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I’ve been reading up a lot on Safe Withdrawal Rates (SWRs) recently. For those that haven’t come across the term, it’s used to find how much a retiree can withdraw from their portfolio each year without running out of money before reaching the end of their life. The author does a very good job at analyzing safe withdrawal rates in much more detail than any other post I’ve ever stumbled upon, so I thought I’d share it here.


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    This is a fantastic series of posts in that it references and comments on many of the previously written articles, so that one can just read this series first and not worry too much about what was written before. Great share.

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      I find the presented probabilities still too optimistic. When taking into account 1. today’s high CAPE ratio and 2. a higher than zero final portfolio value target the 4% becomes less and less viable.

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        Here is something which calls into question the continued usefulness of the Shiller CAPE10 as a measure of the richness of stock market valuations.

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          Defining some new ratio by changing the time window, the kind of earnings used in the calculation and corrections for various differences between the past and the present is fine and all, but if you then don’t show how your new ratio correlates with recessions, your readers know nothing about its usefulness.

          Many of these arguments would have been valid in 2000 and 2008 as well. Yet CAPE10 correlates with those recessions. That could of course be coincidence, but I’d like to at least see that pointed out.

          There are no arguments for corrections that lead to an increased ratio. That is suspicious. If you can find several reasons why the ratio should be lower, surely you can also find one change whose correction makes the ratio slightly higher again.

          I also have my doubts about those corrections. A different method of accounting for goodwill changes the ratio by 4 points?! That suggests goodwill historically constituted an expense of ~20% of earnings, each year. Perhaps that is just surprising to me, but again it seems to me like something to explicitly point out and confirm, so lay readers can follow along.

          So all in all: not convinced. CAPE10 may be wrong, but the proposed alternative doesn’t seem any better, except it may confirm your predisposition.

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            My point is that there are good reasons (no major wars, low inflation) for CAPE to remain at its current levels and there is no indication it must revert back to its historical average anytime soon. It might as well be the other way around: CAPE remaining “elevated” for the next decade and the 10Y moving average catching up with it. I don’t think CAPE on its own means anything, just that when it’s high, bad unexpected events tend to have a greater impact..

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              The thing with high valuations is that there is less cushion if shit hits the fan. Obviously, when stock prices are high it’s because investors agree that conditions are favorable and they are projecting that into the future. However, corporate profit margins can’t continue growing to the sky and there’s a well thought out analysis here which examines various future scenarios for U.S. profit margins and their effect upon future CAPE 10 valuations.

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        I found this very powerful for putting relative risks into perspective. It seems to me that while we debate endlessly on whether it should be 3.6% or 3.5% or 2% or whatever, we lose sight of the fact that our risk of dying and never being able to use up all that money is both greater than running out of money, and growing every day. Don’t lose sight of what is important in life.