Actuary on FIRE reprises Sequence of Returns Risk

[Dr. Mom]

AOF just added his promised post further discussing SORR for those of you interested...

https://www.actuaryonfire.com/reprise-sequence-returns-risk/

I find it helpful how he tries to quantify a drag on your portfolio due to SORR.  Hope you enjoy the article.

 

[q-school]

Thanks for link. I find his stuff strangely fascinating.

[Hatton]

I just read it also.  I like his spreadsheets.  I am really torn as to whether I should rebalance.  I am sitting at 68% equity right now at age 60.

[The White Coat Investor]

hatton1 wrote:

I just read it also.  I like his spreadsheets.  I am really torn as to whether I should rebalance.  I am sitting at 68% equity right now at age 60.

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Yes you should rebalance. It sounds like you're not sure if you have the right asset allocation to rebalance to. That's a trickier question.

[Donnie]

hatton1 wrote:

I just read it also.  I like his spreadsheets.  I am really torn as to whether I should rebalance.  I am sitting at 68% equity right now at age 60.

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Whether to rebalance or not depends on your goals and current savings.  I think you have said before that you have ~$5M in taxable alone (with probably other significant savings in retirement accts).  Doubtful you will burn through your taxable in your lifetime even with a 50% downturn in equities with a 100% equity allocation.

If you have no need/desire to accumulate more wealth beyond what you can spend in your lifetime, then rebalancing could make sense.  If you want to continue to grow wealth without really much risk of ruin (I.e. running out of money), you could keep a more aggressive allocation.

[actuaryonfire]

q-school wrote:

I find his stuff strangely fascinating

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I think I will have that as my blog's mission statement - Actuary on FIRE: Personal finance from a strangely fascinating perspective   

hatton1 wrote:

I am really torn as to whether I should rebalance. I am sitting at 68% equity right now at age 60.

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From a strictly Sequence of Returns (SORR) perspective I would be fairly relaxed. SORR really ramps up north of 70% equities. But it's not just SORR that can bite you, market crashes will obviously hurt you in that position.

From a portfolio risk and return perspective I would need to know more. For example if you're trying to reach for a 4% plus withdrawal rate then perhaps you're ok, but if you only need to withdraw 2%, then I would say de-risk. [That's basically what Donnie said]

There is more work I need to do on SORR for different investment strategies, so I will reprise the reprise. Stay tuned.

 

If it's not too vulgar an advertisement... I'm interested in feedback on another article on using financial economics to think about withdrawal rates. It's on the technical side, but this is the right audience...

 

 

 

[Zaphod]

actuaryonfire wrote:

q-school wrote:

I find his stuff strangely fascinating 

Click to expand…

I think I will have that as my blog’s mission statement – Actuary on FIRE: Personal finance from a strangely fascinating perspective   

hatton1 wrote:

I am really torn as to whether I should rebalance. I am sitting at 68% equity right now at age 60. 

Click to expand…

From a strictly Sequence of Returns (SORR) perspective I would be fairly relaxed. SORR really ramps up north of 70% equities. But it’s not just SORR that can bite you, market crashes will obviously hurt you in that position.

From a portfolio risk and return perspective I would need to know more. For example if you’re trying to reach for a 4% plus withdrawal rate then perhaps you’re ok, but if you only need to withdraw 2%, then I would say de-risk. [That’s basically what Donnie said]

There is more work I need to do on SORR for different investment strategies, so I will reprise the reprise. Stay tuned.

 

If it’s not too vulgar an advertisement… I’m interested in feedback on another article on using financial economics to think about withdrawal rates. It’s on the technical side, but this is the right audience…

 

 

 

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Theres pretty much zero NEED to de risk though. IIRC, dividends and such provide more than enough, etc...and the total amount is enough to where even an historic crash wouldnt phase lifestyle or endpoints at all. Only reason to de risk is desire to not have an estate problem. Nothing wrong with 70/30. Adding bonds would just decrease overall nest egg and increase longevity risk, though thats already small.

At some points it just doesnt really matter anymore. Whether that means you go all equities or increase bond allocation is simply preference, theres not necessarily a reason to do either.

[Dr. Mom]

actuaryonfire wrote:

If it’s not too vulgar an advertisement… I’m interested in feedback on another article on using financial economics to think about withdrawal rates. It’s on the technical side, but this is the right audience…

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I was hoping you were going to develop the "How do I use this" section more in future articles by getting into an Equity Risk Premium analysis.

[Dr. Mom]

hatton1 wrote:

I just read it also.  I like his spreadsheets.  I am really torn as to whether I should rebalance.  I am sitting at 68% equity right now at age 60.

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From your comments about concerns related to health insurance pushing you to keep working despite your current portfolio, it seems to me that your willingness and ability to take risk exceeds your need to take risk.  A little exercise in rebalancing and de-risking might help you decide your comfort level and answer this dichotomy for yourself.  FWIW, it helped us.

[VagabondMD]

I love this ActuaryonFIRE stuff. I would like to see a (virtual, mathematical) cage match between ActuaryonFIRE and Big ERN. Maybe WCI can host and promote the live event in the WCI Dome...or at least have a virtual online smackdown during the Super Bowl halftime show, as an alternative to Justin Timberlake ( :mrgreen: ).

[q-school]

bring actuary on fire to next year's wci!

[actuaryonfire]

Dr. Mom wrote:

I was hoping you were going to develop the “How do I use this” section more in future articles by getting into an Equity Risk Premium analysis

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That is a kind way of saying that I rushed the ending on a Sunday night to meet the press for Monday morning! You're right I need to revisit that rather academic article and make the connection into portfolio construction. Some of my material is missing the link to concrete advice; whether it is on withdrawal rates, portfolio construction, or whatever. I'm gonna be keeping it real peeps!

 

thevaluedoc wrote:

Appreciate your work. If I read your posts correctly, you used the last 33 years of market returns i.e. 1984 to present. If I interpreted this correctly, this analysis assumes that equities and bonds have a strong anti-correlation which occurred during this period. However, over the last 200 years, this correllation held only 11% if the time while a strong correlation held 30% of the time. Please see for more info http://www.artemiscm.com/welcome#research “Prisoners dillema” Have you run simulations that vary the correlation of returns in stock and bonds? Appreciate it in advance

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Very perspicacious comment! It's been bothering me whether I had unintentionally introduced some bias into the work by just taking whatever returns I had sitting on the shelf. I initially thought no, since I re-permute the returns so thought it probably didn't matter. But I need to prove that. I have over 200 years of data so I will test that and get back to you. I owe it to you.

So here's a thought. Imagine if we did medical research like this? Some crackpot on the internet does a load of non-peer-reviewed research on a blog and other random people throw out comments? But unfortunately that's the situation we are in with these issues because there isn't a lot of money to be made in advising people on withdrawal rates and SORR etc.

 

Vagabond MD wrote:

I love this ActuaryonFIRE stuff. I would like to see a (virtual, mathematical) cage match between ActuaryonFIRE and Big ERN

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I've nothing but respect for the big guy. But I warn you, don't corner an actuary when (s)he has a calculator!

 

q-school wrote:

bring actuary on fire to next year’s wci!

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Kind words, thanks. But I would refuse to take second billing to Crixus.

[Zaphod]

 

So here’s a thought. Imagine if we did medical research like this?

 

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Agree if thats the era is really increases risk adjusted returns and for now is not something you can reasonably expect from a similar portfolio going forward.

 

I think if we did medical research like this we'd likely have better results as it would be easier to flame away 99% of the volume which is terrible anyway. Medical research is poorly framed, hugely under powered and put out for the wrong reasons (publish or perish for docs/inst and for revenue by the journals).

[CM]

actuaryonfire wrote:

I’ve nothing but respect for the big guy.

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Is the big ERN actually a big guy? Just curious.

[Donnie]

CM wrote:

actuaryonfire wrote:

I’ve nothing but respect for the big guy.

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Is the big ERN actually a big guy? Just curious.

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Pretty sure this is the guy