Fairly normal movements. That's an interesting take.   Worst fall in the S&P in January ever........

Yes. Up 19% since a year ago. A bit of froth came off, that's all. So far anyway, I make no prediction on the future, just in case you incorrectly read between the lines again.

Not reading between the lines. Markets are driven by differing opinions. Usefull in weighing up the moves one should take with ones own portfolio. 

I don't try to time the market. Certainly not short term anyway. I'm not arrogant enough to think I know better than the collective market opinion, ie that which sets the current market prices. Anyone who thinks they do know better and hasn't got their own private island is deluded.

AS soon as you start saying something like 'the market is low so I will spend from cash rather than shares' you are timing the market in that you are expressing an opinion that in the future the shares portion of your portfolio will be worth more in comparison to the cash part. 

If share prices are a random walk then this is wrong. 

If they show some sort of 'reversion to mean' then there is a guaranteed winning strategy that an efficient market will arbitrage away by definition.

Isn't that assumption always there?  Otherwise, there's no point investing in equites.

The working assumption is on average stock markets will outperform other assets over the long term.  If this year's returns are -3 standard deviations from average, the probability of next year's returns being -3 SD from the average are the same as being +3 standard deviations from the average.  If it is truly random, a bad year this year doesn't make a bad year next year any less likely.  

I think it's a mistake to think of the stockmarket as random. In some ways it would make it much easier if it was random. If you buy £50k of premium bonds, you can pretty much guarantee an annual expected rate of return in quite a narrow range from all those random events every month, with anything deviating substantially being incredibly unlikely. True randomness actually leads to greater predictability over the long term.

The stock market moves by cause and effect, lots of different causes and effects, but not necessarily unlinked to its history. For instance, the current worry about Russia invading Ukraine. If that threat goes away, the history of the markets may be relevant as the issue they were worrying about has gone so it may revert to what it was, all other things being equal. OTOH if they invade then markets could go down further as something that was just a worry becomes a reality. Similarly the COVID dip, the recovery from the drop certainly wasn't random.

I'm not sure it is a mistake, although the example I've given assumes a normal distribution which might well be.  The historic year-on-year data suggests fat tails.

But I disagree with the point you make later than random is not the same as unpredictable.  I think your assumption is that randomness means following a certain distribution. 

I'd say for all practical purposes we can treat stock market returns as being random as while they might be influenced by other events, be it geopolitical (war) or biological (pandemic), these events are also largely unpredictable.  None of us know whether Putin will invade Ukraine, or for that matter could have predicted when a virus might cross species boundaries from bats to humans as mutation itself is a random process.  I'd say the recovery from the Covid dip was pretty random, as most people did not expect it to happen so soon.  

A stong indicator of them not being random (i.e. predictable) is that fund managers would be capable of beating index trackers.  On average, they don't.  
 

You're missing the point. See my later post. The stockmarket not being random doesn't mean it's predictable. Whether fund managers can beat the market depends on whether the market is "efficient", ie whether all known data and probabilty of future events is correctly priced in. If so, nobody can reliably beat the market, they can guess or gamble but are just as likely to lose as win. Or rather, more likely lose once charges are taken into account.

But that's not the point.

Genuine randomness gives predictable results within small margins over the long term. Toss a coin 10,000 times. I can practically guarantee you'll get within 3% of 5,000 heads. Try it with a simple program, or a spreadsheet. Invest £50k in premium bonds. The returns over 5 years for 99% of people will be in a narrow predictable range.

Random individual events give highly predictable outcomes in large numbers. The stock markets moves every second it's open. That's a lot of individual movements, millions per year. If the moves were random, that would make stock market moves over a year or even a month completely predictable within a very small margin of error.

But stockmarket moves are driven by cause and effect, and also arguably by its history. So not random. That doesn't mean it's possible to predict. Quite the opposite, it makes it harder to predict.

Sea_Shell

QE - Does it change the game?

Just to add another dimension to this discussion, has any one watched the recent BBC, 2 part, programme "The Decade the Rich Won".

Having watched it, it appears to me that in recent years, Western Governments simply can't entertain the risk that their economies may collapse in the face of a crisis, and so pump the system with QE.   

This then has the effect of stabilising assets, and even increasing them, making those with assets (the rich) even richer.

So even for private investors who aren't "rich" but do hold a modest portfolio of investments, are we in effect being protected from the catastrophic end (30%+) of the downturn scenarios, in that Central Banks, just won't let it happen.

If we have a balanced diversified portfolio, can we lose the shirts off our backs, in the era of QE?

Just look at the Covid drop and bounce back...what would those graphs have looked like without QE, bailouts, loans & furlough.

In one part of the show, they said that the US Treasury tried to announce they were stopping QE, and the markets reacted badly, so they had to row-back on their announcement.

It appears that our financial markets are now like a fractious baby....who won't settle.   Stops crying when you pick it up and rock it gently, but try to put it down, and it just starts screaming again!!!!


Discuss. 



(i'll add this to the subject line, and edit my first post, for any newcomers to the thread.)

kinger101

zagfles said:

kinger101 said:

zagfles said:

kinger101 said:

michaels said:

zagfles said:

Thrugelmir said:

zagfles said:

Thrugelmir said:

zagfles said:

Anonymous101 said:

michaels said:

I find this thread really interesting in that almost everyone:
a) thinks they can time the markets (change asset mix depending on current equity valuations) and
b) don't seem to understand the theory behind SWR

The latter does reveal a flaw in SWR - many of the lowest scenarios (the ones that determine the historical SWR) have seen situations where the pot shrinks to some low multiple of the annual withdrawal amount quite early in the historical period and then recovers, fine with hindsight but had you 'lived' that series of returns I can guarantee you that everyone would have reduced withdrawals when they saw their pot fall to such a low multiple so early and would thus have had some years where they actually drew less than what turned out to be safe.

I think I understand the theory behind SWR's but what you've hit on is THE flaw in SWR. They work in theory but no-one in their right mind would continue to sell assets and spend as they set out once you get to the extremes of the cases which turned out ok.

If you're portfolio drops 50,60,70% of course you're going to alter spending habits, the SWR theory swims against the tide of human nature there. That's why threads like this are so interesting because what starts as a 5-10% drop and market timing ends up being panic selling. As the falls get bigger eventually everyone develops the fear of running out of money.

Emotions asides, drawing a static "SWR" probably doesn't make financial sense either, using a dynamic withdrawal rate would likely deliver better results overall, see link I posted earlier. Obviously assuming you can cope with swings in income.

But whatever, you need a plan which you stick to and which is designed to cope with big market swings, far bigger than those of the last 3 months, if you go changing your plan because of fairly normal markets movements eg Nov to now, how are you going to cope with a 40% drop? 

Fairly normal movements. That's an interesting take.   Worst fall in the S&P in January ever........

Yes. Up 19% since a year ago. A bit of froth came off, that's all. So far anyway, I make no prediction on the future, just in case you incorrectly read between the lines again.

Not reading between the lines. Markets are driven by differing opinions. Usefull in weighing up the moves one should take with ones own portfolio. 

I don't try to time the market. Certainly not short term anyway. I'm not arrogant enough to think I know better than the collective market opinion, ie that which sets the current market prices. Anyone who thinks they do know better and hasn't got their own private island is deluded.

AS soon as you start saying something like 'the market is low so I will spend from cash rather than shares' you are timing the market in that you are expressing an opinion that in the future the shares portion of your portfolio will be worth more in comparison to the cash part. 

If share prices are a random walk then this is wrong. 

If they show some sort of 'reversion to mean' then there is a guaranteed winning strategy that an efficient market will arbitrage away by definition.

Isn't that assumption always there?  Otherwise, there's no point investing in equites.

The working assumption is on average stock markets will outperform other assets over the long term.  If this year's returns are -3 standard deviations from average, the probability of next year's returns being -3 SD from the average are the same as being +3 standard deviations from the average.  If it is truly random, a bad year this year doesn't make a bad year next year any less likely.  

I think it's a mistake to think of the stockmarket as random. In some ways it would make it much easier if it was random. If you buy £50k of premium bonds, you can pretty much guarantee an annual expected rate of return in quite a narrow range from all those random events every month, with anything deviating substantially being incredibly unlikely. True randomness actually leads to greater predictability over the long term.

The stock market moves by cause and effect, lots of different causes and effects, but not necessarily unlinked to its history. For instance, the current worry about Russia invading Ukraine. If that threat goes away, the history of the markets may be relevant as the issue they were worrying about has gone so it may revert to what it was, all other things being equal. OTOH if they invade then markets could go down further as something that was just a worry becomes a reality. Similarly the COVID dip, the recovery from the drop certainly wasn't random.

I'm not sure it is a mistake, although the example I've given assumes a normal distribution which might well be.  The historic year-on-year data suggests fat tails.

But I disagree with the point you make later than random is not the same as unpredictable.  I think your assumption is that randomness means following a certain distribution. 

I'd say for all practical purposes we can treat stock market returns as being random as while they might be influenced by other events, be it geopolitical (war) or biological (pandemic), these events are also largely unpredictable.  None of us know whether Putin will invade Ukraine, or for that matter could have predicted when a virus might cross species boundaries from bats to humans as mutation itself is a random process.  I'd say the recovery from the Covid dip was pretty random, as most people did not expect it to happen so soon.  

A stong indicator of them not being random (i.e. predictable) is that fund managers would be capable of beating index trackers.  On average, they don't.  
 

You're missing the point. See my later post. The stockmarket not being random doesn't mean it's predictable. Whether fund managers can beat the market depends on whether the market is "efficient", ie whether all known data and probabilty of future events is correctly priced in. If so, nobody can reliably beat the market, they can guess or gamble but are just as likely to lose as win. Or rather, more likely lose once charges are taken into account.

But that's not the point.

Genuine randomness gives predictable results within small margins over the long term. Toss a coin 10,000 times. I can practically guarantee you'll get within 3% of 5,000 heads. Try it with a simple program, or a spreadsheet. Invest £50k in premium bonds. The returns over 5 years for 99% of people will be in a narrow predictable range.

Random individual events give highly predictable outcomes in large numbers. The stock markets moves every second it's open. That's a lot of individual movements, millions per year. If the moves were random, that would make stock market moves over a year or even a month completely predictable within a very small margin of error.

But stockmarket moves are driven by cause and effect, and also arguably by its history. So not random. That doesn't mean it's possible to predict. Quite the opposite, it makes it harder to predict.

I think we're disagreeing only on the definition of random.

Your definition seems to mean the outcome of a single event is unpredictable but can be described in probability terms.  You're saying the stock market isn't like this.  Some argue it is given historic year-on-year data closely resembles a normal distribution.  And people have been using the historic data to predict SWR.

But the word random is used to simply mean unpredictable or haphazard, and if people use that word that way, the meaning does become valid.

Either way, I think most people do tend to make some assumption that the markets are following the statistical definition of random over the long term (i.e. if a data point = 1 year, not 1 trade or one month).  Otherwise why model anything based on historic data?  Or use the term "reversion to the mean".

zagfles

Sea_Shell said:

QE - Does it change the game?

Just to add another dimension to this discussion, has any one watched the recent BBC, 2 part, programme "The Decade the Rich Won".

Having watched it, it appears to me that in recent years, Western Governments simply can't entertain the risk that their economies may collapse in the face of a crisis, and so pump the system with QE.   

This then has the effect of stabilising assets, and even increasing them, making those with assets (the rich) even richer.

So even for private investors who aren't "rich" but do hold a modest portfolio of investments, are we in effect being protected from the catastrophic end (30%+) of the downturn scenarios, in that Central Banks, just won't let it happen.

If we have a balanced diversified portfolio, can we lose the shirts off our backs, in the era of QE?

Just look at the Covid drop and bounce back...what would those graphs have looked like without QE, bailouts, loans & furlough.

In one part of the show, they said that the US Treasury tried to announce they were stopping QE, and the markets reacted badly, so they had to row-back on their announcement.

It appears that our financial markets are now like a fractious baby....who won't settle.   Stops crying when you pick it up and rock it gently, but try to put it down, and it just starts screaming again!!!!


Discuss. 



(i'll add this to the subject line, and edit my first post, for any newcomers to the thread.)

The point of QE wasn't to shore up asset prices, although it seems to be a widely believed conspiracy theory, perhaps even by the BBC (although I haven't watched the programme so can't comment, but the title is a bit of a giveaway).

QE is used when the usual monetary lever, ie interest rates, has been exhausted, ie when interest rates have been reduced to practically zero. The point is to avoid deflation and the decades of stagnation that happened in Japan as a result of deflation. 

Governments and central banks don't care about asset prices except as far as they affect the wider economy. The financial crisis in 2007 wasn't due to assets prices falling alone, it was due to some of those assets, specifically those backed by housing, ie mortgages, having been incorrectly assessed as being very low risk and collaterised and sold on the financial markets as such. The UK wasn't much better with banks and building societies offering 100% or in some cases over 100% mortgages.

In fact as far as housing assets go, in the UK at least, it wasn't the last decade that saw massive growth in asset values, it was the one before. House prices in the UK have fallen in real terms since the FC in 2007, at least up to before COVID. They rose massively in the decade before the FC ie 1997-2007, up 150% in real terms! See https://www.allagents.co.uk/house-prices-adjusted/ I'm guessing this wasn't mentioned in the BBC programme as it doesn't really seem to fit the narrative suggested by the title?

Monetary policy over the last decade, ie ultra low interest rates, has in fact resulted in a transfer from those with money to those without, since low interest rates obviously benefit borrowers (ie those without money) and hurt savers (ie those with money). Of course that itself has led to some asset prices increasing ie equities, as savers look to get some form of return on their savings rather than put up with interest rates below inflation (ie losings rather than savings as Martin puts it).

Stuff like the COVID bailouts, and more recently the energy "loan" just announced, is obviously all down the goverment's perceived responsibility to protect those without money, ie those who don't have savings to fall back on to tide them over while they can't work due to COVID, or to pay their energy bill when the energy costs spike, ie to protect the poor from the effect of market price changes.  The same goes for all these daft "help to buy", "key worker", "shared equity" schemes that started around 2005, well before the FC, as a response to the housing market pricing lots of people out of the market. In fact - to contradict my earlier point - this was probably an example where the govt did care about asset prices, New Labour found rising house prices were very popular and won a record third term on the back of it, so rather than pursue policies to dampen house price inflation, they did the opposite, and instead tried to treat some of the symptoms rather than the cause. 

The bank "bailouts" in the FC weren't really bailouts, they were part nationalisation, ie the taxpayer taking ownership of part of the affected banks to avoid them collapsing and causing massive economic knock on damage. In some cases the taxpayer has profitted from the so-called "bailouts".

Personally I'd prefer an environment where interest rates were above inflation, where annuities were much better value, rather than being forced to rely on the whims of the stock market to avoid a guaranteed fall in the real terms value of my assets.