Can cash be your friend?

[steveo73]

We could chat about it, if you'd like.

Fair point but it's not easy.

The op posts a post that is correct in the proper context. There are completely ignorant posts responding to that. Jacob then turns it into a philosophical/metaphysical discussion to try and justify an alternative reality that doesn't exist.

Was the op correct ? Yes he was. Did any counter come up that was factual and accurate and not a straw man argument. It really didn't. It's almost like I was being baited. Go and read the point about cognitive dissonance. Talk about not being able to look at yourself.

Just to repeat it's not easy.

I'll try to do better. I'm not the only one who should be looking at themselves.

[AxelHeyst]

I can certainly agree that it's not easy. If it were, more places like this would still exist on the internet, I think!

I appreciate your efforts. Thank you.

[steveo73]

I assume this is a post about the pitfalls of the 4% rule

4% Pitfalls

Sample vs Population, Shape of distribution (volatility assumption, normal vs skewed), fat tails, Point estimate vs confidence intervals, SORR vs run probability, extrapolation beyond 30 years.

Can you please explain what this means ?

My take is that you are trying to state that results can change with different data-sets. I don't believe that many people believe differently. If you have believed differently I think you need to reassess your understanding of data and statistics.

Sample vs population
The 4% rule assume all possible market returns are contained in the sample period.

No it doesn't. It doesn't do anything of the sort.

Shape of distribution
The 4% rule assume returns are normally distributed and not skewed.

No it doesn't.

I'll try and explain what a WR is. A withdrawal rate is the amount that you withdraw from your portfolio, So if I have a million dollars and I withdraw 40k then I have a 4% WR for that year.

Various people have completed studies on different types of portfolios and different WR"s. These are studies looking at historical data. Results have been produced from various studies. The Trinity study stated that a WR of 4% was considered safe in that it had a 95% probability of success within that data-set and that portfolio over 30 years.

That 4% has become a figure that people use as a guideline to working out how large their portfolio has to be to survive.

No one who understand statistics or data in any way shape or form should come to the conclusion that a 4% WR is guaranteed to be successful over 30 years. This show someone who doesn't understand statistics.

Now there are other problems with thinking like this as well. You cannot accurately set your WR for life. So in the real world your expenses are variable and life changes etc.

All you have is a guideline. All you have is some metrics to help you gauge how you are tracking.

The key point that I think that you aren't understanding is that there is a massive difference between a back tested data-set with certain parameters and believing that those conditions will hold true in the future. You appear to believe that if the data-set and the results are not completely the same there is a problem but that is an inaccurate assessment.

So if you think a 3% WR with extremely low expenses is safe then you don't understand how data works and specifically how back-testing data is different to managing a real time scenario.

It's all just a guideline.

Those aren't pitfalls at all. They are just how data and statistics works.

[steveo73]

Thanks WFJ
The trinity study was done in 1998, and the average dividend yield on the S&P500 over that timeframe was ~4%. So for most of that time you could just live on dividends from the index. 20 year bond yields were also above 4%. Right now the dividend yield on the S&P500 is 1.5% and bond yields are also much lower than historically. I would argue that at the current point in time you need at least double the amount of money to live of the S&P500/bonds as the trinity study would suggest, so we are at a 2% WR if you want to be safe.
The alternative is to look for better investment strategies. (And no, any portfolio that has only index funds or bond funds in them probably cant work for this, because the underlying expected returns wont change) (and pls dont mention crypto or gold now, inflation adjusted expected returns for these assets are also zero in the long run)

This is the same issue that WFJ has with understanding WR"s and specifically statistical studies.

No one should believe that the data that we have (and forget the Trinity study) is going to replicate going forward. Every year will be different. The future will be different to the past.

Your conclusion regarding better investment strategies flows off the base on an inaccurate understanding of WR's and specifically SWR's.

When it comes to investing strategies one point should be noted as well. You and me and every person on here is probably a poor investor over the course of your/their investing life. So while you believe that you can come up with better options you will probably come up with poorer alternatives.

I should add that the concept of WR's and understanding SWR's is different to investment strategies and the concept of risk-adjusted returns. I understand how they can be confused but they shouldn't be.

[theanimal]

Steveo, the last 2 posts are exactly what @AxelHeyst and others are referring to. It is extremely difficult to have a discussion with you on these matters if you hold the assumption that everyone on here is wrong and you are the only one who understands how things work. That will lead to the death of the thread every single time. The OP, Jacob and others may have different viewpoints than you but their viewpoints don't tend to shut down discussions and/or lead to others not wanting to participate in threads. To reiterate @AH's point, it's not your ideas. It's the way you're communicating them that's offputting.

[mountainFrugal]

I basically do not participate at all in the investment part of the forum because it usually quickly devolves into non-nuanced strawman arguments for index investing for all people in all circumstances (see what I did there? ). This seems a little silly given the diversity of lifestyles and folks on here. This is not to say that indexing (or insert your other favorite strategy here) do not have their strengths. Having detailed/nuanced discussions about different strategies that might be applicable to investors at any one given time as exemplified by @WFJ in this thread are what we need more of. We are all here for different reasons of course, but I think that the intellectual burden should be placed on the status quo index investor camp to steelman (the opposite of strawman) these other investing strategies. Make the best possible case for these other ideas to show that you really understand what you are talking about to discuss these things with nuance and then show how [pick your favorite] strategy is better by working backwards through all of the nuance.

[Campitor]

https://www.cato.org/sites/cato.org/fil ... ssions.pdf

GOOD FAITH: A “Good Faith” argument or discussion is one in which both parties agree on the terms on which they engage, are honest and respectful of the other person’s dignity, follow generally-accepted norms of social interaction, and genuinely want to hear what the other person thinks and has to say. In many cases, they are working together towards a resolution that will be mutually satisfying. “Good faith” is similar to “good will,” in that you wish the other party well and do not intend harm.

BAD FAITH: A “Bad Faith” discussion is one in which one or both of the parties has a hidden, unrevealed agenda—often to dominate or coerce the other individual into compliance or acquiescence of some sort—or lacks basic respect for the rights, dignity, or autonomy of the other party. Disrespect for the other party may include dishonesty. A person engaged in bad faith does not accept the other person as s/he is, but demands that s/he change in order to satisfy his/her requirements or to accept his/her will. A “bad faith” discussion is doomed to fail, as one or both person’s rights, dignity, and autonomy are not respected. A “good faith” argument relies on persuasion to try to convince the other person whereas a “bad faith” argument relies on other means, possibly including intimidation or coercion. “Bad faith” arguments in private life are best exited swiftly, and are generally not effective at swaying hearts and minds.

I'd thought I'd post the above in case there's some confusion on how any follow up posts on this thread should be framed. Please avoid the pejoratives and kindly share the knowledge or resources (books, articles, etc.) that frame your opinion.

[steveo73]

https://www.cato.org/sites/cato.org/fil ... ssions.pdf

GOOD FAITH: A “Good Faith” argument or discussion is one in which both parties agree on the terms on which they engage, are honest and respectful of the other person’s dignity, follow generally-accepted norms of social interaction, and genuinely want to hear what the other person thinks and has to say. In many cases, they are working together towards a resolution that will be mutually satisfying. “Good faith” is similar to “good will,” in that you wish the other party well and do not intend harm.

BAD FAITH: A “Bad Faith” discussion is one in which one or both of the parties has a hidden, unrevealed agenda—often to dominate or coerce the other individual into compliance or acquiescence of some sort—or lacks basic respect for the rights, dignity, or autonomy of the other party. Disrespect for the other party may include dishonesty. A person engaged in bad faith does not accept the other person as s/he is, but demands that s/he change in order to satisfy his/her requirements or to accept his/her will. A “bad faith” discussion is doomed to fail, as one or both person’s rights, dignity, and autonomy are not respected. A “good faith” argument relies on persuasion to try to convince the other person whereas a “bad faith” argument relies on other means, possibly including intimidation or coercion. “Bad faith” arguments in private life are best exited swiftly, and are generally not effective at swaying hearts and minds.

I'd thought I'd post the above in case there's some confusion on how any follow up posts on this thread should be framed. Please avoid the pejoratives and kindly share the knowledge or resources (books, articles, etc.) that frame your opinion.

I will try and work on this.

[steveo73]

Please avoid the pejoratives and kindly share the knowledge or resources (books, articles, etc.) that frame your opinion.

This is where I think some of the issues are arising.

I think there are different levels of posters knowledge and abilty to discuss this issue in good faith. I am copping it but I am discussing the body of work with facts whereas other people aren't. The culture on this forum is that facts don't matter or maybe more accurately put facts are only to be criticized however alternative options with facts are not provided.

So we have different types of posters:-

1. Those that don't have the required investment knowledge and knowledge about WR's.
2. Those that may have the required investment knowledge but they don't agree with it however they cannot provide better options backed up by data.
3. Those that accept the body of evidence and have the ability to see that there are alternative options.
4. Some combination of 1 & 2 but it's not clear.

=> This forum is heavily focused on people in categories 1 & 2 and potentially 4.

Here are some facts:-

Withdrawal Rates

The Withdrawal Rates chart shows the safe withdrawal rate for any asset allocation over a variety of retirement durations based on real-life sequence of returns. Those looking to retire early or leave money to heirs can also see the perpetual withdrawal rate that protected the original inflation-adjusted principal.

Sources:- https://portfoliocharts.com/portfolio/withdrawal-rates/

The point that I'd make is that individual withdrawal rates are not set in stone because the WR (and the SWR) are only a point in time calculation and they are completely dependent on the parameters a person utilizes to determine their expenses.

Your WR is based on how accurately you can judge your expenses over the course or your investing life which is probably the course of your life. This is impossible to get right because you cannot judge your future expenses accurately.

It's just a guideline and a metric to see how you are tracking now and it's prone to bias.

[steveo73]

Investment Portfolios.

https://portfoliocharts.com/portfolios/
https://portfoliocharts.com/about-the-portfolios/
https://portfoliocharts.com/portfolios/

In the same way that a recipe combines a few basic ingredients into a well-prepared meal, a portfolio is a collection of index funds intelligently mixed in the right proportions. Here you can study the real-world performance of your own asset allocation in both good times and bad, compare the results to a variety of popular options recommended by professionals, and learn about the true investing experience beyond simple averages.

The key point when picking and critiquing a portfolio is that you need data.

So if your portfolio is so good then you should be able to prove that with data. You can't prove it via a philosophical discussion. You need empirical evidence.

You also don't need empirical evidence if you can simply state well I understand the reality of the situation in that I cannot prove what I am stating but I feel that this is the right way for me personally to invest.

=> On this forum I hear people stating that portfolio x is wrong and it will never work but my portfolio will work (sometimes not stated) however they do not provide empirical evidence to back this up. They provide words and feelings but these things do not constitute proof.

If you cannot provide sources and empirical evidence you are simply stating an unverified opinion. You can state anything in this situation but if you have integrity you must state that you do not have any proof to back up your belief.

It's actually worse than this. You have people harshly critiquing simple portfolios without providing any proof that there ideas work at all. So they cannot critique their own opinions.

[steveo73]

https://earlyretirementnow.com/

I suggest people read ERN and portfolio charts because there are problems here that relate to a lack of knowledge of the body of evidence related to investing and WR's.

I'll try and now explain how WR's and portfolios can interact.

https://portfoliocharts.com/2021/12/16/ ... ortfolios/

If you have a diversified portfolio different components will perform in different economic environments. So cash in the right situations can actually lead to an increased WR.

[steveo73]

I'll provide some examples within this thread of how fallacies develop within this forum especially.

Its mind blowing that people save for 10-20 years and not really care to know something about how investing/financial market work. I mean there was a threat not long ago about someone blowing up because of this. The people invested in index funds think they are immune to this already because they did a two day research on how to invest. Especially those that just aim for a 4% withdrawal rate are in for a rude awakening someday in the future.

These are words that are meaningless. It's a straw man argument that is flawed in so many ways.

Does the poster provide alternative data-sets to back up their opinion ? No.
Does the poster make comments belittling peoples investment portfolios and decisions when they don't have any empirical evidence to support their point of view ?

This is a simple case of the emperor having no clothes. It's common within this forum.

The response should be (I think) please provide sources and empirical evidence to back up this position. It's not available hence the emperor has no clothes.

[steveo73]

At the risk of starting yet another asinine "investment war", I'd agree (also with WFJ) that the stories generally told within the FIRE movement backs this up. When I pointed out that the investment advice/explanations that is generally given is often rather simplistic, another FIRE community leader responded that "You know that and I know that, but they [the audience] don't [care to] know that."

Another case of the emperor has no clothes.

The answer should be please provide better empirical evidence. If none is forthcoming then the critique isn't valid.

Notice the use of emotive words like simplistic.

If the poster had investment knowledge and self-awareness they could rephrase their point to have it make sense however the message would change significantly.

I would rephrase this comment to something like I utilize a completely personalized approach to investing which means I don't have the data and evidence to back up my approach however I'm comfortable with this approach. I will probably underperfom the market because investors typically underperform but I am comfortable with my approach.

https://www.investopedia.com/articles/i ... a-brkb.asp

[frommi]

@steveo73 Maybe we should try to find some things to agree on.

Are markets expensive right now? Are we at the border of what has happened in the past 150 years?
I am of the opinion that we are.

https://indices.barclays/IM/21/en/indic ... c-cape.app

Just look at japan in 1990 and what has happened to that market going forward. The S&P500 was only 2 times as expensive as right now, that was 2000 and 1929 and we know what happened going forward. High valuations lead to poor returns. And now please dont start a discussion about CAPE, because a lot of other metrics show the same.

Now this time bond yields are also very low as you can see here:

https://www.multpl.com/10-year-treasury-rate

All those backtests (portfoliocharts), the Trinity study etc. are based on was has happened in the past 100 years. But current valuations of bonds and stocks are not in those parameters, bond yields that low and stock valuations that high have never happened before. A japanese early retiree that has started his retirement in 1990 would have had to go back to work 15-20 years later, if he had relied on something like that. Even if he had all his wealth in cash.

[steveo73]

@steveo73 Maybe we should try to find some things to agree on.

Good freaken idea.

I think Stocks are expensive right now. I think Bonds are even more expensive. Rates have been low for years and should increase.

I think another question is relevant and that is would I bet on my opinion in this instance. The answer is no. I have no confidence that my opinion on the market is something that I can make money from.

I am though betting that my portfolio will handle whatever conditions come up over the next X years.

I don't care if markets are high or low. I don't have a lot of bonds. I have a lot of stocks. I like stocks. They are a key driver in most portfolios.

I'd make one point though. If you don't like stocks or bonds longer term or even shorter term you can invest in a different fashion. I'm not pushing my portfolio onto anyone. I think people should pick their own portfolios.

[steveo73]

All those backtests (portfoliocharts), the Trinity study etc. are based on was has happened in the past 100 years.

I have to comment on the data issue. If you can provide better data then you should. If not then it's the best data-set we have.

It's nothing personal. It's about using empirical evidence over feelings.

My impression which could be wrong is that you are focused on tail end events. That is cool but it's harder to prove that you are in one of those tail events right now if that even matters. You could be in a tail event but that tail event occurred on the 25th April 2022 and only if you retired on a perfect 4% WR. It's like 100 years worth of data and you have one data point right now that won't be verifiable for another 50 years. It doesn't take into account so many other factors of your retirement as well. Do you earn an extra years salary etc. Do you have a perfect 60/40 portfolio. Does that make sense ? A good way to phrase this is what is the cost of trying to cater for edge case scenarios ?

[OutOfTheBlue]

Does a stablecoin, which can be parked in an interest-yielding crypto account and used directly with a crypto credit card like Binance (or transferred within a day to a standard bank account) count as cash?

The problem with cash is that it loses value over time because of excessive money printing and inflation.

In a highly volatile context, I understand that it can be seen as a hedge (and one should have ways, including cash, to avoid having to sell assets for life expenses if they take big hit), but given the negative yield it by definition generates, I'd rather keep most of my "cash" in a place where they can match or exceed the current high inflation figures.

[steveo73]

Does a stablecoin, which can be parked in an interest-yielding crypto account and used directly with a crypto credit card like Binance (or transferred within a day to a standard bank account) count as cash?

Is this going to go bust ? Is it guaranteed ? It doesn't sound like cash but does it matter ?

I'd rather keep most of my "cash" in a place where they can match or exceed the current high inflation figures.

Is this really possible ?

Cash sucks as an asset doesn't it. I have 3 years living expenses in cash. I'm retired though. We had minimal cash and bonds prior to retirement.

[OutOfTheBlue]

Indeed, it does not matter if it is cash, the sentence was just rhetorically framed as a question, to introduce a different perspective.

It is hard to quantify risk (and cash is not exempt of it: not only the under mattress kind but also the one sleeping in banks: see what happened to Greece in 2015 where ATM withdrawals were throttled to a few dozen bucks per week or more recently with payments from Russia to and from other countries), but a solid stablecoin should remain rightly pegged against its target asset. Some of these stablecoins (save USDT) seem well backed by assets, but due diligence always comes in handy.

I say you can find interest-yielding solutions for USD-pegged stablecoins, at currently around 8% APY or more (For US citizens, some SEC-led restrictions might require people to get a little more creative).

USD-pegged meaning 1 stablecoin = 1 USD, so you'd get most benefits of cash, and many of its disadvantages, while still beating or matching the official inflation.

Whether holding stablecoins is a valid strategy and can have its place in a portfolio varies depending on many individual and other (location-related, etc.) factors.

I just wanted to throw this newer asset dimension into the mix (the discussion).

---

Cash sucks as an asset doesn't it. I have 3 years living expenses in cash. I'm retired though. We had minimal cash and bonds prior to retirement.

This. I agree being pre-RE (accumulation phase, semiERE, what have you) and being post-RE makes for an inherently different approach in that regard.

Having cash or at least some stable asset on hand in troubled times can give some peace of mind, and that could be priceless!

[frommi]

My impression which could be wrong is that you are focused on tail end events.

When you know already that you are in the tail end event, is it smart to still ignore it?
Imagine owning a house in the midwest. Is it a tail event that your house gets destroyed by a tornado? I am pretty sure it is.
But what if you can see the tornado already on the horizon and its heading to your house, is it still an edge case?
Does it matter at that point?

I say you can find interest-yielding solutions for USD-pegged stablecoins, at currently around 8% APY or more (For US citizens, some SEC-led restrictions might require people to get a little more creative).

8% yield for "cash" should ring all alarm bells. Just ask yourself where that "interest" is coming from when us cash just yields 0.4%. The fact that crypto is involved makes it even more likely that this is some form of scam.