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I used to work in investment, and I sometimes did cash-flow modelling for individuals...even within industry, the work is often woefully inadequate. I can't see

I used to work in investment, and I sometimes did cash-flow modelling for individuals...even within industry, the work is often woefully inadequate. I can't see the FIRE crowd getting this right (every FIRE person I have talked to seems mildly delusional). Usually the "model" is some bogus Excel projection of historical volatility and returns into the future. That is nowhere near enough. The quantitative mistake is not looking at returns as a random process (i.e. not ending up with a monte carlo sim with your assumptions, not modelling returns/volatility/etc. as random processes, if doing that then not using non-parametric models, if doing that then not using enough data, etc.). The biggest practical mistake is understating the effect of volatility. Once you start or plan to take income, volatility becomes very important. Thinking that you can ride out volatility, the de jure thinking today, exposes you to intolerable risk (usually at the point where you are not able to bear that risk i.e. when you can't generate income anymore). The aim of any retirement planning should be robustness. There is some kind of insane irony (the financial world seems to specialise in this) that people are attempting to invest in a way that requires maximum robustness but are often using strategies that produce totally non-robust returns (i.e. 100% equity ETFs). If you are going to try this: stop and consider whether you really understand what you are doing.

emit_time 7y ago
Good blog post covering some safety margin talk[0]. [0]: https://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/ https://www.mrmoneymustache.com/2011/10/17/its-all-about-the...
teej 7y ago
Between the Trinity study, FIRECalc, and a healthy discussion about bond tents - plenty of folks are taking volatility seriously. For every blogger trying to “retire” on $300k there’s another person targeting a 3.5% SWR with a well balanced portfolio, quietly waiting out the boring middle. The former gets more press but I suspect the latter will survive the next downturn just fine.
- emit_time 7y ago
  Yeah, and people also need to cover the alternative. If you don't retire early and don't save a significant portion of your income, are you still going to be protected from massive medical bills? Having a job isn't going to protect you from a lot of things. What if you become disabled and find yourself no longer able to work? What's the cost of stress etc on your happiness life... Not saying one is better than the other, just that saying "what if???" a bunch of times doesn't mean the other situation is any better. I'm sorry if this sounds attacking in any manner, I think it's important to consider that there are risks in both sides, and that having a job isn't going to protect you from lots of things.
- hogFeast 7y ago
  If you are using a fixed withdrawal rate, you don't know what you are doing. Sorry, it is just that simple.
  - teej 7y ago
    Let’s take for granted that the Trinity study is wrong, like you claim. What are you advocating for? Spending flexibility? The Golden Butterfly portfolio? Bitcoin?
    - hogFeast 7y ago
      Statistics. Logic. Reason.
      - teej 7y ago
        What an awful answer
paulpauper 7y ago
Volatility does not matter much if you don't sell The good news about investing is that nominal dividend returns tend to remain the same even when stocks fall a lot ,so your yield goes up and your payments don't fall much despite the market falling a lot. This means your income is still mostly preserved. In 2009 when the market crashed the dividend yield of the S%P500 got as high as 4% versus just 2% earlier. That is what I tell ppl who are invested if they should sell. Ignore the swings. Focus on the long-term compounded returns and payments.
- hogFeast 7y ago
  That is 100% the wrong view. Investing for retirement is about robustness. You are taking a view that is deliberately non-robust (and is, therefore, exposed to significant risk). Compounded returns don't matter. The stuff on dividends is just completely wrong too (for example: your yield doesn't go up, it stays the same if your payments stay the same because the price you paid doesn't change...that is basic). I will say though that when I said income, I wasn't talking about dividends. In most cases (i.e. with most tax systems), you are going to prefer taking income as capital gains. Even in a tax system that isn't tilted towards capital gains, I would prefer companies that can retain earnings and invest your capital at a high rate (I am in the UK, the companies that are returning capital at a high rate are fundamentally weak...maybe this doesn't generalise though).

emit_time 7y ago

Good blog post covering some safety margin talk[0]. [0]: https://www.mrmoneymustache.com/2011/10/17/its-all-about-the-safety-margin/ https://www.mrmoneymustache.com/2011/10/17/its-all-about-the...

teej 7y ago

Between the Trinity study, FIRECalc, and a healthy discussion about bond tents - plenty of folks are taking volatility seriously. For every blogger trying to “retire” on $300k there’s another person targeting a 3.5% SWR with a well balanced portfolio, quietly waiting out the boring middle. The former gets more press but I suspect the latter will survive the next downturn just fine.

emit_time 7y ago
Yeah, and people also need to cover the alternative. If you don't retire early and don't save a significant portion of your income, are you still going to be protected from massive medical bills? Having a job isn't going to protect you from a lot of things. What if you become disabled and find yourself no longer able to work? What's the cost of stress etc on your happiness life... Not saying one is better than the other, just that saying "what if???" a bunch of times doesn't mean the other situation is any better. I'm sorry if this sounds attacking in any manner, I think it's important to consider that there are risks in both sides, and that having a job isn't going to protect you from lots of things.
hogFeast 7y ago
If you are using a fixed withdrawal rate, you don't know what you are doing. Sorry, it is just that simple.
- teej 7y ago
  Let’s take for granted that the Trinity study is wrong, like you claim. What are you advocating for? Spending flexibility? The Golden Butterfly portfolio? Bitcoin?
  - hogFeast 7y ago
    Statistics. Logic. Reason.
    - teej 7y ago
      What an awful answer

paulpauper 7y ago

Volatility does not matter much if you don't sell The good news about investing is that nominal dividend returns tend to remain the same even when stocks fall a lot ,so your yield goes up and your payments don't fall much despite the market falling a lot. This means your income is still mostly preserved. In 2009 when the market crashed the dividend yield of the S%P500 got as high as 4% versus just 2% earlier. That is what I tell ppl who are invested if they should sell. Ignore the swings. Focus on the long-term compounded returns and payments.

hogFeast 7y ago
That is 100% the wrong view. Investing for retirement is about robustness. You are taking a view that is deliberately non-robust (and is, therefore, exposed to significant risk). Compounded returns don't matter. The stuff on dividends is just completely wrong too (for example: your yield doesn't go up, it stays the same if your payments stay the same because the price you paid doesn't change...that is basic). I will say though that when I said income, I wasn't talking about dividends. In most cases (i.e. with most tax systems), you are going to prefer taking income as capital gains. Even in a tax system that isn't tilted towards capital gains, I would prefer companies that can retain earnings and invest your capital at a high rate (I am in the UK, the companies that are returning capital at a high rate are fundamentally weak...maybe this doesn't generalise though).