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Challenging the 4% Rule

Including Financial Independence and Retiring Early (FIRE)
hiriskpaul
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Re: Challenging the 4% Rule

#472829

Postby hiriskpaul » January 13th, 2022, 5:29 pm

1nvest wrote:
hiriskpaul wrote:
Lootman wrote:
BullDog wrote:Overall, with gold not paying any income, that means the remaining portfolio assets have to sweat harder to produce the income.

Not necessarily. You can hold gold miners, which typically do pay dividends. You can use gold options and futures to generate income. And of course you can sell some gold each year, given that the SWR is not just about income but about having enough capital to draw down.

In fact I could be 100% in Berkshire Hathaway, which pays no income at all, and just sell 4% a year. Who needs income?

The thing about doing that is you get to decide how much income to take. The natural yielders get what they are given. It wouldn't suit me, but some people prefer the latter.

For the former with investments in funds inside ISAs/SIPPs, I think there is much to be said for holding accumulation versions of funds/ETFs. That way your money stays fully invested until you chose to take it out. With funds that pay dividends you end up having more cash hanging around than is optimal.

Some stocks are pretty slow at paying out dividends, might take a couple of months between when the stock went ex-div and the share price was marked down to when you actually receive the dividend (and maybe a further delay before that money is reinvested again and after brokers, stamp duty, market maker, FX agent, taxman ..etc. may also have taken a slice). For higher yielding portfolios that might be 4% of the portfolio value being idle and/or bearing costs for several months each year. Maybe not that dissimilar to investing only 99% and leaving 1% in hard cash. Such generosity of 'free money' gifted to others enables them to operate out of expensive buildings/locations and pay high wages. Personally I don't feel like being generous to such cases and would rather keep it for myself or gift it to where I opined there was a greater need.

In theory during the time between a share going ex-div and being paid the unpaid dividend should be earning the risk free rate, so on ex-div date the share price should fall by slightly less that the dividend (which contradicts what I have said on another thread!). In addition though, a cum-div shareholder is carrying credit risk after ex-div date, which should also reduce the drop. After ex-div date of a final dividend, those entitled to the dividend become senior creditors to the company and can force payment, but when it comes to interim dividends the payment can be cancelled at any time with no recourse for shareholders who are entitled to the dividend but who sold on or after ex-div date. The motto is if you are intending to sell out of a dodgy looking company, don't wait until ex-div date!

Going off topic here...

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Re: Challenging the 4% Rule

#472834

Postby hiriskpaul » January 13th, 2022, 5:46 pm

vand wrote:I like strategies like the Permanent Portfolio and All-weather portfolio, but sometimes they are a hard sell to people who are wedded on the traditional 60/40 or some other stock/bond mix.

A small allocation to gold has historically improved the survivability of all stock/bond portfolios. This is easy to understand in highsight, if you consider that the two major periods where paper assets have struggled (1968-1982, 1999-2009) gold was undergoing major bull market and would have acted as the lifebouy that kept your portfolio afloat during these difficult periods.

You can use cfiresim and choose any combination of stock/bonds, then knock 5% off each one, add a 10% gold allocation and rerun.

I'd challenge anyone to come up with a good argument why the standard retirement portfolio shouldn't be 60/30/10 stocks/bonds/gold (99.18% survival rate) rather than the usual 60/40 (95.08% survival rate). This is a very easy to implement modification that anyone can do.

60/40: https://www.cfiresim.com/d689c17b-84a3- ... 90bd1065a6
60/30/10: https://www.cfiresim.com/5cba3a75-5dde- ... 0188439608

One of the things I dislike about gold is that the track record is actually very short because for much of history gold was money. So the performance history only makes sense after the end of Bretton Woods. From that point it is true that gold did rise strongly, peaking in the early 80s. But then it collapsed not to reach its previous price in nominal terms for about 25 years. We then had a period when it has done ok, but has been volatile. Hardly a safe store of value. For an asset with no intrinsic value and a history like that, I cannot say I have ever seen the attaction. Not as bad as the crypto nonsense because gold does have non-financial uses and attractions and used to be money, but not a million miles away either.

I do appreciate gold has helped lift SWRs in backtests, but cannot dismiss the feeling that this has just been coincidence.

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Re: Challenging the 4% Rule

#472855

Postby dealtn » January 13th, 2022, 6:54 pm

vand wrote:I like strategies like the Permanent Portfolio and All-weather portfolio, but sometimes they are a hard sell to people who are wedded on the traditional 60/40 or some other stock/bond mix.

A small allocation to gold has historically improved the survivability of all stock/bond portfolios. This is easy to understand in highsight, if you consider that the two major periods where paper assets have struggled (1968-1982, 1999-2009) gold was undergoing major bull market and would have acted as the lifebouy that kept your portfolio afloat during these difficult periods.

You can use cfiresim and choose any combination of stock/bonds, then knock 5% off each one, add a 10% gold allocation and rerun.

I'd challenge anyone to come up with a good argument why the standard retirement portfolio shouldn't be 60/30/10 stocks/bonds/gold (99.18% survival rate) rather than the usual 60/40 (95.08% survival rate). This is a very easy to implement modification that anyone can do.

60/40: https://www.cfiresim.com/d689c17b-84a3- ... 90bd1065a6
60/30/10: https://www.cfiresim.com/5cba3a75-5dde- ... 0188439608


Where is this "traditional" and "standard retirement portfolio" 60:40?

In my view there is nothing standard or traditional and never has been.

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Re: Challenging the 4% Rule

#472859

Postby 1nvest » January 13th, 2022, 7:07 pm

hiriskpaul wrote:One of the things I dislike about gold is that the track record is actually very short because for much of history gold was money. So the performance history only makes sense after the end of Bretton Woods. From that point it is true that gold did rise strongly, peaking in the early 80s. But then it collapsed not to reach its previous price in nominal terms for about 25 years. We then had a period when it has done ok, but has been volatile. Hardly a safe store of value. For an asset with no intrinsic value and a history like that, I cannot say I have ever seen the attraction. Not as bad as the crypto nonsense because gold does have non-financial uses and attractions and used to be money, but not a million miles away either.

I do appreciate gold has helped lift SWRs in backtests, but cannot dismiss the feeling that this has just been coincidence.

Since 1970's, US data since 1972 (limit of PV)
1970's gold the winner
1980's stocks
1990's stocks
2000's gold
2010's stocks

Whilst the 1970's gold gains might have been a Bretton Woods one-off, the 2000's reiterated that when stocks falter so gold can do well. For each of the above individual decades the diversification across all three more consistently resulted in (generally) no real loss after 4% SWR.

Forward time and the large flow into US$ and hence US assets (stocks/bonds) pushing prices higher, and a stronger $ = lower gold price in US$'s. Once fear subsides and 'better value' is seen elsewhere than in US assets, so the outflow might see both US stocks and golds down, US$ down, gold up and the 2020's might again have gold as the better performer. If so the 3 out of 5 last decades for stock, 2 out of 5 for gold, might again see that become 3 out of 6 (50/50) for both. But equally might see stocks again being the 2020's winner to make 4 out of 6 for stocks, 2 out of 6 for gold. Either way the diversification of holding multiple choices rather than the risk of concentration into just one is inclined to have supported a 4% SWR reasonably well.

If anything I'd question the value of bonds as a diversifier/hedge. 50/50 stock/gold since the 1970's has yielded a relatively consistent 6%+ annualised real. You can use actual gold prices back to 1931 when the UK ended convertibility and that relatively smoother real gain progression line for 50/50 stock/gold was much the same as since the 1970's.

Prior to 1930's and yes holding gold was crazy, as being convertible at a fixed rate it made more sense to convert gold to money and lend that money to the state (buy treasury bonds) that paid interest, as that was like the state paying you for it to securely store your gold (convertible back to (more) gold at any time). As such pre 1930's and 50/50 stock/bond would have been more broadly advocated over that of 50/50 stock/gold. If anything maybe its the stock/bond blend that is a historic relic.

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Re: Challenging the 4% Rule

#472860

Postby 1nvest » January 13th, 2022, 7:11 pm

dealtn wrote:
vand wrote:I like strategies like the Permanent Portfolio and All-weather portfolio, but sometimes they are a hard sell to people who are wedded on the traditional 60/40 or some other stock/bond mix.

A small allocation to gold has historically improved the survivability of all stock/bond portfolios. This is easy to understand in highsight, if you consider that the two major periods where paper assets have struggled (1968-1982, 1999-2009) gold was undergoing major bull market and would have acted as the lifebouy that kept your portfolio afloat during these difficult periods.

You can use cfiresim and choose any combination of stock/bonds, then knock 5% off each one, add a 10% gold allocation and rerun.

I'd challenge anyone to come up with a good argument why the standard retirement portfolio shouldn't be 60/30/10 stocks/bonds/gold (99.18% survival rate) rather than the usual 60/40 (95.08% survival rate). This is a very easy to implement modification that anyone can do.

60/40: https://www.cfiresim.com/d689c17b-84a3- ... 90bd1065a6
60/30/10: https://www.cfiresim.com/5cba3a75-5dde- ... 0188439608


Where is this "traditional" and "standard retirement portfolio" 60:40?

In my view there is nothing standard or traditional and never has been.

dealtn you do of course know that the traditional asset mix of 60% stocks and 40% bonds has been a starting point for investors since the proliferation of modern portfolio theory in the 1950s. Efficient frontier curves et al.

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Re: Challenging the 4% Rule

#472864

Postby dealtn » January 13th, 2022, 7:19 pm

1nvest wrote:
dealtn wrote:
vand wrote:I like strategies like the Permanent Portfolio and All-weather portfolio, but sometimes they are a hard sell to people who are wedded on the traditional 60/40 or some other stock/bond mix.

A small allocation to gold has historically improved the survivability of all stock/bond portfolios. This is easy to understand in highsight, if you consider that the two major periods where paper assets have struggled (1968-1982, 1999-2009) gold was undergoing major bull market and would have acted as the lifebouy that kept your portfolio afloat during these difficult periods.

You can use cfiresim and choose any combination of stock/bonds, then knock 5% off each one, add a 10% gold allocation and rerun.

I'd challenge anyone to come up with a good argument why the standard retirement portfolio shouldn't be 60/30/10 stocks/bonds/gold (99.18% survival rate) rather than the usual 60/40 (95.08% survival rate). This is a very easy to implement modification that anyone can do.

60/40: https://www.cfiresim.com/d689c17b-84a3- ... 90bd1065a6
60/30/10: https://www.cfiresim.com/5cba3a75-5dde- ... 0188439608


Where is this "traditional" and "standard retirement portfolio" 60:40?

In my view there is nothing standard or traditional and never has been.

dealtn you do of course know that the traditional asset mix of 60% stocks and 40% bonds has been a starting point for investors since the proliferation of modern portfolio theory in the 1950s. Efficient frontier curves et al.


No, and even if it was it is only a starting point.

I will have to revisit my books but I'm not sure Markowitz used 60%40 in determining risk-averse diversification and an efficient frontier curves. It is a lazy assumption I think, even in theory, let alone practice.

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Re: Challenging the 4% Rule

#472875

Postby 1nvest » January 13th, 2022, 7:54 pm

dealtn wrote:
1nvest wrote:
dealtn wrote:
vand wrote:I like strategies like the Permanent Portfolio and All-weather portfolio, but sometimes they are a hard sell to people who are wedded on the traditional 60/40 or some other stock/bond mix.

A small allocation to gold has historically improved the survivability of all stock/bond portfolios. This is easy to understand in highsight, if you consider that the two major periods where paper assets have struggled (1968-1982, 1999-2009) gold was undergoing major bull market and would have acted as the lifebouy that kept your portfolio afloat during these difficult periods.

You can use cfiresim and choose any combination of stock/bonds, then knock 5% off each one, add a 10% gold allocation and rerun.

I'd challenge anyone to come up with a good argument why the standard retirement portfolio shouldn't be 60/30/10 stocks/bonds/gold (99.18% survival rate) rather than the usual 60/40 (95.08% survival rate). This is a very easy to implement modification that anyone can do.

60/40: https://www.cfiresim.com/d689c17b-84a3- ... 90bd1065a6
60/30/10: https://www.cfiresim.com/5cba3a75-5dde- ... 0188439608


Where is this "traditional" and "standard retirement portfolio" 60:40?

In my view there is nothing standard or traditional and never has been.

dealtn you do of course know that the traditional asset mix of 60% stocks and 40% bonds has been a starting point for investors since the proliferation of modern portfolio theory in the 1950s. Efficient frontier curves et al.


No, and even if it was it is only a starting point.

I will have to revisit my books but I'm not sure Markowitz used 60%40 in determining risk-averse diversification and an efficient frontier curves. It is a lazy assumption I think, even in theory, let alone practice.

As I recall Markowitz originally preferred 50/50 himself, but the maths at the time indicated 60/40 that Sharpe pretty much also confirmed. Whilst a variable curve according to the period looked at, broadly the curve shapes have been relatively consistent in suggesting neither all stock nor all bond to be the most efficient and that instead a blend of both yields better risk adjusted rewards (assuming you consider volatility to be a risk).

Image

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Re: Challenging the 4% Rule

#472887

Postby 1nvest » January 13th, 2022, 8:35 pm

Kitces indicates that achieving 2%+ real for the first 15 years ... or thereabouts, has high correlation to success/failure of SWR (4% inflation adjusted withdrawals for 30 years). For a linear/consistent 4% real withdrawals/2% real gains and after 15 years you still have around two thirds of the inflation adjusted start date portfolio value available - that has a very good prospect of seeing you through the 15 years.

For UK data since 1896, all 15 year periods (calendar year granularity), a third each US stock, UK Gilts, Gold ... relatively consistently secured 15 year 2% real gains, excepting across/during World War periods.

Image

Remove bonds or remove gold and there were more instances of where that failed, and as such 4% SWR was more inclined to fail. 50/50 UK stock/Gilts for instance was more sinusoidal, higher peaks, lower troughs. with around 40 year type frequency and the last being in the late 1970's/early 1980's. Great for some, lousy for others, depending upon whereabouts in that cycle your personal circumstances/retirement drops.

The cost of greater prospect to achieve a 4% SWR via a stock/bond/gold trio is that of a lower residual value at the end of 30 years. In effect leave heirs less on average for the benefit of more likely having a successful retirement lifetime oneself. That inheritance however can still be reasonable, multiples of the inflation adjusted start date portfolio value.

US$ primary reserve fiat currency, invested in US stocks, domestic Pounds fiat currency invested into Gilts, gold commodity currency ... is a three currencies, 67/33 fiat/commodity currency diversification blend holding stocks, bond and commodity asset diversity.

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Re: Challenging the 4% Rule

#472893

Postby vand » January 13th, 2022, 8:48 pm

I don' think it's particularly controversial to say that a 60/40 is the de facto starting point for balanced portfolio. Of all stock/bond mixes it has the highest Sharpe ratio so is naturally a sensible starting point for the discussion of how to balance risk and reward. You could certainly put in a lot of time and effort and do a lot worse, as a lot have found out.

Love Kitces work, 1nvest. The doyen of retirement investing, in my book.

Here's a similar post, illustrating why it's so hard to know if you have chosen a sensible SWR.. because on a smoothed trajectory your retirement wealth should not peak until a decade after your retire, and you should not even begin to dip into capital for almost 17-18 years (and that's just on a 30yr horizon)!

Image
https://www.kitces.com/blog/consumption ... -portfolio

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Re: Challenging the 4% Rule

#473070

Postby TUK020 » January 14th, 2022, 1:26 pm

hiriskpaul wrote:
vand wrote:I like strategies like the Permanent Portfolio and All-weather portfolio, but sometimes they are a hard sell to people who are wedded on the traditional 60/40 or some other stock/bond mix.

A small allocation to gold has historically improved the survivability of all stock/bond portfolios. This is easy to understand in highsight, if you consider that the two major periods where paper assets have struggled (1968-1982, 1999-2009) gold was undergoing major bull market and would have acted as the lifebouy that kept your portfolio afloat during these difficult periods.

You can use cfiresim and choose any combination of stock/bonds, then knock 5% off each one, add a 10% gold allocation and rerun.

I'd challenge anyone to come up with a good argument why the standard retirement portfolio shouldn't be 60/30/10 stocks/bonds/gold (99.18% survival rate) rather than the usual 60/40 (95.08% survival rate). This is a very easy to implement modification that anyone can do.

60/40: https://www.cfiresim.com/d689c17b-84a3- ... 90bd1065a6
60/30/10: https://www.cfiresim.com/5cba3a75-5dde- ... 0188439608

One of the things I dislike about gold is that the track record is actually very short because for much of history gold was money. So the performance history only makes sense after the end of Bretton Woods. From that point it is true that gold did rise strongly, peaking in the early 80s. But then it collapsed not to reach its previous price in nominal terms for about 25 years. We then had a period when it has done ok, but has been volatile. Hardly a safe store of value. For an asset with no intrinsic value and a history like that, I cannot say I have ever seen the attaction. Not as bad as the crypto nonsense because gold does have non-financial uses and attractions and used to be money, but not a million miles away either.

I do appreciate gold has helped lift SWRs in backtests, but cannot dismiss the feeling that this has just been coincidence.

Very good question to raise.

I keep 5-10% of my portfolio of tradeable financial assets in what I think of as "insurance" against the sort of incident that causes everything else to go south. The sort of scenario is "Tanks roll into the Baltic countries", "China invades Taiwan" or "NK lobs a nuke at Seoul/Tokyo".
At the moment this insurance is in the form of Physical Gold ETF (PHAU) and Gold Miner ETF (SPGP).
Gold has disadvantages, but what do you think would work better as insurance for this sort of catastrophe?

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Re: Challenging the 4% Rule

#473078

Postby Lootman » January 14th, 2022, 2:04 pm

TUK020 wrote:[I keep 5-10% of my portfolio of tradeable financial assets in what I think of as "insurance" against the sort of incident that causes everything else to go south. The sort of scenario is "Tanks roll into the Baltic countries", "China invades Taiwan" or "NK lobs a nuke at Seoul/Tokyo".
At the moment this insurance is in the form of Physical Gold ETF (PHAU) and Gold Miner ETF (SPGP).

Gold has disadvantages, but what do you think would work better as insurance for this sort of catastrophe?

If we are discussing disaster scenarios then there are two possibilities:

1) Asset markets crash but remain functioning. In that case ETFs and other securities that are negatively correlated to shares and bonds should do well AND most importantly you will still be able to profitably trade and liquidate those holdings. Short positions would also do well.

2) The disaster is such that the capital markets stop working properly, at least in your location. Then your safety holdings may not help you even if they are theoretically going up in value, because you can't sell them. In that situation you would want your gold held physically.

But then we are in a Mad Max scenario where you also might need to stockpile food, fuel, guns and ammo!

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Re: Challenging the 4% Rule

#473118

Postby TUK020 » January 14th, 2022, 4:38 pm

Lootman wrote:
TUK020 wrote:[I keep 5-10% of my portfolio of tradeable financial assets in what I think of as "insurance" against the sort of incident that causes everything else to go south. The sort of scenario is "Tanks roll into the Baltic countries", "China invades Taiwan" or "NK lobs a nuke at Seoul/Tokyo".
At the moment this insurance is in the form of Physical Gold ETF (PHAU) and Gold Miner ETF (SPGP).

Gold has disadvantages, but what do you think would work better as insurance for this sort of catastrophe?

If we are discussing disaster scenarios then there are two possibilities:

1) Asset markets crash but remain functioning. In that case ETFs and other securities that are negatively correlated to shares and bonds should do well AND most importantly you will still be able to profitably trade and liquidate those holdings. Short positions would also do well.

2) The disaster is such that the capital markets stop working properly, at least in your location. Then your safety holdings may not help you even if they are theoretically going up in value, because you can't sell them. In that situation you would want your gold held physically.

But then we are in a Mad Max scenario where you also might need to stockpile food, fuel, guns and ammo!

I understand that Possibility 2 leads towards a "shotgun & beans" plan.
My question is what is the best negatively correlated tradeable security to hold as a log term position as insurance against Possibility 1?

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Re: Challenging the 4% Rule

#473147

Postby hiriskpaul » January 14th, 2022, 6:32 pm

TUK020 wrote:
hiriskpaul wrote:
vand wrote:I like strategies like the Permanent Portfolio and All-weather portfolio, but sometimes they are a hard sell to people who are wedded on the traditional 60/40 or some other stock/bond mix.

A small allocation to gold has historically improved the survivability of all stock/bond portfolios. This is easy to understand in highsight, if you consider that the two major periods where paper assets have struggled (1968-1982, 1999-2009) gold was undergoing major bull market and would have acted as the lifebouy that kept your portfolio afloat during these difficult periods.

You can use cfiresim and choose any combination of stock/bonds, then knock 5% off each one, add a 10% gold allocation and rerun.

I'd challenge anyone to come up with a good argument why the standard retirement portfolio shouldn't be 60/30/10 stocks/bonds/gold (99.18% survival rate) rather than the usual 60/40 (95.08% survival rate). This is a very easy to implement modification that anyone can do.

60/40: https://www.cfiresim.com/d689c17b-84a3- ... 90bd1065a6
60/30/10: https://www.cfiresim.com/5cba3a75-5dde- ... 0188439608

One of the things I dislike about gold is that the track record is actually very short because for much of history gold was money. So the performance history only makes sense after the end of Bretton Woods. From that point it is true that gold did rise strongly, peaking in the early 80s. But then it collapsed not to reach its previous price in nominal terms for about 25 years. We then had a period when it has done ok, but has been volatile. Hardly a safe store of value. For an asset with no intrinsic value and a history like that, I cannot say I have ever seen the attaction. Not as bad as the crypto nonsense because gold does have non-financial uses and attractions and used to be money, but not a million miles away either.

I do appreciate gold has helped lift SWRs in backtests, but cannot dismiss the feeling that this has just been coincidence.

Very good question to raise.

I keep 5-10% of my portfolio of tradeable financial assets in what I think of as "insurance" against the sort of incident that causes everything else to go south. The sort of scenario is "Tanks roll into the Baltic countries", "China invades Taiwan" or "NK lobs a nuke at Seoul/Tokyo".
At the moment this insurance is in the form of Physical Gold ETF (PHAU) and Gold Miner ETF (SPGP).
Gold has disadvantages, but what do you think would work better as insurance for this sort of catastrophe?

We keep quite a bit in short dated "junk" bonds. the biggest being Enquest (2023), Co-op Group (2026) and Metro Bank (2028). We also hold quite a bit in undated FI, mostly Natwest prefs, MBS PIBS and a number of other PIBS and prefs. Total FI about 30% of the portfolio. How the FI would fair in the next major incident is hard to tell, but if history is anything to go buy the undated stuff would rapidly head South. Some may disappear, but most would hopefully continue to pay. It really depends on how bad things get for banks and whether debt restructuring is needed, etc. If oil/energy prices rise as a result of whatever the incident is, that would be great for my Enquest bonds. Difficult to say what might happen to the Co-op, but they do have a lot of assets, so I would hope they would survive.

We currently hold 40% in cash. Sounds a lot, but much is used as a variation margin buffer for option positions and would take a significant hit in a stock market collapse if I was unluckily positioned at the time of the collapse.

The fallback position is property - we own 2. The holiday home could be let or sold. Our main London house is bigger than we need now as well, so we could downsize or maybe let it if property prices collapsed.

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Re: Challenging the 4% Rule

#473214

Postby 1nvest » January 15th, 2022, 3:13 am

Digging out FRED US data for currency in circulation since 1918 and comparing the annualised expansion rate of that to reported US inflation ... has a 3.5% annualised difference (US reported inflation lags currency expansion rate). Perhaps the 4% SWR should be 3.5% and isn't really a real rate of return, instead is just part of a reflection of understated inflation rates.

50/50 fiat/non-feat (US$ invested into US stock total return/gold) yielded a smoother progression line that more closely aligned with the historic US currency in circulation expansion rate. Which in reported inflation terms was a win, as others saw their cash interest, pension increases, wage rises ...etc. all being in effect depressed/lowered. Reducing capital gains and tax on interest/dividends can also help.

Strange world. The US$ has extended its position at the helm not via gold reserves that it reduced by around 70% before Nixon had to end that outflow, but rather via the petrodollar, Saudis convinced to price oil in US$ and buy US treasuries with surplus capital/gains from selling oil. With oil demand in decline ??? Russia and China are working together to shift away from US being able to print/spend and export inflation. Much can change over a 30 year (retirement) period. But odd situations can carry on much longer than you might expect. Japan's central bank pretty much buys up all the bonds that its treasury issue, and also owns around 75% of all ETF's domiciled there. Some in the EU would like to print enough to buy up all treasury bonds, junk bonds, stocks, housing and they've made quite some headway in that direction (bought up bonds/junk and started buying up stocks). Nice to have money printing machines that you can just keep churning away buying up whatever you like. Wouldn't be surprised if the next government, most likely Labour with a majority large enough to dictate, ended up printing enough to also buy up all UK bond/stock/houses, some kind of grand nationalisation as per their core remit. But where first prices were intentionally suppressed - huge rises in council tax to oust grandma from her single person 3-bed occupancy into a single self-contained enabling more Labour supporting migrant families to share that home; High interest rates to drive down stock/bond prices etc.

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Re: Challenging the 4% Rule

#473274

Postby ursaminortaur » January 15th, 2022, 12:08 pm

TUK020 wrote:
Lootman wrote:
TUK020 wrote:[I keep 5-10% of my portfolio of tradeable financial assets in what I think of as "insurance" against the sort of incident that causes everything else to go south. The sort of scenario is "Tanks roll into the Baltic countries", "China invades Taiwan" or "NK lobs a nuke at Seoul/Tokyo".
At the moment this insurance is in the form of Physical Gold ETF (PHAU) and Gold Miner ETF (SPGP).

Gold has disadvantages, but what do you think would work better as insurance for this sort of catastrophe?

If we are discussing disaster scenarios then there are two possibilities:

1) Asset markets crash but remain functioning. In that case ETFs and other securities that are negatively correlated to shares and bonds should do well AND most importantly you will still be able to profitably trade and liquidate those holdings. Short positions would also do well.

2) The disaster is such that the capital markets stop working properly, at least in your location. Then your safety holdings may not help you even if they are theoretically going up in value, because you can't sell them. In that situation you would want your gold held physically.

But then we are in a Mad Max scenario where you also might need to stockpile food, fuel, guns and ammo!

I understand that Possibility 2 leads towards a "shotgun & beans" plan.
My question is what is the best negatively correlated tradeable security to hold as a log term position as insurance against Possibility 1?


In the initial part of a Mad Max scenario gold probably wouldn't have that much value. A better store of value would probably be things like salt (from which we get the word salary) and possibly other spices (wars were fought over nutmeg) and even in modern times Saffron is more expensive than gold.

https://www.dailymail.co.uk/news/article-2823029/How-ounce-saffron-expensive-gold-Cultivation-exotic-spice-returns-Essex-time-200-years.html

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Re: Challenging the 4% Rule

#473294

Postby Will2pass » January 15th, 2022, 1:38 pm

I constantly read about the 4% rule or 3.5% in the UK but one key factor is having a contingency pot.

Having 'cash' that you can use during a downturn far outweighs the potential drag on returns during the good times in my opinion.
The tricky bit is getting the amount in that pot right. 3-5 years of essential spending and then attempting to rebalance during the good times.

Anyone who blindly withdraws a set amount regardless of annual return is asking for trouble.

Unfortunately one can't then title something with the snazzy strap line 'X % Rule'.

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Re: Challenging the 4% Rule

#473304

Postby Hariseldon58 » January 15th, 2022, 2:44 pm

Will2pass wrote:I constantly read about the 4% rule or 3.5% in the UK but one key factor is having a contingency pot.

Having 'cash' that you can use during a downturn far outweighs the potential drag on returns during the good times in my opinion.
The tricky bit is getting the amount in that pot right. 3-5 years of essential spending and then attempting to rebalance during the good times.

Anyone who blindly withdraws a set amount regardless of annual return is asking for trouble.

Unfortunately one can't then title something with the snazzy strap line 'X % Rule'.


Exactly, I started living on drawdown in late 2007 without an adequate cash reserve….despite this error, it worked out profitably and when I had the means I incorporated a contingency pot of around the size you mention.

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Re: Challenging the 4% Rule

#473305

Postby 1nvest » January 15th, 2022, 2:46 pm

Seems to me that its being missed that we no longer live in a free world. The transition to book-entry to avoid "money laundering" is aligned with the removal of social freedoms. When the state knows where all your money is, where you are ...etc. its just a open prison, with your rights and money subject to being removed at any time. Labour introduced a retrospective 130% tax rate in 1968, yes that was just for the highest rate taxpayers but could just as easily have been applied to all. Governments can be elected with fewer than 20% of the population having voted for it and extremes can arise at any time.

Consider bearer bonds, not registered, a bond certificate with coupon/stamps attached that you tore off at its intervals to submit that coupon to the issuer in return for the interest payment, perhaps 8%/year coupons until all had been submitted and the bond submitted for repayment of the loan. Simply holding that bond was the entitlement, similar to cash such as US$ bills/notes, but where $'s are zero coupon. Lost or stolen and the finder/thief gets the benefits. Now in effect banned due to 'money laundering' (tax avoidance) issues.

Similar for social freedoms, camera's and tracking to avoid/reduce crimes. Which is fine until the state itself might impose what might be criminal conditions/circumstances that might remove your freedoms and/or confiscate all your wealth. Under such conditions you might consider your freedom and wealth as being just a good citizen loan, available to be called-in at any time the state so chooses.

Custodial banks used to securely store what you deposited into their safe. Nowadays a deposit you make into a bank becomes their money, free to do whatever they like with within regulations, a promise to maybe return that money when you ask, perhaps paying some interest in between times. Banks can bet with that money and heads they win, tails ... and taxpayers might bail them out. Pretty mad really. Following their tails toss, losing and taxpayers bailing them out and the betting moved over to being at state levels, but where there is no higher tier to bail them out if/when they might fail.

Fundamentally total trust in the book-entry based 'assets', where all investments/money are recorded against individuals by (or visible to) the state is a significant risk factor. Governments are great at spending other peoples money.

Generational wealth has tended to favour the likes of land, gold, bearer bonds, art ..etc. Tangible physical assets with no or low counter-party risks. Retention of the asset/value rather than entrusting to counter party risks. But in turn states have sought to clamp down on such on the basis of being tax avoidance - which is fine when taxation is modest/reasonable, but unreasonable if tax levels are paramount to total confiscation.

I guess bit coin is a possible option, however all bitcoins are stored within the blockchain, similar to bearer bonds where a private key is ownership. A factor there however is that unlike a bearer bond that has to be physically/locally stolen, with blockchain the thief can remotely steal the value from anywhere in the world. Private keys are just a 32 character password and with quantum computers on the rise I wouldn't entrust anything other than relatively small amounts to such security.

Pull that together and 4% SWR is all highly subjective, and for a 30 year SWR horizon book-entry based investments are more inclined to at some point see a state induced failure of SWR. If anything we're moving closer to the Chinese model where 'good citizens' are supported and bad citizens are punished and where there's total state control. Already pretty much within a Mad Max age, just not yet having a totally mad government that might decide the likes of 100%+ taxation rates to be appropriate.

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Re: Challenging the 4% Rule

#473306

Postby 1nvest » January 15th, 2022, 2:56 pm

Will2pass wrote:I constantly read about the 4% rule or 3.5% in the UK but one key factor is having a contingency pot.

Having 'cash' that you can use during a downturn far outweighs the potential drag on returns during the good times in my opinion.
The tricky bit is getting the amount in that pot right. 3-5 years of essential spending and then attempting to rebalance during the good times.

Anyone who blindly withdraws a set amount regardless of annual return is asking for trouble.

Unfortunately one can't then title something with the snazzy strap line 'X % Rule'.

Half in 2x leveraged stock, half in bonds, yearly rebalanced, will pretty much track 100% 1x.

PV

Say you have £100K inside ISA, £100K outside of ISA, all invested in 1x stock, and stocks are down when you want to make a £20K cash withdrawal, then sell £20K of 1x stock inside ISA and buy £20K of 2x with the proceeds, and sell £20K of 1x outside of ISA, and deposit that in bonds ... and overall you've still the (near-as) exact same portfolio. But where you might now borrow those bonds (or rather not have bought bonds, but spent the £20K instead).

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Re: Challenging the 4% Rule

#473313

Postby 1nvest » January 15th, 2022, 3:47 pm

For a UK resident, how much would sticking half your money into gold and the other half into hard US$'s, both stuffed under a mattress cost in real (after UK inflation) terms since 1896? (Assuming at the end of each year you rebalanced both back to 50/50)

Image

Broadly just a 2.2% annualised real loss!

So if you'd taken those US$ notes and instead invested/deposited them and earned a 4.4% nominal net return, perhaps in safe US Treasury loans/bonds, then you'd have negated inflation, such that 4%/year withdrawals would tend to have lasted 25 years, seen a 65 year old through to age 90.

Some say adding some stocks to a otherwise all-bond portfolio is better than not. Or for tax efficiency reasons holding stocks might be better than holding bonds. Using PV US data to inspect historic differences for different choices since 1972 and the prospects of a 4% 25 year SWR looked reasonable whichever way you might have sliced/diced things.

Present tax wise and if you directly buy US treasuries then there's no US withholding taxes applied, but HMRC will come looking for a slice. Unfortunately you can't hold foreign currencies inside a ISA so any US$ interest is converted to £'s and may incur a 0.75% type FX currency conversion cost. US dividends from US stocks incur a 15% withholding tax, assuming you're known to the US IRS (W8BEN registered), but at least you can pick a stock index fund that automatically reinvests dividends which avoids round-trip 1.5% FX costs to otherwise reinvest dividends. Gold legal tender coins are UK CGT exempt. Physical gold, alongside a ISA with the likes of BRK held within it that pays no dividends so no withholding taxes would seem a reasonable choice provided you didn't mind the single stock risk factor (along with being a insurance business BRK is somewhat like a Investment Trust, holds a diverse range of investments). Two currencies, US$ primary reserve fiat currency and gold global non-fiat currency. Two assets - stocks and commodity. Alongside owning a UK home, so you don't have to find/pay rent to others, and that might serve to also cover late life care home costs and that's land/stock/commodity and three currencies diversity.


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