These debates come up all the time and it is pretty clear that the data can be mined to say whatever someone wants it to say. Generating alpha against some equity benchmark is not the goal for many very wealthy people, I mean really wealthy. There are also plenty of people who have below normal tolerances for volatility.
I do not know what percentage of the investing population that might have been studied is either too wealthy or too scared but these are real segments of the sample size.
I do know that these debates are far too generalized and thus cloud the issue. I said many times before that for some people passive is the way to go but for others active works very well. Further, the $80 billion number is for one year. Hussman has said (and I agree) that it makes more sense to consider this over the entire stock market cycle.
What about risk adjusted returns? In years past I have hypothetically asked readers to weigh in with their thoughts about a strategy that captured 80% of the upside with only half the downside (this is in the same neighborhood of what John Serrapere tries to do) and based on those past posts it was very well received. Well obviously anyone pursuing something along these lines is not trying to capture alpha on an annual basis.
On December 31, 1999 the S&P 500 closed at 1469. At 1033 going into the open today it is down 30% (not including dividends) for the decade. I would venture to say that if you are meaningful ahead of the SPX' result for the decade that that is far more important than whether you added alpha in 2004, 2005, 2006 or 2007.
People believe what they believe and should do what is right for them but many of the debates on this subject are far too simplistic.
10 comments:
Down 30% and you probably still stick to that 4% per year for retired folks.
So now we are looking at 30% less now than a decade ago the way you reduce the amount due to down years. Do you really think the average person could do this? IMO the decade a head will be volatile but not positive over all.
I still think 3% or possibly less is more realistic draw down.
the many studies that conclude 4% take into account the 1970s and still come up with the 90% success ratio.
Anyone who can get by on less clearly has a better chance for success. In my defense I have been consistent in say whatever you got; 4% which means if your portfolio drops so does your withdrawal.
Additionally how many posts have I had that say retirement needs to change, the people need to become very resourceful in creating incomes for themselves to relieve some of the burden from the portfolio?
Yes you do promote working in retirement and that is good. But since dividends have been less than 4% the portfolio would actually be down more than 30%.
The studies are to biased by the short period of time looked at and the 80's and 90's. Plus I have been trying to say over and over that this decade and next decade are one of the 10% of times 4% will not work. Come the 2020's 5% may work for all I know, but I advocate spending much less for now.
Jeepers, how about we not take out anything from our portfolio. Oughta last a long time then.
Beyond that, in terms of active managers not capturing alpha. Well sure. This isn't Lake Wobegone, where everyone is above average. Some are; many aren't.
And finally, what would happen if every investor indexed everything?
Roger,
Today we made a new high from march. These days I have been making some purchases cpr.mi . As I mentioned before I think that we are going to 1166. We are 120 from it. What a ride. Thanks to you Roger, I am learing alot about the market.
Best,
Jeff from Milan Italy
"Jeepers, how about we not take out anything from our portfolio. Oughta last a long time then."
Sorry if I sound so negative but look at Japan after their stock market bubble, followed by a housing bubble (sound familiar???)
Japan has had a bad 2 decades and I think that is where we are headed. The only other solution I see is the 1930's all over again and I think the fed will prefer a ZIRP policy and Japanese like outcome. On the bright side I think we will do better than Japan, but that is the best model available IMO.
Another bright point is I did not say people could not take a small percentage from their assets I just would strongly suggest they reduce their spending in this deflationary environment. Deflation is a very difficult environment for people to deal with, and it will be with us for quite some time.
An 80% upside capture and 50% downside capture strategy would have a beta of 0.65 and presumably have a high alpha. I don't think it makes sense to think about beating the market adjusted for beta in any one year and you probably agree, though this strategy might do so, depending on the variance around the alpha.
80% up while avoiding no more than 50% down would be a killer strategy if you could do it YoY since it only takes about 64% up while avoiding 50% down to match the market; e.g., http://tinyurl.com/mwls6y
Semi-OT but it's useful to consider the fact that gaining income from other sources -- work, social security, rents, what have you -- can have a significant impact on required financial portfolio size; e.g., at a 4% drawdown rate, $1,000 more a month from other sources means you need $300,000 less in financial assets to make the monthly nut.
I don't think working in retirement gets you any benefits. How does the tax deduction work in these cases?
Hi Roger, my name is Roger and my license plate is "Random4" because the other "Randoms" were taken. I am slightly older than you so I probably had the name before you did, BUT it is very enjoyable to know that there is another "Random Roger" out there! I invest my own money and I would be considered a "very good" investor. From 1996-2003, I was able to average about 37%/year (annually!) which according to Shelans is one of the top 10 in the US and better than all mutual funds during that period of time. I was unprepared for the latest downswing, but have recovered most of my losses as of today (which gives me a lot of room on the upside if there is a full recovery!). I am a scientist by nature, so I have very little credibility among financial people. I was wondering if we could start a dialogue....not interested in anything else at this moment. r.m.v.0585@msn.com is my secondary email that I check once a month, so please write me a letter to say Hi. I dont see your email on any of the pages.
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