Is the 4% rule still applicable today?

Pat38493

Secret2ndAccount said:

But another wise man said "Those who do not study history are doomed to repeat it".
Even if the future behaves exactly like the past (not sure how we measure that anyway), the 4% rule is still not guaranteed to work as there could be sequences of inflation, equity and bond returns which break it. You have to start somewhere, and I think a 3% rule is a good way to estimate a floor under your income given your starting pot. There is nobody I would trust to predict future economics more than a historian. Maybe Michael Saylor is right and we should all buy levered bitcoin. Or Jack bogle, who died 6 years ago is wiser with sensible drawdown from a 60:40 portfolio.
In the end, having a large portfolio is the most likely measure of success. If you have more than you need, and you draw any kind of reasonable income, you are likely to be fine. If your portfolio is barely sufficient to meet your needs then it is down to luck as much as skilled management whether you end up comfortable or destitute.

Has anyone here read the book "Triumph of the Optimists" - I heard one of the authors of this on a podcast and they were talking about how some of the major market indices that are used for SWR and so on may be over optimistic due to contamination by survivorship bias and success bias.  They didn't specifically talk about whether this impacts on data such as that discussed above, but they did discuss that during the 19th century, the risk premium from being invested in equities over bonds was arguable reversed (but with some caveats).

I have not read the book as it costs a bomb but I was wondering if anyone else here was familiar with the work of these researchers.

dunstonh

An interesting graph (if it unfortunate that the software you are using is no longer available to new retail clients). That 100% stocks for UK retirees improved SWR is fairly well known (e.g., see https://blog.iese.edu/jestrada/files/2018/03/MaxWR.pdf ), but the removal of data before 1915 does skew the results (I'm not sure why 1915 was chosen, except that for the UK it was the first year in which dated gilts, as opposed to consols, were issued in significant numbers).

1915 was the year that all data points had reliable data.    Before that, there were gaps or assumptions that were not necessarily sound.

Secret2ndAccount

Pat38493 said:

Has anyone here read the book "Triumph of the Optimists" - I heard one of the authors of this on a podcast and they were talking about how some of the major market indices that are used for SWR and so on may be over optimistic due to contamination by survivorship bias and success bias.  They didn't specifically talk about whether this impacts on data such as that discussed above, but they did discuss that during the 19th century, the risk premium from being invested in equities over bonds was arguable reversed (but with some caveats).

I have not read the book as it costs a bomb but I was wondering if anyone else here was familiar with the work of these researchers.

Index investing is still stock-picking. It is just done using a clear, rules-based method with a long term approach. This avoids many common mistakes - emotional trading, chasing losers, over-trading, ignoring costs. They do add and subtract stocks from the index from time to time, based on success. That cost/benefit is included in the long term value of the index - no cheating going on.
It stands to reaon in a buy-and-hold approach that you will end up with more of your winners. Some people criticise the indices, saying that you end up with 40% of your money in 6-8 US tech stocks. If you think it's a real concern, you can choose funds that act as insurance. On the other hand, you could ask how we arrived in this position. 95% of people who plan to beat the index fail to beat the index...
Index investing isn't a search for maximum return - it's a search for average returns with average risk - get rich slowly.

Book is available secondhand for less than half a bomb if you are keen.

Pat38493

Secret2ndAccount said:

Pat38493 said:

Has anyone here read the book "Triumph of the Optimists" - I heard one of the authors of this on a podcast and they were talking about how some of the major market indices that are used for SWR and so on may be over optimistic due to contamination by survivorship bias and success bias.  They didn't specifically talk about whether this impacts on data such as that discussed above, but they did discuss that during the 19th century, the risk premium from being invested in equities over bonds was arguable reversed (but with some caveats).

I have not read the book as it costs a bomb but I was wondering if anyone else here was familiar with the work of these researchers.

Index investing is still stock-picking. It is just done using a clear, rules-based method with a long term approach. This avoids many common mistakes - emotional trading, chasing losers, over-trading, ignoring costs. They do add and subtract stocks from the index from time to time, based on success. That cost/benefit is included in the long term value of the index - no cheating going on.
It stands to reaon in a buy-and-hold approach that you will end up with more of your winners. Some people criticise the indices, saying that you end up with 40% of your money in 6-8 US tech stocks. If you think it's a real concern, you can choose funds that act as insurance. On the other hand, you could ask how we arrived in this position. 95% of people who plan to beat the index fail to beat the index...
Index investing isn't a search for maximum return - it's a search for average returns with average risk - get rich slowly.

Book is available secondhand for less than half a bomb if you are keen.

Their issues seems to be more that going very far into the past to re-create indexes where not enough data was available, researches tended to be biased to keep the same companies in the index and overlook companies that had come and gone before the full data was available - i.e. companies that should have been in the index but then shrunk down to very low value and gone bust were not included in the very old data when they should have been.  The example was a bank before 1900 that had formed 30% of the US economy at some time or other but then shrank and went bust, but was never reflected in any of the research.

FIREDreamer

Secret2ndAccount said:

Pat38493 said:

Has anyone here read the book "Triumph of the Optimists" - I heard one of the authors of this on a podcast and they were talking about how some of the major market indices that are used for SWR and so on may be over optimistic due to contamination by survivorship bias and success bias.  They didn't specifically talk about whether this impacts on data such as that discussed above, but they did discuss that during the 19th century, the risk premium from being invested in equities over bonds was arguable reversed (but with some caveats).

I have not read the book as it costs a bomb but I was wondering if anyone else here was familiar with the work of these researchers.

Index investing is still stock-picking. It is just done using a clear, rules-based method with a long term approach. This avoids many common mistakes - emotional trading, chasing losers, over-trading, ignoring costs. They do add and subtract stocks from the index from time to time, based on success. That cost/benefit is included in the long term value of the index - no cheating going on.
It stands to reaon in a buy-and-hold approach that you will end up with more of your winners. Some people criticise the indices, saying that you end up with 40% of your money in 6-8 US tech stocks. If you think it's a real concern, you can choose funds that act as insurance. On the other hand, you could ask how we arrived in this position. 95% of people who plan to beat the index fail to beat the index...
Index investing isn't a search for maximum return - it's a search for average returns with average risk - get rich slowly.

Book is available secondhand for less than half a bomb if you are keen.

Hhhhhhhhhhow much!!!

OldScientist

Pat38493 said:

Secret2ndAccount said:

But another wise man said "Those who do not study history are doomed to repeat it".
Even if the future behaves exactly like the past (not sure how we measure that anyway), the 4% rule is still not guaranteed to work as there could be sequences of inflation, equity and bond returns which break it. You have to start somewhere, and I think a 3% rule is a good way to estimate a floor under your income given your starting pot. There is nobody I would trust to predict future economics more than a historian. Maybe Michael Saylor is right and we should all buy levered bitcoin. Or Jack bogle, who died 6 years ago is wiser with sensible drawdown from a 60:40 portfolio.
In the end, having a large portfolio is the most likely measure of success. If you have more than you need, and you draw any kind of reasonable income, you are likely to be fine. If your portfolio is barely sufficient to meet your needs then it is down to luck as much as skilled management whether you end up comfortable or destitute.

Has anyone here read the book "Triumph of the Optimists" - I heard one of the authors of this on a podcast and they were talking about how some of the major market indices that are used for SWR and so on may be over optimistic due to contamination by survivorship bias and success bias.  They didn't specifically talk about whether this impacts on data such as that discussed above, but they did discuss that during the 19th century, the risk premium from being invested in equities over bonds was arguable reversed (but with some caveats).

I have not read the book as it costs a bomb but I was wondering if anyone else here was familiar with the work of these researchers.

Yes, Dimson et al (who also write the Global Returns Investment Handbook) have done a huge amount of work on improving historical return data over the last few decades - although if you think the book is expensive, you should try obtaining the database (one of the reasons the macrohistory.net database is popular with independent researchers is that it is free and steadily improving).

The research is not static either with lively 'discussion' - e.g., Grossman's New Indices of British Equity Prices, 1870–1913 which was first published in 2002 has been critiqued (e.g., https://eprints.lse.ac.uk/90547/1/Hannah_London%20stock%20exchange_2018.pdf ) and revised (e.g., see https://pureadmin.qub.ac.uk/ws/portalfiles/portal/229369844/Before_the_Cult_of_Equity_1_.pdf and references). McQuarrie's recent papers (available at SSRN) on US treasury and equity returns are also worth a read (incredibly thorough and incredibly long!).

Bostonerimus1

OldScientist said:

Pat38493 said:

Secret2ndAccount said:

But another wise man said "Those who do not study history are doomed to repeat it".
Even if the future behaves exactly like the past (not sure how we measure that anyway), the 4% rule is still not guaranteed to work as there could be sequences of inflation, equity and bond returns which break it. You have to start somewhere, and I think a 3% rule is a good way to estimate a floor under your income given your starting pot. There is nobody I would trust to predict future economics more than a historian. Maybe Michael Saylor is right and we should all buy levered bitcoin. Or Jack bogle, who died 6 years ago is wiser with sensible drawdown from a 60:40 portfolio.
In the end, having a large portfolio is the most likely measure of success. If you have more than you need, and you draw any kind of reasonable income, you are likely to be fine. If your portfolio is barely sufficient to meet your needs then it is down to luck as much as skilled management whether you end up comfortable or destitute.

Has anyone here read the book "Triumph of the Optimists" - I heard one of the authors of this on a podcast and they were talking about how some of the major market indices that are used for SWR and so on may be over optimistic due to contamination by survivorship bias and success bias.  They didn't specifically talk about whether this impacts on data such as that discussed above, but they did discuss that during the 19th century, the risk premium from being invested in equities over bonds was arguable reversed (but with some caveats).

I have not read the book as it costs a bomb but I was wondering if anyone else here was familiar with the work of these researchers.

Yes, Dimson et al (who also write the Global Returns Investment Handbook) have done a huge amount of work on improving historical return data over the last few decades - although if you think the book is expensive, you should try obtaining the database (one of the reasons the macrohistory.net database is popular with independent researchers is that it is free and steadily improving).

The research is not static either with lively 'discussion' - e.g., Grossman's New Indices of British Equity Prices, 1870–1913 which was first published in 2002 has been critiqued (e.g., https://eprints.lse.ac.uk/90547/1/Hannah_London%20stock%20exchange_2018.pdf ) and revised (e.g., see https://pureadmin.qub.ac.uk/ws/portalfiles/portal/229369844/Before_the_Cult_of_Equity_1_.pdf and references). McQuarrie's recent papers (available at SSRN) on US treasury and equity returns are also worth a read (incredibly thorough and incredibly long!).

The past few posts are the reason I decided to base my retirement income on DB, SP and rental income. All the SWR modeling is just an attempt to fit an essentially risky equities square in to a guaranteed income circle. I'd be more amenable to the equities approach if dividends were emphasized over total return.