SWR question - lower future returns & lower Std Dev...

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Cb
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Joined: Tue Feb 20, 2007 11:39 pm

SWR question - lower future returns & lower Std Dev...

Post by Cb »

A few weeks back there was a reply in a thread here in which the poster said that he had done some Monte Carlo SWR analysis which suggested that n% lower portfolio Std Dev was suficient to offset some % lower returns. I wish I'd saved the post...was that ratio approximately 2% lower SD = 1% lower returns? :(

Perthaps the greatest criticism of what might be called historical SWR studies such The Trinity Study and John Greaney's subsequent work is that they rely largely on past returns of the S&P 500 index during the US's transition from a emerging economy to the world's largest.

If they overwhelming majority of experts are correct, and equity returns in the next few decades (or more) are lower than those of the past century, to what extent should reduced equity portfolio SD offset that?

Please share your thoughts in the space below.

Cb :lol:
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bob90245
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Re: SWR question - lower future returns & lower Std Dev.

Post by bob90245 »

Cb wrote:A few weeks back there was a reply in a thread here in which the poster said that he had done some Monte Carlo SWR analysis which suggested that n% lower portfolio Std Dev was suficient to offset some % lower returns. I wish I'd saved the post...was that ratio approximately 2% lower SD = 1% lower returns? :(
Here is the post:
DRiP Guy wrote:
Norbert Schlenker wrote:Readers of this thread might find a post I made at FWF last summer worth thinking about. It discusses the sensitivity of withdrawal rates to various inputs.
Thanks, Norm -- that's exactly the type of input I personally am hoping to see. JDC says there is over reliance on the 4%-as-absolute, and perhaps in the absence of credible and readily applicable paradigms to supplant it, that could be so (now, that is a tentative allowance only for the purposes of furthering discussion, and not a capitulation, though... <chuckle>)

In particular, I found this observation you made from your studies to be quite intriguing:

...1% of extra return is worth about as much as 2.5% of reduced volatility - is pretty robust over a wide interval.
I honestly don't put Shiller, Bogle, et al on a pedestal, but when I see stuff like that, I just can't help but think of... 'broad diversification... of a wide selection of investments... held over a long period of time....' as being the best way most mortals can gird their virtual loins for the battle with time to come... it certainly (IMHO) is not via molybdenum futures <chuckle>... I know I digress, but I think there is a common theme between toying with SWR and toying with what we do with the money we invest-- those who want to 'tinker' with 4% are welcome to do so. Certainly if there is reason, and the risk seems reasonable, why not?

But personally, I am not looking to max out one more quarter percent draw per year. Instead, I am looking to protect (and even grow!) a nest egg against the ravages of time and market uncertainty, even while I "sip" a little of it's nectar. What I need is to balance not being too frugal and living a miserly life, with not killing the golden goose through profligate excess.

It seems to me, until proven otherwise, that for someone in my condition, 4% will work fine to start.

Can I adapt if need be, though? You bet your boots!

8)
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Cb
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Post by Cb »

Thanks Bob90210!!

Now I just need to get out my Excel doc with TrevH's dat and figure how to tickle 7.5% of SD out of an equity portfolio!

Cb :lol:
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