Is it all too good to be true?

tichtich

I haven't read the whole thread, so apologies if I'm repeating something that's already been said.

I've always found it a bit odd that many people use a withdrawal rate (such as the traditional 4%) based on the market price of their portfolio at the time they retire, without taking into account whether the market is over- or under-priced. If investments are over-priced, then future returns (on that price) are likely to be significantly lower than if they are appropriately- or under-priced.

The same applies if you are still some way from retirement, though probably to a lesser degree, as there is more time to recover from the next down-turn. So I think the OP is wise to apply a discount to his current portfolio price. (I like to call it "price", and save the word "value" for the underlying worth of investments, based on their expected future cash flows.)

Albermarle

tichtich said:

I haven't read the whole thread, so apologies if I'm repeating something that's already been said.

I've always found it a bit odd that many people use a withdrawal rate (such as the traditional 4%) based on the market price of their portfolio at the time they retire, without taking into account whether the market is over- or under-priced. If investments are over-priced, then future returns (on that price) are likely to be significantly lower than if they are appropriately- or under-priced.

The same applies if you are still some way from retirement, though probably to a lesser degree, as there is more time to recover from the next down-turn. So I think the OP is wise to apply a discount to his current portfolio price. (I like to call it "price", and save the word "value" for the underlying worth of investments, based on their expected future cash flows.)

A market can not be over or under priced, as if this was the consensus, the market would have already moved to correct that. 
Of course you can have your own personal opinion, but it is just as likely to be wrong as right, especially in the short term. 

tichtich

Albermarle said:

tichtich said:

I haven't read the whole thread, so apologies if I'm repeating something that's already been said.

I've always found it a bit odd that many people use a withdrawal rate (such as the traditional 4%) based on the market price of their portfolio at the time they retire, without taking into account whether the market is over- or under-priced. If investments are over-priced, then future returns (on that price) are likely to be significantly lower than if they are appropriately- or under-priced.

The same applies if you are still some way from retirement, though probably to a lesser degree, as there is more time to recover from the next down-turn. So I think the OP is wise to apply a discount to his current portfolio price. (I like to call it "price", and save the word "value" for the underlying worth of investments, based on their expected future cash flows.)

A market can not be over or under priced, as if this was the consensus, the market would have already moved to correct that. 
Of course you can have your own personal opinion, but it is just as likely to be wrong as right, especially in the short term. 

Studies have shown that high CAPE ratios are strongly correlated with low returns over the next 20 years.

Bobziz

tichtich said:

Albermarle said:

tichtich said:

I haven't read the whole thread, so apologies if I'm repeating something that's already been said.

I've always found it a bit odd that many people use a withdrawal rate (such as the traditional 4%) based on the market price of their portfolio at the time they retire, without taking into account whether the market is over- or under-priced. If investments are over-priced, then future returns (on that price) are likely to be significantly lower than if they are appropriately- or under-priced.

The same applies if you are still some way from retirement, though probably to a lesser degree, as there is more time to recover from the next down-turn. So I think the OP is wise to apply a discount to his current portfolio price. (I like to call it "price", and save the word "value" for the underlying worth of investments, based on their expected future cash flows.)

A market can not be over or under priced, as if this was the consensus, the market would have already moved to correct that. 
Of course you can have your own personal opinion, but it is just as likely to be wrong as right, especially in the short term. 

Studies have shown that high CAPE ratios are strongly correlated with low returns over the next 20 years.

One of the reasons for Goldman's forecast of 3%. It does seem very pessimistic, but provides food for thought. I see Xtrackers do a world ex us etf now. Might be an easy way to reduce US exposure 🤔

michaels

tichtich said:

I haven't read the whole thread, so apologies if I'm repeating something that's already been said.

I've always found it a bit odd that many people use a withdrawal rate (such as the traditional 4%) based on the market price of their portfolio at the time they retire, without taking into account whether the market is over- or under-priced. If investments are over-priced, then future returns (on that price) are likely to be significantly lower than if they are appropriately- or under-priced.

The same applies if you are still some way from retirement, though probably to a lesser degree, as there is more time to recover from the next down-turn. So I think the OP is wise to apply a discount to his current portfolio price. (I like to call it "price", and save the word "value" for the underlying worth of investments, based on their expected future cash flows.)

Some of the tools quote higher 'SWRs' depending whether the S&P 500 is at an all time high or if it is 'x%' below its high.  The SWR itself is of course supposed to be worse case so likely the key historic worse case was indeed from a market high moment hence SWRs being higher if the market is not at peak

OldScientist

tichtich said:

I haven't read the whole thread, so apologies if I'm repeating something that's already been said.

I've always found it a bit odd that many people use a withdrawal rate (such as the traditional 4%) based on the market price of their portfolio at the time they retire, without taking into account whether the market is over- or under-priced. If investments are over-priced, then future returns (on that price) are likely to be significantly lower than if they are appropriately- or under-priced.

The same applies if you are still some way from retirement, though probably to a lesser degree, as there is more time to recover from the next down-turn. So I think the OP is wise to apply a discount to his current portfolio price. (I like to call it "price", and save the word "value" for the underlying worth of investments, based on their expected future cash flows.)

ERN (https://earlyretirementnow.com/2016/12/21/the-ultimate-guide-to-safe-withdrawal-rates-part-3-equity-valuation/ ) and McClung (Living off your money) both take CAPE (as a measure of valuations) into account, but only in very broad brush terms since CAPE is a weak predictor of the subsequent 10 year returns (from memory the correlation is about 0.7). To take an example from the graph presented in ERN's article linked above, for a CAPE of 20, the annualised total return over the subsequent 10 years varied from -3% to +9% which is a rather wide range of predictions! Of course, in SWR terms, it is not only the return but the sequence of returns that matters which just compounds the uncertainty.

There are uncertainties in SWR values of around 50 bp arising from the flaws in the method itself (e.g., very few independent data points) and uncertainties in the values of historical inflation (e.g., there are at least four inflation series for the UK before 1948) and asset returns (which are not necessarily what they purport to be, e.g. Shillers 10-year US treasury series is not actually based on treasuries prior to about 1930 and his inclusion of dividends in the equity series is approximate). Even the returns for something as 'simple' as bonds are critically dependent on exactly how these have been calculated and their maturity or duration. Taking account of the CAPE in the SWR is within that sort of error, so maybe more of a perturbation to a planned withdrawal rate than a critical one.

Besides which, from an implementation point of view, SWR is flawed for many reasons one of which is a complete lack of robustness to future events that are unlike those found in the past (other reasons have been discussed upthread).

horsewithnoname

You know the thing that money can’t buy? Time. Obviously it’s ultimately what you enjoy doing, and if it genuinely is work then crack on. But don’t you have family and friends to enjoy yourself with? Don’t you have hobbies or interests that you like to do more of?
only you can answer for yourself. 

barnstar2077

horsewithnoname said:

You know the thing that money can’t buy? Time. Obviously it’s ultimately what you enjoy doing, and if it genuinely is work then crack on. But don’t you have family and friends to enjoy yourself with? Don’t you have hobbies or interests that you like to do more of?
only you can answer for yourself. 

This is how I feel.  News flash, we are all dying!  Every week there are new stories on this forum of people with million pound pots discussing whether to take 3.5% or 3.25%, or work one more year etc.  Most of them will only ever spend a fraction of the money.  Most people won't make it to their nineties (with many of them wishing they hadn't) so go as soon as the numbers add up and cut your cloth accordingly.  People can always adjust their spending, but no one can buy more time! 

Dazed_and_C0nfused

barnstar2077 said:

horsewithnoname said:

You know the thing that money can’t buy? Time. Obviously it’s ultimately what you enjoy doing, and if it genuinely is work then crack on. But don’t you have family and friends to enjoy yourself with? Don’t you have hobbies or interests that you like to do more of?
only you can answer for yourself. 

This is how I feel.  News flash, we are all dying!  Every week there are new stories on this forum of people with million pound pots discussing whether to take 3.5% or 3.25%, or work one more year etc.  Most of them will only ever spend a fraction of the money.  Most people won't make it to their nineties (with many of them wishing they hadn't) so go as soon as the numbers add up and cut your cloth accordingly.  People can always adjust their spending, but no one can buy more time! 

It hasn't stopped people trying though!

Or maybe it's more it hasn't stopped entrepreneurs from finding ways to get rich people to part with some of their money 😉 

https://www.theguardian.com/science/2015/jan/11/-sp-live-forever-extend-life-calico-google-longevity

Starmer24

barnstar2077 said:

horsewithnoname said:

You know the thing that money can’t buy? Time. Obviously it’s ultimately what you enjoy doing, and if it genuinely is work then crack on. But don’t you have family and friends to enjoy yourself with? Don’t you have hobbies or interests that you like to do more of?
only you can answer for yourself. 

This is how I feel.  News flash, we are all dying!  Every week there are new stories on this forum of people with million pound pots discussing whether to take 3.5% or 3.25%, or work one more year etc.  Most of them will only ever spend a fraction of the money.  Most people won't make it to their nineties (with many of them wishing they hadn't) so go as soon as the numbers add up and cut your cloth accordingly.  People can always adjust their spending, but no one can buy more time! 

I think this is certainly me (trying to model different returns etc) and i am now looking to retire either March 25 (4 mths?) , or March 26 (16 mths).   The uncertainty is based on the fact i am not 55 until Feb 2026, and hence going a year before means i will be eating into my capital for 12 mths.

But of course, if i live till 75 i only have 21 yrs to go...do i want to use one of these precious 21 years working in a job i really dislike and having the opportunity cost of not enjoying myself in the meantime

But the decision of time vs money is certainly one i am very conscious of as i have a lot of stuff i want to do now...but also the decision to retire so young (with 3 kids and one in primary school) based on the uncertainties of a DC pension and a lifetime of being prudent isnt something i want to make without proper consideration!