On the risk of investing in stocks for the long run

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black_son_of_gray
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Re: On the risk of investing in stocks for the long run

Post by black_son_of_gray »

@Seppia Good point!

Additional note: Didn't Pfau also have some analysis showing the 4% rule didn't apply for most European countries—it was really a 2.5-3% SWR world over there? Which isn't to say that the same isn't true for the US now as well, just that historically 4% worked in the US. But at 30-50X expenses for 30-50 year retirements, which a 2.5-3% SWR implies—that is basically saying that historically you'll just keep up with inflation over the long term. And of course, if you get a bad stretch of decades in the series, maybe you won't and will eat into your capital pretty heavily.

jacob
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Re: On the risk of investing in stocks for the long run

Post by jacob »


Lucky C
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Re: On the risk of investing in stocks for the long run

Post by Lucky C »

If you run FireCalc set to random performance with high returns of 10% (nominal) on average and high volatility of 17% like the stock market, with inflation 3% and starting withdrawal rate of 4%, you get a 30-year survival rate of only about 78% (averaged 10 runs which produce very different results each time).

If instead you sacrifice a whole 3% of returns (7% nominal) in order to bring volatility down by half (8.5%), over 10 runs I got an average survival rate of 85%, a pretty good improvement, while being a much less stressful portfolio, even with the significant 3% underperformance year after year.

Now this is not a good model of what the stock market vs. a more balanced asset allocation actually does, let alone an active strategy trying to avoid big drawdowns, but it demonstrates that avoiding those big losses is more important than keeping up with The Market. If your withdrawal rate is close to 0% then yeah sure go with a passive 100% equities portfolio if you want, but otherwise that is just too risky!

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