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    • bostonerimus
    • By bostonerimus 24th Dec 18, 10:03 PM
    • 2,740Posts
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    bostonerimus
    Merry Correction Day
    • #1
    • 24th Dec 18, 10:03 PM
    Merry Correction Day 24th Dec 18 at 10:03 PM
    With major indexes in correction territory (greater than 10% down) it's time for all retirees to do their Guyton Klinger income adjustments, check on the cash reserve, or feel smug about having an annuity or DB pension....seriously this is where sequence of returns risk becomes a practical reality rather than some theoretical possibility.
    Last edited by bostonerimus; 24-12-2018 at 10:22 PM.
    Misanthrope in search of similar for mutual loathing
Page 5
    • Audaxer
    • By Audaxer 8th Jan 19, 9:20 PM
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    • 984 Thanks
    Audaxer
    Ideally you'll have read Drawdown: safe withdrawal rates and be using the Guyton-Klinger rules to start at 5% rather than 3% and adjust subsequently based on actual performance.
    Originally posted by jamesd
    Thanks jamesd, that's interesting but not sure I understand it all looking at this page in particular:
    https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/
    It says that one or two years of really bad returns early on should not affect SWRs. In the example shown it says even if in the first year there is a loss of 42% there could still be a SWR of 5.34%. I would have thought safer not to draw anything in a loss year, especially a crash year? It also says if in the first year there was a positive return of 35%-55% the SWR could still be between 5% and 6% - so not much difference from a bad first year.

    It goes on to say that bad decades are the real problem rather than a couple of bad years. I understand that but it says later in the page that even compounded real returns (taking inflation into account) of below about 3% over a decade are still in the 4% to 5% SWR range. That seems a really high SWR for a low growth, so I don't understand how that is calculated?
    • Thrugelmir
    • By Thrugelmir 8th Jan 19, 9:41 PM
    • 62,503 Posts
    • 55,603 Thanks
    Thrugelmir
    Nothing is perfect but hopefully the chances of a better retirement will be higher than using a fixed withdrawal rate or just doing by guesswork. Until a better idea comes out its the one I am aiming for
    Originally posted by Prism
    The original studies use US Treasuries as the bond proxy. Given UK Gilts yield considerably less at the current time, not even covering inflation. What bonds are you proposing to hold that provide 100% guarantee of no default. The equity portion of your portfolio is going to have to do some heavy lifting to compensate.
    "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch
  • jamesd
    The original studies use US Treasuries as the bond proxy. Given UK Gilts yield considerably less at the current time, not even covering inflation. What bonds are you proposing to hold that provide 100% guarantee of no default. The equity portion of your portfolio is going to have to do some heavy lifting to compensate.
    Originally posted by Thrugelmir
    The original studies include times of low bond yields and times of high inflation.
  • jamesd
    it says later in the page that even compounded real returns (taking inflation into account) of below about 3% over a decade are still in the 4% to 5% SWR range. That seems a really high SWR for a low growth, so I don't understand how that is calculated?
    Originally posted by Audaxer
    SWR is the highest rate for the rules used that doesn't run out of capital. So there is income draining capital built in, not drawing only investment returns and leaving capital intact.

    I would have thought safer not to draw anything in a loss year, especially a crash year?
    Originally posted by Audaxer
    You have to live on something. Selling equities would be a bad move but you have bonds, cash and investment income or could work. So you might:

    1. have a year in cash savings
    2. use income versions of funds instead of accumulation and top up savings from dividends and interest
    3. sell bonds
    4. use Guyton's sequence of return risk reduction to cut equity percentage when prospects are worst
    5. Use the Guyton-Klinger rules that do 2 and 3, sell equities when values are high, skip inflation increases and maybe cut income if needed
    6. remember that it's already allowed for in the safe withdrawal rate

    It goes on to say that bad decades are the real problem rather than a couple of bad years
    Originally posted by Audaxer
    And that's moderately predictable based on the cyclically adjusted price/earnings ratio. So we know that US safe withdrawal rates are still near to the bottom end of the range. But someone who uses Guyton's approach to reduce equity holdings and later switch back into equities can expect to do better.
    • Audaxer
    • By Audaxer 13th Jan 19, 8:06 PM
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    • 984 Thanks
    Audaxer
    You have to live on something. Selling equities would be a bad move but you have bonds, cash and investment income or could work. So you might:

    1. have a year in cash savings
    Originally posted by jamesd
    Thanks jamesd, I know I am probably too cautious but I'd always want at least a few years cash savings as a buffer.
    2. use income versions of funds instead of accumulation and top up savings from dividends and interest
    I have a portfolio of good income equity funds and strategic bond funds from which I will draw dividends. Hopefully dividends on these funds will be less volatile than capital values in markets crashes?
    3. sell bonds
    I also hold Vanguard LifeStrategy funds. I like the simplicity of the funds, the fact that they are low cost, globally diversified and have automatic rebalancing, but for the purpose of selling bonds alone in an equity crash, I wonder if it would be better to hold separate global equity and bond funds?
    • Alexland
    • By Alexland 13th Jan 19, 8:47 PM
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    Alexland
    I also hold Vanguard LifeStrategy funds. I like the simplicity of the funds, the fact that they are low cost, globally diversified and have automatic rebalancing, but for the purpose of selling bonds alone in an equity crash, I wonder if it would be better to hold separate global equity and bond funds?
    Originally posted by Audaxer
    In an equity crash the fixed allocation fund manager would be selling the increasingly valuable bonds in order to buy more lower cost equities. However yes if you were selling down fund units you would be selling both bonds and some of the newly purchased equities.

    For those that might want to take further advantage of the more attractive equity prices to increase their exposure then mixed asset funds are inflexible to changes in asset allocation. I run my workplace pension as a 2 fund portfolio of equities and bonds to enable me to make changes without many units having time out the market.

    Given the partial recovery I am increasing bonds 5% to rebalance to an overall 80/20 allocation next week.

    Alex
    • Thrugelmir
    • By Thrugelmir 13th Jan 19, 9:41 PM
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    • 55,603 Thanks
    Thrugelmir
    In an equity crash the fixed allocation fund manager would be selling the increasingly valuable bonds in order to buy more lower cost equities.
    Originally posted by Alexland
    With equities and bonds highly correlated at the current time. Why are only equities going to be impacted by whatever news causes a major market down pricing movement. Many bonds are trading at over nominal par value. Might not as be as valuable as you are suggesting. QE has changed the playing field somewhat. In the chase for higher yields by investors.
    "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch
    • Alexland
    • By Alexland 13th Jan 19, 10:43 PM
    • 4,731 Posts
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    Alexland
    With equities and bonds highly correlated at the current time.
    Originally posted by Thrugelmir
    Maybe when investing globally because of exchange rate movements but a quick check of a couple of UK domestic investments suggests the inverse correlation and protection is still just about working.

    The VMID ftse250 ETF is down 9.07% over the past 6 months but VGOV UK gilts ETF is only down 0.04%. Yet over the past month VMID is up 4.9% and VGOV is down 1.13%.

    Alex
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