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Was chatting with my father this holiday and the topic of dividends came up. He is drawing down his portfolio and spoke about a key idea which favor dividend paying stocks - predictability. He spoke about the confidence that he would never have to sell a stock when the market was down (and a downturn could last quite a while) and not having to keep low return cash on hand (this has changed a bit this year) to buffer things.

The "cost" of holding say 2-3 years of cash as a safety net is "not nothing". With dividends funding your cashflow you don't really need to hold any extra cash.

Something to ponder...

tecmo
...

He is drawing down his portfolio and spoke about a key idea which favor dividend paying stocks - predictability.

I used to believe this.

Then I watched as retiree darling AT&T cut its dividend in half.

No one talks about dividend cuts or suspensions.

I much prefer to manufacture my own dividend by selling shares. That also gives you the ability to control your income. But selling shares is too big a psychological hurdle for most people.

Something to ponder...

But not for too long : )
Once you've pondered for a little bit, you realize that what you're selling in any given bear market is a very small percentage of what you're going to be selling during your whole retirement.
(or you have a very small portfolio and therefore much bigger worries to ponder)

Over 10 or 20 or 40 years or whatever, the average valuation level you get on stuff you sell is going to be pretty average. Sometimes lucky, sometimes not, all comes out in the wash.


The "cost" of holding say 2-3 years of cash as a safety net is "not nothing".

I agree that cash cushions for bear markets are problematic. You need to be able to forecast prices 3 years in advance to figure out when to use it and when to sell more stuff to replenish it. I wouldn't want to try that when I'm old and [even more] doddering. Other than a cash pile for emergencies, I don't see a great need for a cash cushion to ride through bear markets, for the reasoning above: it's a passing problem and you'll sell at average prices over time anyway, so don't sweat it.

My key assertion is that a good portfolio with a low dividend yield is very much better to have than a worse portfolio selected for a high dividend yield. So start with the best picks you can manage. If you can put together a decent port with a high dividend yield, that's great, but beware the "reach" risk--on average you get much lower total returns as the payout gets high. The best way to build a dividend portfolio is usually to pick a bunch of plausibly good stocks which happen to have not-too-high yields.

Jim

There used to be an excellent REIT board on the old site. One of the more knowledgeable posters pointed out that even in REITS, dividend was one of the worst indicators of total returns.

I have done well with high yield REIT preferred stocks this year and I think another good year or so is very likely, with 7-9% dividends and another 2-5% of capital gain.

The problem is that people think that dividends are some sort of "free money". You can't/don't/won't see that the stock drops in value by the amount of the dividend, therefor that drop doesn't exist.

If you really need a steady income stream, you can put your money into a broad market index fund and direct them to send you an automatic monthly distribution.

"He is drawing down his portfolio and spoke about a key idea which favor dividend paying stocks - predictability.

I used to believe this.

Then I watched as retiree darling AT&T cut its dividend in half.

No one talks about dividend cuts or suspensions.

I much prefer to manufacture my own dividend by selling shares. That also gives you the ability to control your income. But selling shares is too big a psychological hurdle for most people."

I tend to invest in dividend paying stocks because I like the option it gives me of having a cash payout there if I need it, or I can reinvest it if I don't. I find a lot of the sources I tend to lean on talk a lot about the risks of cuts and suspensions to them, so I find this sort of criticism a bit weak.

Yes, cuts and suspensions can happen but like with any investment it needs you to do as much research/ due diligence as you can - and looking for whatever margins of safety wherever you can find them. One or two stocks cutting their payouts shouldn't de-rail an entire strategy if you have a decent portfolio (both in quality and size).

I think what does go unmentioned is the different approaches within the dividend investing community (i.e those that do stretch for maximum yield and those who give much greater priority to growth of that dividend for example).

Best wishes,

Indefensible.

"The problem is that people think that dividends are some sort of "free money". You can't/don't/won't see that the stock drops in value by the amount of the dividend, therefor that drop doesn't exist."

You are right some people do think that way, but I'm not sure how many it actually is. I certainly don't.

I admit, it does baffle me just how a stock can drop say 2-3% to reflect the dividend payout that quarter/half year but I fully accept that - as the dividend payout is my bird in the hand/Jam today portion of my return and I know it comes at the cost of potentially lower amount of Jam tomorrow than may have otherwise been the case. Equally, I appreciate that money retained by companies can be misspent and not really add much benefit too.

"My key assertion is that a good portfolio with a low dividend yield is very much better to have than a worse portfolio selected for a high dividend yield. So start with the best picks you can manage. If you can put together a decent port with a high dividend yield, that's great, but beware the "reach" risk--on average you get much lower total returns as the payout gets high. The best way to build a dividend portfolio is usually to pick a bunch of plausibly good stocks which happen to have not-too-high yields."

I think a Buffett 'Lens' works great for this. Although he is by his own account not a 'dividend investor', much of his approach is great for those who are seeking regular income from their investments without too much trading.

You are right some people do think that way, but I'm not sure how many it actually is.

I used to spend a lot of time reading the "Dividend Growth Investing" board on TMF and on SeekingAlpha. Those people clearly believed dividends were free money.



it does baffle me just how a stock can drop say 2-3% to reflect the dividend payout that quarter/half year

When AT&T pays out $2,000,000,000 ($2 billion) in quarterly dividends, the company is obviously worth $2B less than it was the day before.

Over 10 or 20 or 40 years or whatever, the average valuation level you get on stuff you sell is going to be pretty average. Sometimes lucky, sometimes not, all comes out in the wash.

Nope.

Over 10 or 20 or 40 years or whatever, the average valuation level you get on stuff you sell is going to be pretty average. Sometimes lucky, sometimes not, all comes out in the wash.
...
Nope.


You think one's periodic stock sales over the next few decades can be at an average valuation level that is materially different from the average valuation the underlying portfolio sees over that time frame? Why so?
Unless one *plans* to sell in some future panic for some reason, they are almost by definition going to be the same within rounding error, no?

Jim

Something to ponder…and I have been for many years. I also ponder all the good points about total return, sell to make your own dividend, and sell at the average price over time. That’s a lot of moving parts.

We have a portfolio of 15 stocks, the largest position is BRK at around 30% and the smallest is GOOGL at about 0.5%. The other 13 pay dividends and currently cover all of our living expenses, and then some.

This cash flows into multiple accounts each month and gives us both independence and peace of mind. No big sell decisions, or many small ones. No stockpile of multi years living expenses. The dividends flow into both taxed and tax advantaged accounts so we have some discretion over income splitting with my wife, and how much to extract each year and flow through income tax.

I retired in 2015 at 56, my wife in early 2016 and we have been living off the dividend cashflow since then. I managed our investments through the tech crash, the great recession, and the pandemic and each time I got a few dividend cuts and some freezes. Generally, I think we took a 10% dividend reduction to the portfolio twice, but in relatively short order dividends are restored and continue upwards, with annual “pay raises” as I like to call them.

I sleep well at night, even through large market corrections, and am much more comfortable about spending money than I ever was through the whole accumulation phase.

It may not be the very best investment strategy to maximize our total income but, it suits our income needs, complexity level and my personality. My wife is happy.

Happy New Year!
PS Tail wind coming for all those bond proxy, yield hogs, this year :-)

"it does baffle me just how a stock can drop say 2-3% to reflect the dividend payout that quarter/half year

When AT&T pays out $2,000,000,000 ($2 billion) in quarterly dividends, the company is obviously worth $2B less than it was the day before."

I understand that, it's the actual drop in the market price to reflect that change I find difficult to understand given the wide number of actors buying and selling at any one time and the wild swings we can see in prices.

You think one's periodic stock sales over the next few decades can be at an average valuation level that is materially different from the average valuation the underlying portfolio sees over that time frame? Why so?

Unless one *plans* to sell in some future panic for some reason, they are almost by definition going to be the same within rounding error, no?

For those withdrawing around the "safe" rate of 4% every year, I believe the order of portfolio valuation matters, not the average.

https://earlyretirementnow.com/2017/05/17/the-ulti...

https://earlyretirementnow.com/2017/05/24/the-ulti...

https://earlyretirementnow.com/safe-withdrawal-rat...

Doesn't matter much if withdrawing below 3.25%.

For those withdrawing around the "safe" rate of 4% every year, I believe the order of portfolio valuation matters, not the average.
...
Doesn't matter much if withdrawing below 3.25%.

I think the notion of SWR of [real] 4% of starting portfolio market value advice is like advising people to subsist on unicorn meat. Does anybody still buy that stuff? But what do I know.
Sequence of returns risk per se doesn't really exist. It's really just "risk that you got bad advice and are withdrawing way too much". If you can't ride out a bad bear, you can't retire with the withdrawal rate you're contemplating, period. It's terrible to simply say to someone "you're not rich enough for that retirement income", but that's way better than saying "you're rich enough" when they clearly aren't.

I'll grant that starting with 4% of a decent estimate of the intrinsic value of the portfolio on retirement day would make some sense. It would be much more defensible. But just try to get someone to agree on the fair value. *

Personally I base retirement withdrawal ideas on a fixed fraction of portfolio liquidated each period, not a forever-fixed real dollar amount of withdrawals.
Putting up with a bit of variation in income hugely simplifies the planning: it eliminates the need for whole swathes of projections of the future, and all the risks arising from errors in those projections. e.g, if you sell 4% of every remaining position every year, you know with certainty that you'll still have 44.2% as many shares of everything after 20 years. If those firms are still around (especially if it's an index), you know for sure you can't go broke. The future market value is unknown and the dividend yield along the way is unknown, but that's better than having those two issues AND not knowing how many shares you'll have later on. And, as mentioned, you know for sure that the average valuation multiple you'll realize along the way is the future average market valuation multiple, within a coupla basis points.

Jim


* Planning a robust strategy is hard, especially if it relies on figuring out what something is worth. A bit of memento mori: Based on a multiple of smoothed real earnings, if the market today were valued as it was at the 1982 bear market low, the S&P 500 would be at 918 right now, including the adjustment for inflation. And that's using current smoothed earnings based on recent history while profit margins have been weirdly high compared to history: even smoothed profits for the broad US market are very high lately, meaning S&P=918 is perhaps an overestimate.

For a SPY-holder really insisting on something resembling the old "real 4% SWR" trope, I'd at least suggest a withdrawal rate of 4% of intrinsic value estimated as (say) the average valuation since 2000 or earlier. So, for example, the S&P 500 has traded at an average of 6.76 times trailing sales since 2000, so use that as your estimate of today's S&P index value, and withdraw 4% of that. Using the sales to end Q3, that would be S&P 500 = 3172. That's 67% of today's S&P value, so start your withdrawals with 67% of 4% = no more than 2.68% of today's starting SPY portfolio value. The notion is that income outcomes like what was typical in the past can only be expected if the starting situation resembles those that were typical in the past.

Personally I base retirement withdrawal ideas on a fixed fraction of portfolio liquidated each period, not a forever-fixed real dollar amount of withdrawals. Putting up with a bit of variation in income hugely simplifies the planning: it eliminates the need for whole swathes of projections of the future, and all the risks arising from errors in those projections. e.g, if you sell 4% of every remaining position every year, you know with certainty that you'll still have 44.2% as many shares of everything after 20 years.


There's more than "a bit of variation" in income with a constant 4% withdrawal. Withdrawal amounts might be depressed by around 50% for an extended period:

https://earlyretirementnow.com/2018/05/09/the-ulti...

There's more than "a bit of variation" in income with a constant 4% withdrawal. Withdrawal amounts might be depressed by around 50% for an extended period:

You kind of have to define the strategy a bit more to make sure we're talking about the same thing.

Here are two.

The usual "4% rule" is usually taken to mean "take 4% of the market value of your portfolio on the day you retire, liquidate and withdraw that much the first year, then inflation-adjust that cash withdrawal amount upwards each year so it is a constant dollar amount". This will generally have an unacceptably large chance of going bust even if you start when your portfolio is at a pretty average valuation level, but REALLY risky if started at a moment of high valuations. Being both old and broke at the same time is no fun. In most things I've read, it has been pretty much debunked and abandoned as a suggestion.

My suggestion was: each year to sell 4% of the number of shares you still own that year. The number of shares sold each year falls on a precisely predictable schedule.
(if they are dividend producing assets, of course, you just subtract the dividends received from that security from the dollar value of how much of that security you've calculated you have to sell)
So, the real income amount that you cash out can not fall more than the real price(s) of your asset(s). You can't ever have a wipe-out even if you're Methuselah, provided your securities don't go bust.

That web site starts with Dec 1999. Taking the same start date, FWIW, a person using my suggested strategy monthly on Berkshire stock would have a worst-case rolling two-year real income drop from its real all-time-high of -23.5%. (one reason the drop was even that big was because the all time high was set during the run-up to Sept '08, rolling two year income up 12% from a year earlier). Despite the withdrawals, real income for the last two years had risen inflation + 2.79%/year since the first two years. The number of shares owned is now down to 37.5% of the original pile.

If you'd done the same strategy with the S&P 500 Equal Weight (starting at end '99, the top of the bubble), the biggest drop in real rolling-two-year income from highest-to-date rolling-two-years was -34.8% for the period ending Aug 2010. (Despite the very unlucky start date for valuations, the real income drop from peak was only -16.6% in the tech bust). Real income in the last two years was up inflation + 2.44%/year compared to the real income in the first two years.

I think figures in that range are pretty acceptable for variation in income, as long as you know it can happen and don't (say) set up your expense profile on the assumption that it can't--especially if recent income from the strategy is at all time highs and has been rising fast. Allowing for a bit of up and down is WAY smarter than simply keeping your withdrawals constant and watching the portfolio value drop to zero. Obviously "cash out" will fall over the long run if the securities don't rise in price faster than inflation + 4%/year over the long run, but at least you can't ever go broke as long as the securities don't go bust.

If you're going to use "formulaic periodic withdrawals for life" as your strategy, it's better to have a little flexibility in the income level and have that certainty of completely eliminating longevity risk. Starting the strategy at a time of high valuations leads to lower income for a fair while--that's not ideal, but better than a diet of dog food.

Jim

This is a topic I spend a lot of time thinking about. I think the whole thing with dividends has to do with the circle of competence. It is definitely true that selling off a long term non dividend bearing stock is a more tax effective way of going about securing income, however, it brings the human element into the situation and for someone like me that doesn't want to have to think about when to sell it is a burden. I've structured my portfolio with dividend and non dividend assets in mind, this way I have income coming in and long term stocks I can buy and hold that I don't have to worry about selling. Whenever I purchase anything I try to add to whatever position is most undervalued at the time.

There's more than "a bit of variation" in income with a constant 4% withdrawal. Withdrawal amounts might be depressed by around 50% for an extended period:

Yeah, how come so many people get the 4% rule wrong?

It is 4% for the first year, then every year thereafter it goes up by the inflation amount. 4% is used only the first year.

It is 4% for the first year, then every year thereafter it goes up by the inflation amount. 4% is used only the first year.

You are correct, but I think this is in response to Jim's suggestion of withdrawing a constant 4% of whatever remains. To eliminate any possibility of running out of money.

If you'd done the same strategy with the S&P 500 Equal Weight (starting at end '99, the top of the bubble), the biggest drop in real rolling-two-year income from highest-to-date rolling-two-years was -34.8% for the period ending Aug 2010. (Despite the very unlucky start date for valuations, the real income drop from peak was only -16.6% in the tech bust). Real income in the last two years was up inflation + 2.44%/year compared to the real income in the first two years.

--------------------------------------------------------------------------------------------------------------------------------
Jim, are there any screens that are very safe and work like RSP or even better?

"This is a topic I spend a lot of time thinking about. I think the whole thing with dividends has to do with the circle of competence. It is definitely true that selling off a long term non dividend bearing stock is a more tax effective way of going about securing income, however, it brings the human element into the situation and for someone like me that doesn't want to have to think about when to sell it is a burden. I've structured my portfolio with dividend and non dividend assets in mind, this way I have income coming in and long term stocks I can buy and hold that I don't have to worry about selling. Whenever I purchase anything I try to add to whatever position is most undervalued at the time."

FULLMARKS!

That is succinctly stated my exact strategy, as well.

Thank you.

Rick

I think it was Jim who said its not 4% of your money, when dealing with BRK, its 4% of the number of shares you have. There was quite some discussion on it a while back when an old article was resurfaced. Yes indeed this leads to variation in income , someone posted that around 7500 shares of BRK at 4% share withdrawal per annum, you were unlikley to run out of money for retirement...as I recall...

Jim, are there any screens that are very safe and work like RSP or even better?

My favourite approach along those lines is outlined here.
http://www.datahelper.com/mi/search.phtml?nofool=y...
"This is a retirement portfolio kind of screen: LargeCapCash.
The goal is a screen which is as safe as the S&P 500 but with the hope of somewhat higher returns over the long run.
This specific screen has low turnover, lower concentration risk than the S&P with largest position at 2.5% of portfolio, probably significantly lower company specific risk because of requirement of very strong balance sheet and profitability. And a very strong large cap bias...",


Several slight variants are discussed in the thread, but the two in the first post are just fine.
One variant is just a bunch of large cap stocks, the second variant is the same but just insists that all picks pay a dividend.

Both variants have beat the market in the first 3 1/3 years after that post when used as suggested. The version requiring a dividend has done a bit better, consistent with the backtest result. That one has beat the S&P in all the rolling 2-year periods since the post so far. (and in 95% of rolling-2-year periods in the last 20 years, by 5.0%/year overall after trading costs, if backtests have any value)
The work you'd have to do:
Buy equal weight 40 stocks, hold for 2 months, calculate the fresh picks and replace any stocks no longer among the top 45 with the highest ranked ones you don't already own. Rebalance the whole thing to equal weight once a year.
Reality will never be as good as a backtest, but I suspect that over the long run you wouldn't do worse than with the index because it's all large cap stocks with lots of cash and high profitability. The short term correlation is pretty high. The correlation coefficient is about 96% at the one month interval.

Jim

I think the notion of SWR of [real] 4% of starting portfolio market value advice is like advising people to subsist on unicorn meat. Does anybody still buy that stuff? But what do I know.
Sequence of returns risk per se doesn't really exist. It's really just "risk that you got bad advice and are withdrawing way too much". If you can't ride out a bad bear, you can't retire with the withdrawal rate you're contemplating, period. It's terrible to simply say to someone "you're not rich enough for that retirement income", but that's way better than saying "you're rich enough" when they clearly aren't.

I'll grant that starting with 4% of a decent estimate of the intrinsic value of the portfolio on retirement day would make some sense. It would be much more defensible. But just try to get someone to agree on the fair value. *

Personally I base retirement withdrawal ideas on a fixed fraction of portfolio liquidated each period, not a forever-fixed real dollar amount of withdrawals.
...


There is a group of people over at bogleheads that use a method like this for retirement withdrawals.
https://www.bogleheads.org/wiki/Variable_percentag...

Variable percentage withdrawal (VPW) is a method which adapts portfolio withdrawal amounts to the retiree's retirement horizon, asset allocation, and portfolio returns during retirement. It combines the best ideas of the constant-dollar, constant-percentage, and 1/N withdrawal methods to allow the retiree to spend most of the portfolio using return-adjusted withdrawals. By adapting withdrawals to market returns, VPW will never prematurely deplete the portfolio.

The VPW method uses an increasing percentage to determine withdrawals from a portfolio during retirement. Each year, the withdrawal is determined by multiplying that year's percentage by the current portfolio balance at the time of withdrawal.

They also have a spreadsheet over at their web site.

Rich

Then I watched as retiree darling AT&T cut its dividend in half.

And today I'm watching as dividend aristocrat Walgreens cuts its dividend in half.

And today I'm watching as dividend aristocrat Walgreens cuts its dividend in half.

Ha! I used to hang out on the TMF Dividend Growth Investing board telling them that XX years of growing dividends is meaningless; that companies could cut their dividends at any time. They piled on me saying "Nuh-uh. A dividend champ company will NEVER cut their dividend."

Hard to believe that Walgreens is still in the DJIA. One of the 30 finest blue chips in US? You could say it is the ideal member for an anachronistic index.

Any guesses as to which company will replace it?

I think of dividends as a form of arbitrage and discipline.

Management companies who give out a steady dividend and know that that's an expectation are probably more conservative given that constraint versus some companies without a dividend with management that will try to diworsify. In cases of companies with large ownership managers, it also sort of helps to align shareholders with upper management.

Wrt arbitrage, regardless of the stock valuation, there will always be that percentage of the dividend that is coming directly from the company's cash. As such I feel it works to align valuation as a weak(?) form of arbitrage so to speak.

Then there's also what others have mentioned which is that you get a certain check by default every year versus having to think about things and deciding what to sell.

That said I totally agree that you can't completely take your eye off the ball. But I don't think there's any harm in having some proportion of your portfolio in a dividend achiever etf, or similar

They try to pick companies that are "leaders" in their industry. Walgreens are seen as retailers, not healthcare related.
I suppose Amazon could make a logical pick as a leading retailer?

Walgreens has the lowest weight in that silly old index, but that's only because they have the lowest nominal stock price at the moment.

Jim

“ Then there's also what others have mentioned which is that you get a certain check by default every year versus having to think about things and deciding what to sell.”

The fully retained earnings and the significant compounding effect of not paying out dividends with BRK has really resonated with us over the years and had a big influence on the choice of other long-term positions, esp. since most of our assets are in a taxable account.

We started drawing down this year and after trying to balancing capital gains with some losses, it was sorta fun deciding where we were going to create our own dividend by selling shares. Flexibility is maintained and for instance many might trim from their Magnificent 7 for their “dividend”this year that would not a year ago where they might have trimmed perhaps a nice run up in a big oil position.

Orders are such a breeze now, unlike the old days of the 70s-80s where Dad had to go thru the expense and effort to contact his PaineWebber broker. Plenty of colleagues seem more content and secure with a bunch of dividend positions recommended by their advisors, yet I suppose that’s what makes markets.

it was sorta fun deciding where we were going to create our own dividend by selling shares.

It will be less fun in a down market.

tecmo
...

I think the notion of SWR of [real] 4% of starting portfolio market value advice is like advising people to subsist on unicorn meat. Does anybody still buy that stuff? But what do I know.

Sequence of returns risk per se doesn't really exist. It's really just "risk that you got bad advice and are withdrawing way too much". If you can't ride out a bad bear, you can't retire with the withdrawal rate you're contemplating, period. It's terrible to simply say to someone "you're not rich enough for that retirement income", but that's way better than saying "you're rich enough" when they clearly aren't.

Most poors don't have the luxury of satisfying their every desire at a 3.25% WR of initial portfolio value or 4% WR of shares. And some others still might wish to "Die With Zero" or otherwise make the best use of their savings (while consumption smoothing).

Thus, the *industry standard* 4% SWR advice.

The notion is that income outcomes like what was typical in the past can only be expected if the starting situation resembles those that were typical in the past.

Not typical, but worst. 4% is based on the WR that survived the historical worst SOR. Unless you fear a worse SOR, it's safe enough.


No one blindly adheres to it, of course. Retirees naturally WR less after bad years in the market.

And since the average retiree's SOR is better than the historical worst, they end with a portfolio something like 2.8X their initial balance, they WR more once past SORR.

Jim: each year to sell 4% of the number of shares you still own that year.

I think the 4% rule is for the typical retiree, needing a simple and easily executable rule of thumb, not for people who spend half their lives on the Berkshire board, discussing in detail this and that and trying to come up with the most efficient technique, no matter how complex that might be.

And if your portfolio consists not practically only of Berkshire shares contains a bouquet of shares and index funds "selling each year 4% of the number of shares you own that year" IS complex for people who still have a life away from such boards.

I personally once made a complex Excel sheet, projecting my route until the statistically probable end of my life + 10-20 years, with the usual variables as input (inflation, interest rates, expenses; maybe others too, I don't know, haven't looked at it since years), with two scenarios for the largest expense, house (renting vs. buying) - - - but hey, how many people have the time on their hands - and the inclination - to do so?

I didn't know then about that simple "4% SWR" rule, but think it's far more suitable for most retirees than whatever sophisticated scheme this board comes up with, actually think it's brilliant to have such a simple rule of thumb!

And since the average retiree's SOR is better than the historical worst, they end with a portfolio something like 2.8X their initial balance, they WR more once past SORR.

Maybe that's why our boss says 5% (instead of 4%)?

Maybe that's why our boss says 5% (instead of 4%)?

"In point of fact, the historical initial withdrawal rate that would have worked for a 60/40 portfolio over any particular 30-year time horizon has varied between 4% and 10%, and the median is close to 6.5%.

But since we don’t necessarily know up front whether the next 30 years will be more like the average, the highs, or the lows, the idea of the safe withdrawal rate was simply to treat every time period as though it might turn out to be the worst."

https://www.kitces.com/blog/the-ratcheting-safe-wi...

Success Rates by Withdrawal Rate:

https://www.whitecoatinvestor.com/the-4-rule-safe-...

Calculator:

https://www.firecalc.com/

"In point of fact, the historical initial withdrawal rate that would have worked for a 60/40 portfolio over any particular 30-year time horizon has varied between 4% and 10%, and the median is close to 6.5%.
But since we don’t necessarily know up front whether the next 30 years will be more like the average, the highs, or the lows, the idea of the safe withdrawal rate was simply to treat every time period as though it might turn out to be the worst."
https://www.kitces.com/blog/the-ratcheting-safe-wi...

Success Rates by Withdrawal Rate:
https://www.whitecoatinvestor.com/the-4-rule-safe-...

Calculator:
https://www.firecalc.com/

These are excellent examples of the sort of "common wisdom" that is floating around the internet and should be dismissed out of hand, if not banned. It is up there with using bleach to sterilize your veins.

Not nearly enough people will read and internalize the health warning at the calculator site:
"If your retirement strategy would have withstood the worst ravages of inflation, the Great Depression, and every other financial calamity the US has seen since 1871, then it is likely to withstand whatever might happen between now and the day you no longer have any need for your retirement funds."
The reason I highlight this assumption is that it is NOT a reasonable assumption.
I predict that a large fraction of the people picking the resulting SWRs are in fact pretty likely to watch themselves go broke. And I say that after studying the data far more closely than the majority of the population.

First, the future can easily be far, far worse than anything seen in the past. Why would anyone believe otherwise? The future hasn't happened yet.
Second, scale that up by the risk added by the starting valuation levels these days: expensive equities and low real bond yields. US equities have been this expensive only about 5% of the time since 1916, and that's based on recent earnings that are hugely above trend.
Third, bear in mind that the observed returns in a given period in the past included the boost from a trend of becoming expensive, amounting to 0.87%/year of the historical equity returns on average. That trend is likely to end, and could easily reverse to become a drag.

Random spot check on equity risks: imagine portfolio of 100% the S&P 500 and its cap-weight predecessors. Purchased today at today's valuation based on cyclically adjusted real earnings (which is much less overvalued than if we use cyclically adjusted sales).
Imagine it drops the first period to the valuation level seen at the end of 1929 measured the same way based on cyclically adjusted earnings yield, then tracks real total returns observed starting then. (reality could easily be much worse, but this is something we know happened in the past)
Use the traditional 4% SWR. (4% of initial portfolio value withdrawn per year, adjusting with inflation)
That equity pot would last less than 11 years.

Just a thought.

Jim

This calculator is interesting for drawdown uses tons of history

https://www.wealthmeta.com/calculator/retirement-w...

Here is another retirement calculator worth knowing about. Not the most user-friendly interface, but comprehensive:

https://www.firecalc.com/

Baltassar

First, the future can easily be far, far worse than anything seen in the past. Why would anyone believe otherwise?

I suppose we could certainly have a war far, far worse, but I doubt we'd have a recession worse than 1929. Why would I believe that? I took a few economics courses in college, and I think that all those smart professors and fed chairs actually have learned something about monetary policy. I recently watched "The Boys in the Boat", and was impressed with the depiction of the Great Depression. Deficit spending for WWII showed how to get out of that sort of downturn, and while we have not managed monetary policy wonderfully, I think we have done better.

I'm not saying I don't appreciate the numbers you put out there on the current price of equities though. They are hard to refute and not enough people seem worried. I think we will see some big time disappointment in long term appreciation.

First, the future can easily be far, far worse than anything seen in the past. Why would anyone believe otherwise?

Sure, the "so-called worst-case event, when it happened, exceeded the worst case at the time” (Taleb).

But there's many reasons it's unlikely: https://dariusforoux.com/stock-market-crash/


For poors, they cannot afford to insure against such an unlikely event.

Better they cut withdrawals only if they need to.


In any case, the more likely risks aren't financial anyway: medical, legal, political:

"Any estimate of long-term financial success greater than about 80% is meaningless."

http://www.efficientfrontier.com/ef/901/hell3.htm

I liked the second link. I suffer from a phobia of quitting work. If I were to retire today i would be able to cover my expenses by selling 2.6% of my portfolio a year, however despite not enjoying work, I am young (39) with two young kids and would like to get this down to 2pct before deciding my next move.

Sure, the "so-called worst-case event, when it happened, exceeded the worst case at the time” (Taleb).
But there's many reasons it's unlikely...

Here's a way of looking at it. We know that the worst case that happened in the past can definitely happen.
OK, let's say we call that a fall to ground level.
But falling to the ground from 5 feet up is not the same risk as falling to the ground from 50 feet up.

This valuation table is based simply on the number of [smoothed] after tax earnings dollars per year you get for each dollar's worth of US cap-weight index investment.

If the market fell to the average valuation level 1930 to 1935, that would be a drop of -65% from here
If the market fell to the average valuation level 1936 to 1940, that would be a drop of -53%
If the market fell to the average valuation level 1941 to 1945, that would be a drop of -67%
If the market fell to the average valuation level 1946 to 1950, that would be a drop of -67%
If the market fell to the average valuation level 1951 to 1955, that would be a drop of -61%
If the market fell to the average valuation level 1956 to 1960, that would be a drop of -51%
If the market fell to the average valuation level 1961 to 1965, that would be a drop of -39%
If the market fell to the average valuation level 1966 to 1970, that would be a drop of -43%
If the market fell to the average valuation level 1971 to 1975, that would be a drop of -60%
If the market fell to the average valuation level 1976 to 1980, that would be a drop of -71%
If the market fell to the average valuation level 1981 to 1985, that would be a drop of -73%
If the market fell to the average valuation level 1986 to 1990, that would be a drop of -55%
If the market fell to the average valuation level 1991 to 1995, that would be a drop of -40%
If the market fell to the average valuation level 1996 to 2000, that would be a rise of   3%  (woo!)
If the market fell to the average valuation level 2001 to 2005, that would be a drop of -21%
If the market fell to the average valuation level 2006 to 2010, that would be a drop of -37%  (this is not exactly the deep dark past)
If the market fell to the average valuation level 2011 to 2015, that would be a drop of -30%
If the market fell to the average valuation level 2016 to 2020, that would be a drop of -13%
If the market fell to the average valuation level 2021 to 2025, that would be a drop of  -3%

If the market fell to the average valuation level for the 70 year period 1930 to the end of the century, that would be a drop of -59% from today. So, the distribution of outcomes of a historical "4% rule" portfolio might reasonably be considered as likely as the results of a "1.65% rule" today.

For a specific example, if the valuation level tomorrow were the same as the valuation level at the August 1982 lows, the S&P 500 index would close at 918, a drop of -81%.
To hit the cheapness of 1921 it would close at 326.
Short summary: the broad US market is very expensive today compared to almost any time in the past, even if you assume the recently anomalously high net margins are representatively on trend. It was never in US history this expensive prior to July 1997.

So, if anyone is going to make the likely fatal mistake of thinking that past returns in certain intervals is representative of the likely range of forward returns from here, they should first adjust their portfolio value down by the figure shown for any interval(s) they think might be representative.

Add another margin of safety because net profit margins are at levels far above what was normal prior to the last couple of decades. Far higher than the highest in those decades, for that matter.
If that recent anomaly does not continue--and who says it has to?--all of those market drop estimates above are underestimates.

And then remember that the market got more expensive by almost 1%/year over the last century or so, so almost 1%/year of the past returns in any interval can not be extrapolated - returns rose faster than value did for a very long time.

And lastly, there is nothing at all to suggest that the market can't get cheaper than it ever did before. Note that the valuation levels were lower in the early 1980s than they were during the great depression. Imagine the surprise of investors who were used to the 1960s and concluded things could never get worse than history's nastiest.
Or that the market might get "pretty darned cheap" within the range of historical observations for a really really long time. Stuff happens.

The entire notion that past retirement portfolio trajectories meaningfully informs the risk of future ones is a case study in the subject of dangerous falsehoods. The deep past can inform the present, but old words work better than historical market returns. "Popular delusions and the madness of crowds"..."permanently high plateau"..."irrational exuberance"...

Jim

"We know that the worst case that happened in the past can definitely happen."

the question is how to prepare. China attacking or blockading Taiwan would trigger a shock as would war with Iran.

Other than a significant cash buffer not sure what else one can do. Perhaps options protecting against a market drop.

Gold maybe.

"Other than a significant cash buffer not sure what else one can do."

Perhaps i am looking in the wrong place, but looking more towards small cap

"We know that the worst case that happened in the past can definitely happen."
...
the question is how to prepare. China attacking or blockading Taiwan would trigger a shock as would war with Iran.

Personally, I take an odd inspiration from history: it's not the geopolitical things that you have to worry about. Most of them can't be spotted on a long term chart. e.g., if you look only at days the market was open, you can't even pick out Sept 11 2001. The two-trading-day drop was only the 6th worst in 2001, and was almost the same as the preceding two-trading-day drop Sept 5-7. The market rose during a surprising number of crises, for no obvious reason.

Rather, the bigger worry is a 15 year stretch of extremely low valuation levels. Or, given where we are today, perhaps even a 15 year stretch of historically average valuation levels would be crushing to a lot of people. That's probably even harder to predict than a nasty geopolitical shock.

Jim

Random spot check on equity risks: imagine portfolio of 100% the S&P 500 and its cap-weight predecessors. Purchased today at today's valuation based on cyclically adjusted real earnings (which is much less overvalued than if we use cyclically adjusted sales).
Imagine it drops the first period to the valuation level seen at the end of 1929 measured the same way based on cyclically adjusted earnings yield, then tracks real total returns observed starting then. (reality could easily be much worse, but this is something we know happened in the past)
Use the traditional 4% SWR. (4% of initial portfolio value withdrawn per year, adjusting with inflation)
That equity pot would last less than 11 years.

I thought I'd find the data showing today's valuation is significantly higher than its peak in 1929, but the data I see has today's CAPE ratio at 32.2, and a peak 1929 CAPE ratio of 32.6 occurring in September. I guess in your scenario we're adjusting it to December of 1929 when it was at 22.01, and already into the crash, then we're using yearly data onward. I understand the point is basically we're overvalued, it doesn't make sense to be in bonds, but 100% stocks wouldn't have survived the great depression. I just want to make sure this isn't 1929's crash on top of another 1929 crash.

I thought I'd find the data showing today's valuation is significantly higher than its peak in 1929, but the data I see has today's CAPE ratio at 32.2, and a peak 1929 CAPE ratio of 32.6 occurring in September.

On my figures, using weekly data, the current cap-weight US equities valuation level is 16.2% more expensive than anything from my start of data (1916) through to the 1990s.
The very earliest data get a bit iffy, of course, as there weren't all that many stocks with data available, and I had to splice some different data sources with longer histories. But from around 1926-1930 the market returns data set is better than the one used by most academic researchers.

The difference is probably just that I just use a smoother smoothing method than the E10 in CAPE.
I found four smoothing methods that seem to work adequately, one of which is E10. Then I scaled each of those by whatever factor made it best match current earnings levels best (since each smoothing method has some time lag). Then I take a simple average of those four methods. Why do I do that? E10 has the disadvantage of reporting a sudden upswing in the reported trend earnings on the 10th anniversary of any earnings recession. A "weighted moving average" (WMA) works better, because older data disappear gradually rather than suddenly.

Other smoothing and scaling methods will give different numerical results, but FWIW: My data set shows a current cyclically adjusted earnings yield of 3.251% (analogous to a CAPE of 30.76), versus a 50 year average cyclically adjusted earnings yield of 6.259% (analogous to a CAPE of 15.98). The 25-year valuation (just long enough to catch the tech bubble, credit bubble, and post-pandemic bubbles) gives an average CAEY of 4.067% (analogous to a CAPE of 24.59)--some optimists might consider that the "modern normal", which current levels exceed by only 25%.

Jim

Here's a way of looking at it.

But the reasons it's less likely to crash are also the reasons for it's higher valuation.

Essentially the Dow 36,000 argument: as stocks are recognized as less risky than thought, they correct upward.

It's *very* unlikely valuations will crash to the August 1982 lows.

Because: it's different this time.


Once you've pondered for a little bit, you realize that what you're selling in any given bear market is a very small percentage of what you're going to be selling during your whole retirement.

What Poors are selling in a bear market is NOT a very small percentage of what they're selling during their whole retirement.

They cannot afford the luxury of withdrawing so small a percentage that SOR isn't a risk.

And for anyone looking to maximize the expected utility of their wealth, it is inefficient.


(or you have a very small portfolio and therefore much bigger worries to ponder)

How many have portfolios greater than 25X annual spending?

Your 1.65% rule requiring 60X would convince most everyone they could never retire.

And unnecessarily.

Again, the chances of not living out 30 years of retirement is far greater than the risk of market returns worse than history.

On my figures, using weekly data, the current cap-weight US equities valuation level is 16.2% more expensive than anything from my start of data (1916) through to the 1990s.

Jim

Would you mind posting a graph or a table with your valuation level.

Thanks

Craig

<ik>Would you mind posting a graph or a table with your valuation level.


Sure.

http://stonewellfunds.com/TrendEY_1916-2023.png
As this is the smoothed earnings yield, low numbers mean "expensive", so I inverted the vertical scale. That makes "up" mean "expensive", the way people are used to seeing things.


Coupla more figures, since I have 'em.

5-year average trailing dividend yield (not cyclically adjusted!) compared to 50-year average dividend yield would suggest stocks have been running around 63% more fully valued than past average.
Latest figure would suggest 86% pricier than 50 year average.

5-year average trailing earnings yield (not cyclically adjusted!) compared to 50-year average would suggests stocks have been running around 51% more fully valued than past average.
Latest figure would suggest 60% pricier than 50 year average.

Based on S&P 500 non-financial companies price/sales, the current ratio (10.15) appears to show the index 50.1% more expensive than the average of the same ratio since 2000 (6.77).
Some small fraction of that is explained by a change in the mix of firms in the S&P 500: a few more high-net-margin firms have been added, and a few low-net-margin firms have been dropped, but it's not a night-and-day difference.

Jim

Rather, the bigger worry is a 15 year stretch of extremely low valuation levels. Or, given where we are today, perhaps even a 15 year stretch of historically average valuation levels would be crushing to a lot of people. That's probably even harder to predict than a nasty geopolitical shock.

Jim

I remember the 1960s and the 1970s. Jim's comment above is always factored into my thinking about investing, retiring, (I have no plans to fully retire) and preparedness. I feel many people retire too early. I also feel there is a major reset coming sometime in the future (demographics, government debt sales issues, inflation and a zillion other possible unforeseen causes). Munger said we should be prepared to mark down our assets by 50%. Jim is telling us to consider the specter of long running poor market returns as seen in past eras.

In the 1970s the market went nowhere while inflation devalued the purchasing power of our money. Imagine today's stock market dropping by 30% and oscillating like a sine wave around a flat valuation for, say, ten years while inflation averages 4% per year. At the end of that period a person would be annually spending about 55% more in dollars ten years later assuming their lifestyle was unchanging. I am concerned for the folks with retirement holdings in indexes who are counting on the market to continue growing their retirement funds sufficiently to offset their retirement distributions. This kind of thinking is called extrapolation. Jim is telling us to be wary of extrapolating the future using our recent/present era of high profits and high equity valuations.

This 2004 interview with Peter Bernstein is a touchstone I read at least once every year as it helps "re-set" my mindset. https://money.cnn.com/2004/10/11/markets/benstein_... Peter also wrote some excellent books: https://www.amazon.com/stores/Peter-L.-Bernstein/a...


On the other hand, there were those who did quite well during the 1970s. Henry Singleton did well. Warren Buffett also did well. So did John Templeton. Margin of Safety, a common aspect of those three successful investors, was built into their thinking. Of these three, Henry Singleton was a three sigma level investor at adopting different strategies ahead of other investors. Value investors should read Henry Singleton's story in the book, "Distance Force: A Memoir of Teledyne Corporation and the Man Who Created It".

Uwharrie

If only there was a mechanism to distribute the companies earnings out to shareholders so they didn't have to worry about valuation levels....

tecmo
...

PS: What is the title of this thread?

Shouldn't some of this be corrected for inflation? I don't think anyone could claim that in today's environment (with the Fed aiming for 2% inflation) that stock prices should be so low as to reach the 15% earnings yield reached in 80's.

I suppose a case could be made that we'd return to high inflation of the late 70's, and that would drag earnings yields upward. But since the pent up spending following covid restrictions seems to have been reined in, I don't see a driver for it.

My next question is going to be, so what about Berkshire Hathaway? I think for them a major crash like this would be a time when gold rains from the sky. But what about the valuation of the stock itself? I'd hate to sell it a huge discount just because I don't want to have a job working for a jerk.

preparedness

I'm not blind to Risk.

"Most people just assume improbable events don’t happen, but technical people tend to view risk very mathematically." He continued, "The tech preppers do not necessarily think a collapse is likely. They consider it a remote event, but one with a very severe downside, so, given how much money they have, spending a fraction of their net worth to hedge against this . . . is a logical thing to do.”

http://www.newyorker.com/magazine/2017/01/30/dooms...

The Surprisingly Solid Mathematical Case of the Tin Foil Hat Gun Prepper

https://medium.com/s/story/the-surprisingly-solid-...

It could be that if you spend all day thinking of ways to break a system, you realize how easily everything can be broken.

https://www.nytimes.com/2020/04/24/technology/coro...

The Design Margin is rooted in the notion that life is uncertain; that since things have often collapsed in the past and may collapse again we actually need to have more reserves than we think. Asteroid strikes, wars and natural calamities happen — and with far more frequency than the space alien invasions that Paul Krugman suggests we prepare against.

Bad times are frequent events.

The idea that the office on the corner will always be able to dispense Government Cheese does not reflect the normal historical experience. Rather it reflects that peculiar period of stability and prosperity which followed the end of the Second World War: the Pax Americana, which the Left hates. Our civilizational attitudes have been formed on the basis of the exception, not the rule.

https://pjmedia.com/richardfernandez/2012/07/02/yo...

The unimaginable can occur. That is a notion at once banal and perennially useful to recall.

https://www.theatlantic.com/magazine/archive/2014/...

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait. Chesterton

Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. One is capable of unwittingly playing Russian roulette - and calling it by some alternative “low risk” game. Taleb

I just believe one has to consider the opportunity cost of insurance.

What is logical for the wealthy tech prepper to hedge against (remote events), isn't for the average Poor.

Shouldn't some of this be corrected for inflation? I don't think anyone could claim that in today's environment (with the Fed aiming for 2% inflation) that stock prices should be so low as to reach the 15% earnings yield reached in 80's.

All of the historical prices and dividends and earnings I've mentioned are adjusted for inflation.
Then all of them are cyclically adjusted. Unsurprisingly, over the long haul, the correlation between net after-tax aggregate corporate earnings and GDP is pretty close. Both of them trend pretty well over the long run.
The growth trend for all of them is remarkably linear over time, once adjusted for inflation. (except for the long run trend that real prices have risen faster than real earnings)

So---
The going price for a given number of dollars of "on trend" real earnings was very much lower back then than it is now. And it was quite a bit lower on average in the last century than it is now.
The question is, why would the high inflation in a particular decade back then make much of a difference to that observation?

I think the main take-away is that market valuation levels don't really correlate very well with inflation or interest rates, other than the occasional stretch that inflation is so high that the economy breaks. People tend not to want to pay a lot for stocks when the economy is broken, which makes some sense. But thankfully that's a very rare occurrence and doesn't make much of a contribution to the short, medium, or long term average valuation levels.

The bigger observation is that sometimes people (for whatever justification) pay a whole lot for each dollar of (cyclically adjusted) earnings per year, and sometimes they won't pay very much at all. The reason doesn't matter much. But over the millennia, the range tends to be almost always from $5 to $25*, and more often closer to the middle of that range than at the extremes. Purchases done near the bottom end of that range tend to lead to good medium to long run returns, and purchase done near the top of that range tend to lead to below-average medium to long run returns. It was ever thus, and (I presume) ever shall be.

Jim

* Average trend EY in the US since 1916 equates to a multiple of 13x. Average trend EY in the US in the last 50 years equates to a multiple of 16x. Average last five years and also current, 30x.
Maybe multiples will stay this high. I'm not saying they won't--the future hasn't happened yet. But I for one sure wouldn't wager money on it.

"The deep past can inform the present, but old words work better than historical market returns."

Speaking of Charlie Munger quotes:

"The functional equivalent of undisclosed embezzlement can be magnified and have
massive macroeconomic consequences when the victims, as well as the perpetrators are led to
believe they are getting richer under conditions that are going to last for a long time."
– Charlie Munger, A Parody About the Great Recession Slate July 6 2011

(Maybe not "embezzlement", per se. "Grifting", perhaps?)

---

All of this SWR discussion inevitably leads back to annuities, and (especially with Jim in the thread) tontines. For me, both come down to trust. And while it's bad enough trusting an insurance company to be around and ethical in some misty far-off when my relict is depending on them, trying to find ten or more reasonably affluent contemporaries whose executors all pass the foxhole test is...another thing entirely.

Which is presumably why tontines have never taken off?

--sutton
ran at 4.25% until Medicare, then 4% until Social Security, then around 3.2%

All of this SWR discussion inevitably leads back to annuities, and (especially with Jim in the thread) tontines.

And his BAC-L ($1,179) and WFC-L ($1,180) yielding 6.2% and 6.4% today.

https://discussion.fool.com/a-value-opportunity-in...

The link broken?

From my notes:

Q.

The Times had a recent article on "How to make you money last as long as you do" which has been a topic here as well. They quote a financial planner who has done some Monte Carlo simulations of the possibilities of running out of funds and found that delaying social security until age 70 helped considerably but that adding a single premium immediate annuity reduced the risk of running out of funds to essentially zero. The kicker? For $298k this annuity would generate $12k/year (~4% yield). Our much-discussed WFC/L is currently above 6% yield, so perhaps you could avoid the financial planner and do considerably better?

Jim.

The difference is far more than it appears in that comparison.
In one case it's a yield, and in the other case it's mostly return of capital.

Let's say you go for one or the other deal today for $298k, inflation is 2%/year, and you croak 20 years from today.
WFC/PL is trading at $1199.60 today. Let's call it $1200, so the $75 coupon is exactly 6.25%.

Between you and your estate, how much do you get from the annuity?

For annuities I believe that only a very small and changing portion of the amount is taxable for Americans. Let's say 5% just so we don't ignore it?

So, you receive $12k payments for 20 years or $240k, which after inflation equates to $190710 in today's money.
After tax, that's around $181794 in today's money, which is 60.8% of your original money.
The other 39.4% of your money (in purchasing power) is lost and gone forever.
Even with zero tax and living to 103, you have had a negative real return on your money after 38 years.
Only in year 39 do you start to come out ahead on the deal, at age 104, and your rate of return at that point is less than 0.1%/year.

If you buy WFC/PL instead, you get 248.33 shares, paying a coupon of $75, total $18625/year pretax.
Let's assume you're US based and a top tax bracket kind of guy and pay 23.8%, so that's net $14192 per year after tax in today's dollars.
So, your real after-tax return after 20 years to your assumed death gets you $225550 in coupons overall in today's money, which is 18% more than the annuity gave you.

But...and here is the kicker...your estate still owns the preferred stock.
Assuming the price is still $1200 in then-current dollars, it's worth $741.77 per share in
today's dollars or $184206. There is no capital gains due if it's sold, as the nominal price hasn't changed.
Losing 2%/year in value to inflation is a lot better than losing it all.

So, after 20 years you (including your estate) end up putting in $298000 and end up with either
* $181794 total back in today's money from the annuity, after taxes and inflation
* $409756 total back in today's money from the WFC/PL, after taxes and inflation

The thing to remember about an annuity is that you are not *investing* that money.
It is an insurance premium expense, and once given over to the insurer, the principal never comes back to you.
Thus the payments are not a yield at all, but little steps back up out of that really big initial hole.
They are priced so badly that you have to live a *really* long time for it to be better than simply running down the pile of cash it would have cost you.

(that $298000, again without inflation protection or any return at all, will obviously last 24.8 years at a $12k/year rundown rate as there is no tax)


A disadvantage of the WFC/PL in these really long scenarios is that it's not perpetual.
There is the likelihood that each WFC/PL that cost you $1200 will get forcibly exchanged for $1300 worth of WFC common stock...eventually. Maybe 16-25 years out?

Your earnings yield is probably going to be a bit lower on the common than than the yield on the preferred, and "payments" will
get irregular (selling bits of stock when the market value of the block rises in real terms above its initial level).
But it does mean that you start getting inflation protection from that point onwards.
Hardly a wipe-out.

Previously I have suggested to people to use a mix of mainly WFC/PL for yield and a little WFC common to "insure" against the forced conversion.

The only scenario that you get the forced conversion is the scenario wherein WFC has gone up by 3.5 from today's price,
so when you eventually lose yield from the WFC/PL you have done wonderfully on the WFC common.
On certain assumptions a portfolio of 1/3 WFC and 2/3 WFC/PL would keep your yield from dropping below
its initial nominal level when the conversion happens, which is 4.90% pretax at current prices and yields.
You also get a material amount of inflation protection on your coupons, though not complete.

This calculator is interesting for drawdown uses tons of history
https://www.wealthmeta.com/calculator/retirement-w...

Here is another one: Rich, Broke or Dead? Post-Retirement FIRE Calculator: Visualizing Early Retirement Success and Longevity Risk. Description: "This interactive post-retirement fire calculator and visualization looks at the question of whether your retirement savings can last long enough to support your retirement spending and combines it with average US life expectancy values to get a fuller picture of the likelihood of running out of money before you die." https://engaging-data.com/will-money-last-retire-e...

Enjoy!

abromber

here is the link for Wealthmeta (the original link didn't work)

I like this quite a bit:

https://www.wealthmeta.com/calculator/retirement-w...

On the page from the link it says:


Ran 96 Simulations Each 30 Years In Length 1928 - 2023

If the simulation is 30 years long, I think only 66 simulations can be performed.

Aussi

Ran 96 Simulations Each 30 Years In Length [Ending in] 1928 - 2023

From the calculator:

This calculator generates simulation runs for each year of data in our historical dataset (1928 - present) based on what you enter above.

So I think that it is 66 simulations of 30 years each. Or perhaps 96 simulations and the last 30 are not 30 years long. The calculator allows you to change the duration. For instance, for 20 years, it still says 96 simulations.

Anyway, a minor quibble. It is a fast calculator and allows adjustments of the inputs.

Aussi

Here is another one: Rich, Broke or Dead? Post-Retirement FIRE Calculator: Visualizing Early Retirement Success and Longevity Risk. Description: "This interactive post-retirement fire calculator and visualization looks at the question of whether your retirement savings can last long enough to support your retirement spending and combines it with average US life expectancy values to get a fuller picture of the likelihood of running out of money before you die."..

That would count as another fine example of the sort of "calculator" that should be completely banned.
The assumptions are stated, but few will read them, and even fewer will realize that the assumptions are absolutely not reliable, so neither are the results.
The biggie can be summed up here: "if your retirement portfolio survives most historical cycles, there is a good chance that it’ll survive in the future without any major black swan events."

The reason for the concern?
This would be true if the prior "stress test" periods started with situations similar to today's. But they didn't. So the assumption is dangerously invalid. Ignore the simulator.


An example: In 1929, usually the worst stress test, bond yields were over 5% and there was mild deflation, not inflation. (CPI fell steadily 1925-1933, total -30%). So real yields were closer to inflation + 6-7%.
And even at the 1929 bubble top, stocks were on many metrics very much cheaper than they are today.
e.g., the median P/S among non-financial firms in the S&P 500 and its predecessors never exceeded 2.0 before 2013 in all US history.
(looking at the 400 largest non-financial firms by market cap)
The tech bubble absolute peak of that median was 1.639 and the credit bubble absolute peak was 1.844
The latest figure is about 3.21


Now, with a bit of work, I think that sort of calculator can give some output that is of potential interest.
First, estimate the valuation level of bonds relative to their deep history, say 60+ years. Real bond yields versus their long run average.
Then, estimate the valuation level of stocks relative to their deep history, say 60+ years. Say, average of the results of a CAEY calculation and a P/S calculation.
Apply those haircuts to the starting portfolio size, then see the result. If the numbers are different, calculate a weighted average based on the likely stock/bond mix you'll be testing.
e.g., imagine you look at those numbers and estimate that both stocks and bonds are (say) 40% more expensive today compared to deep history.
So, the forecasts for a starting portfolio size of $60k entered in the simulator might give you a reasonable idea of the expected range of outcomes of a portfolio of mark-to-market value $100k starting today.
This is more or less consistent with this assumption: the market more or less immediately drops down to a valuation level that is historically typical of the past, then follows the range of outcomes seen in that same past. The reason is obvious: the historical distribution of outcomes of equities (or anything!) can never be thought of as representative of the future unless the starting situation is at least reasonable typical of the past.

This approach will still be too optimistic, though, because all historical equity return observations were in periods of gradually rising valuations. In a typical decade in teh past, around 1% of the observed return was from things simply getting more expensive.
If that trend does not repeat--and there is no reason to think it will--then all the historical returns are on average overestimates of the future likely returns even from the same starting valuation level.

Jim

Thanks Jim, but I suppose by simply avoiding tech and investing in say RSP the P/S drops to about 1.5?

Thanks Jim, but I suppose by simply avoiding tech and investing in say RSP the P/S drops to about 1.5?

No, alas.
The figures I quoted (just a single way of demonstrating a more general problem) are the MEDIAN figures. So that's the valuation level of the middle of the pack firm, not any big tech outlier or specific industry. The high valuations are unusually broad these days, hitting both fancy and boring. I can't say that valuations of "ordinary" typical firms will fall at some point, but I can say with confidence that they're very high compared to history. You're not getting very many dollars of sales or earnings for each dollar worth of stock you buy. The more history you consider, the higher the prices look.

This is a mix of a couple of factors.
The simplest is that high multiples are pretty widespread (cyclically adjusted P/E ratios) throughout the list of companies, not just among the modern tech giants. As with any market cycle.

Then, those multiples are being applied to earnings which are unusually high relative to history, even when smoothed--we've seen remarkable net profit margins lately. That's the flip side of low share of GDP going to workers and government in the last 10-15 years, partly via lower net interest costs. This is why valuations based on earnings show that things are expensive, but valuations based on sales show things to be REALLY expensive.

The truth probably lies somewhere in between...I have no idea what net profit margins are going to do in aggregate in the US in the next many years, but absent any better information it seems best to assume they will fall back at least partway towards old norms rather than expanding without limit or staying near happy record highs forever. The levels that used to be cyclical highs are now cyclical lows, so that's the number I might guess. The most recent figures are around 10.9%, quite a bit above the highest single quarterly figure 1951-2004 at 8.54%. The average 1952-2006 was 6.5%, measured a very slightly different way. Given all those, a future normal average in the range of 8% might be the least bad guess?

One Fed chart that is potentially useful
https://fred.stlouisfed.org/graph/?g=cSh

How to dodge the problem?
Don't own the broad cap-weight US market. RSP won't save you, but I think it's probably a better bet than SPY.
Pick individual securities that are not themselves plainly overvalued.
If you want a broad index, I prefer QQQE (equal weight Nasdaq 100) to RSP (equal weight S&P 500) for the long haul. The valuation is higher than usual for both, but the rate of earnings growth has been so much better for so long among the Nasdaq 100 that if that trend remains mostly true then QQQE will grow into its current price far sooner than RSP will.
Or just live with the expectation of pretty low returns for a few years.
One approach which I do not recommend is expecting historically "normal" returns and then being unpleasantly surprised.

Here's yet one more chipper thought:
US stocks have become more expensive very slowly on trend in the last 50-100 years, accounting for a pretty significant fraction of the long run real returns.
Is there any law of nature saying that the reverse could not be true in the next 50-100 years? What if that all unwound?
Instead of ~2% real earnings growth giving ~3%/year real price growth, what if ~2%/year real earnings growth gave ~1%/year real price growth for the rest of your life? (add dividend yield to price growth to get real total return, and those aren't the exact real numbers)

Jim

Is there any law of nature saying that the reverse could not be true in the next 50-100 years? What if that all unwound?
Instead of ~2% real earnings growth giving ~3%/year real price growth, what if ~2%/year real earnings growth gave ~1%/year real price growth for the rest of your life?


You are forgetting your Hemingway. "slowly, then all at once.”

That's how stocks move (up slowly then down sharply) and how empires go (cf. Soviet Union).

Jim wrote:
Both variants have beat the market in the first 3 1/3 years after that post when used as suggested. The version requiring a dividend has done a bit better, consistent with the backtest result. That one has beat the S&P in all the rolling 2-year periods since the post so far. (and in 95% of rolling-2-year periods in the last 20 years, by 5.0%/year overall after trading costs, if backtests have any value)
The work you'd have to do:
Buy equal weight 40 stocks, hold for 2 months, calculate the fresh picks and replace any stocks no longer among the top 45 with the highest ranked ones you don't already own. Rebalance the whole thing to equal weight once a year.
Reality will never be as good as a backtest, but I suspect that over the long run you wouldn't do worse than with the index because it's all large cap stocks with lots of cash and high profitability. The short term correlation is pretty high. The correlation coefficient is about 96% at the one month interval.

Are there any commercially available products that do this or something like this? It seems that if we are discussing Roll-your-owns that have good performance but require that much maintenance that there would be a company who does that for you for some tiny fraction of a percent fee. Plus presumably one could have some pretty good data from such an offering to see how well it has actually done in a somewhat reliable way by looking at their materials about the fund.

Just wondering.
R:)

I didn't know then about that simple "4% SWR" rule, but think it's far more suitable for most retirees than whatever sophisticated scheme this board comes up with, actually think it's brilliant to have such a simple rule of thumb!

I am surprised that at least so far in this thread, no one has mentioned the idea of just taking "RMDs" as a strategy.

Traditional IRAs and 401ks have a schedule of payouts called "RMDs" or Required Minimum Distributions. The RMD for each year is very simply based on how many more years you are expected to live. If you are expected to live 25 more years, your RMD is 4% or 1/25 of your account. As you age, and your expected remaining life drops, your payout ratio increases. As your expected remaining life drops from 20, to 16.7, then 14, then 12.5,... 11,.. 10 more years or life, your RMD rises to 5%, 6%, 7%, 8%, 9%, then 10%.

By comparison to the 4% SWR, just taking the RMD each year is NOT trying to be a steady income, particularly. RMD's go up as you make more money in an account, and go down, eventually, as you get older and are taking more out than the account earns. But an RMD does never go to zero, although when you are 120 years old and older, the RMD settles down to 50% per year, which means with relatively low income in the account, you are more or less getting 1/2 the income each year than the year before.

SO I can see people are looking for steadiness as a proxy for how much income you want. I tend to think I'll want more income when I am younger retiree than older, but of course that is backwards if I require $5000/month of assistance if I can't walk and can't transfer myself in and out of a wheelchair.

ANyway, I was interested if anybody saw anything interesting in comparing the IRA RMD "strategy" to the 4% SWR and other strategies discussed here.

R:)

Are there any commercially available products that do this or something like this?

I presume there are portfolio managers who will attempt something similar. Between their fees, the necessity to hold cash for redemptions, and other institutional imperatives, the small anticipated advantage would likely disappear. Even without those burdens, my predictions for the strategy were merely a reasonable hope of moderate long run outperformance (with very low chances of doing materially worse), not a free lunch.

I tried meeting with a "wealth management" bank once, asking them if they would implement my strategy for me. They said no.

That generally leaves trying it yourself. One big advantage is the power to eliminate stocks you find unacceptably odious as investment candidates for whatever reason. And of course control over the precise strategy chosen.

There are certainly some denizens of the Mechanical Investing board who have done well with purely quant/mechanical strategies, though not many. Most strategies look good in backtest but when used in real life they fall down because the backtest was just too "lucky".

Of note is a strategy outlined in 2000 if I recall, which has been followed by one board member with real money all this time. He has done very well. The account is up 20-fold in 20 years, which is a little over 16%/year compounded. It is a spectacularly wild ride, though. He holds about 2/3 cash at any given time, and puts the other 1/3 into call options for stocks mechanically chosen mostly on momentum. Note, the 20x return is on the entire account including the drag of the large cash pile--the return on the actual positions is much higher. The drawdowns would give someone white hair quite quickly, which is why he does it in a separate account. It started out as "play money" sized, but grew to be a relative significant fraction of his overall assets simply because it did so well.

Jim

The tech bubble absolute peak of that median was 1.639 and the credit bubble absolute peak was 1.844
The latest figure is about 3.21

Could someone advise me on how sales by subsidiaries are treated? Do the sales show up in the earnings statements as sales or is just the profit/loss transferred to the parent company? Wondering if company structure and accounting are changing the way sales are accounted.

Thanks

Aussi

I just believe one has to consider the opportunity cost of insurance.

What is logical for the wealthy tech prepper to hedge against (remote events), isn't for the average Poor.

This is as good a point in the thread as any to chime in an "Amen" to this idea.

A lot of Mungofitch's calculations seem quite appropriate to the 1% or maybe even the 0.1%, but it seems to me the insight that this is an unaffordable over-caution for the bottom 99% is right.

Your optimum "withdrawal rate" MUST depend on whether your savings consist of 0.5X your annual spending or 500X your annual spending. Everybody I know who has purchased "long term care insurance" has FAR MORE money than everybody I know who has not purchased this insurance. The reason is NOT that "rich people are smarter about how they spend their money", or at least not solely due to that, as the existence of $1million dollar cars and gold-plated toilet bowls will show.

Even with a millionaire in the US has a finite chance of running out of money while they are alive. My parents, or certainly were most of the way to having a million in net worth when they were 75 or so, spent the final years of their lives in assisted living which, while their money lasted, cost about $8,000/month EACH. $16,000/month went through their retirement savings in a few years, they were still alive. We did what I suspect many "middle class" people do when they last a long time: we got them qualified for "Medi-Cal" which is California's name for Medicaid which is the US gov'ts program to subsidize medical care for people who can't afford their medical care. Medi-Cal supported my father in a nursing home for the last year of his life and my mother in assisted living for the last 2 or 3 years of her life. To be clear, they had ~ $5,000 a month income from soc sec, pension, etc., which Medi-Cal took all of (well, they allowed $35/month to each of my parents for other expenses, and Medi-cal paid the, one guesses, $10,000/month shortfall (we do not know exactly what deal Medi-Cal struck with the homes my parents were in.)

So in my own planning, I have been flummoxed. DO I plan to leave my kids a bunch, assuming the Tesla Robot will usher in an era of astounding corporate earnings and I will not need $10,000 a month care for a bunch of years? Or do I plan a future where Russia nukes Kyiv, China nukes Taiwan, and Elon Musk turns out to have been lying about the rockets actually making it to orbit and the cars actually having been sold at positive margins, and I run out of money long before I run out of breath?

Does Medi-Cal survive a nuclear war any longer than my portfolio does?

I think I plan my portfolio as if the nuke's stay in their suitcases and the earth does turn out to be round, the rockets and the cars are real, and a few million Optimus robots are adding to our GDP by my 80th birthday (2037 fyi). And my "insurance" in case I am wrong is two layered:

1) Medi-cal qualification and big bottle of benzodiazapene's for when the life style Medi-Cal affords me is no longer to my liking

2) The ability to go noisily insane if the world somehow lays waste to the US economy while I am lying in a bed unable to get myself out of it without assistance.

Wow. That turned dark...

R:)

Average trend EY in the US since 1916 equates to a multiple of 13x. Average trend EY in the US in the last 50 years equates to a multiple of 16x. Average last five years and also current, 30x.
Maybe multiples will stay this high. I'm not saying they won't--the future hasn't happened yet. But I for one sure wouldn't wager money on it.

I've been trying to think, is there some fundamental reason that a $1 of earnings per year would cost more sometimes and less other times?

And I think I've got it. In a world in which there is very little capital investment, the investments made are the "low hanging fruit". That is, if the average laborer doesn't even have a $10 shovel as her capital investment, then when she is hired to dig ditches her productivity is pretty low, and perhaps buying $10 shovels for your ditch diggers yields a 8% return in perpetuity on your investment. But future increases in productivity require buying a $10,000 mini-bobcat which maybe yeilds only 6% on your marginal investment over buying shovels. And later, buying optimus robots for $150,000 each yields only a 3% earnings improvement beyond your bobcat-provisioned labor pool of ditch diggers.

So do we think that there should be a natural decline in the yield of capital investment as we get more and more capital investment in our economy? That each time we triple the value of capital equipment our workers, on average have to use, we only double their output?

I've thought about this for a grand total of about 4 minutes by now, and so far it seems like it might be right.

R:

I tried meeting with a "wealth management" bank once, asking them if they would implement my strategy for me. They said no.

That generally leaves trying it yourself.

The problem would be in easily getting a good source of cash & debt data. VL seems to often put out crappy or obsolete data.

Last time I successfully ran this screen was mid 2023. There were 248 stocks that passed the early filters and that I needed to get the cash & debt figures for.
I got the data by scraping the WSJ page. But now they (and many other web sites) have blocked scraping.

So...probably too much trouble, and not enough of a payoff. Might as well take the top 40 of the S&P 500 or GSPY. Equal weight or same relative weights.

=======================================

Of note is a strategy outlined in 2000 if I recall, which has been followed by one board member with real money all this time. He has done very well. The account is up 20-fold in 20 years, which is a little over 16%/year compounded. It is a spectacularly wild ride, though.

That was Elan. Very wild ride!! I did quite well on that strategy for a while, but when it stops working it STOPS WORKING. After about 5 consecutive months where the strategy lost 100% of its money I threw in the towel.

Are there any commercially available products that do this or something like this?

There are managers screening for “profitability” and “value”, selecting stocks on some combo of the two, rebalancing regularly.

This is one I like:
https://www.avantisinvestors.com/avantis-individua...

There’s no equally weight 40 stock fund.

Large cap value:
https://www.avantisinvestors.com/avantis-investmen...

“Invests in a broad set of U.S. large-cap companies and is designed to increase expected returns by focusing on firms trading at what we believe are low valuations with higher profitability ratios.”

15 basis points. Different weighting than SPY. No Berkshire, interestingly.

Looking at Avantis funds and ETF, none have an inception date before 2018 and many say 2022 and 2023. So nowhere near a long enough track record to establish anything meaningful.

I'm a lucky amateur at this game. I "discovered" BRK when the B shares were fairly new and put enough of my then tiny net worth to make me look smarter than I am. I hold shares in taxable accounts and in IRAs... I got fancy a few times in my IRAs and sold BRK when it was high and bought back shares when it was lower. I end up with about the same returns, with the leave it alone taxable accounts showing slightly better returns. It's taught me that unless I think prices are really way out of whack and that I will actually not buy back shares until they get ridiculously low prices that I'm not doing anything productive. In fact, I'm stressing out while waiting for that moment when the price is low enough. I always buy back at too high a price. I can't wait it out that long. I always feel like I'd better buy it back now because... when the stock price is high, it often goes higher. But not always. Same with the other way.

I'm not smart enough to grasp options. It takes up too much concentration on my part. I'm not a natural. Know your circle of competence, right?

I'm hugely invested in BRK.B but have been diverting other money to QQQE over the years for some diversification. Have a little Fairfax, Markel, Google.

Be kind and someone let us know when the BRK train has stopped. It's important to get off before it goes off the rails.

Cheers!

That was Elan. Very wild ride!! I did quite well on that strategy for a while, but when it stops working it STOPS WORKING. After about 5 consecutive months where the strategy lost 100% of its money I threw in the towel.

That's what's so remarkable about Elan's result. He always kept enough cash in the account to keep going, and (most importantly) he kept going.

After several years he did start using a (gasp) market timing signal to indicate that there were enough bad omens that you might as well conclude it's a bear market and sit in cash for a while.

Jim

Jim wrote up-thread: My suggestion was: each year to sell 4% of the number of shares you still own that year. The number of shares sold each year falls on a precisely predictable schedule.

I would phrase this as selling 4% of each position you own each year. Whether you choose to measure 4% in share count or current market value at the time of sale, it works out to the same thing, right?

Say I own 1,000 shares of BRK-B. Market price is $398, so I have $398,000 of BRK-B.

I can sell 4% of the shares, which is 40 shares.

Or I can sell 4% of the market value, which is $15,920.

Either way I choose to think about it, the result is the same: I'll raise $15,920 in cash, and will have 960 shares left.

Not in the subsequent years. The actual amount of shares you sell decreases and the resulting value received depends on share price action.

I would phrase this as selling 4% of each position you own each year. Whether you choose to measure 4% in share count or current market value at the time of sale, it works out to the same thing, right?

Sure.
The only reason I phrased it as share count is because that number is precisely predictable in advance forever into the future, and emphasizes that the sale quantity is entirely mechanistic. For example, you could put in all the broker orders for the next 20 years in advance.

You can do a forecast of the stock price separately to estimate how much money that raises each period. Prices are hard to predict, but easier than trying to visualize your portfolio value trajectory incorporating a sales schedule at the same time.

It's simply not possible to design a plan that lets one spend the capital while guaranteeing to fund a lifespan of unknown length, while having withdrawals of a predetermined [real] size.
Your choices are having a (probably unacceptable) risk of running out of money, having withdrawals that vary in size somehow. So the main discussion is about what formula to use for the variation in withdrawals.
(You can also have withdrawals that are trivially small and basically have no chance of eating into the capital, but then of course you don't get to spend the capital)

The best solution is to dodge the problem. Cut off the tail of the longevity risk with a pooled scheme like an annuity.

Jim

Not in the subsequent years. The actual amount of shares you sell decreases and the resulting value received depends on share price action.

Yes, in subsequent years. I understand that price changes and shares don't. All I'm saying is the math is the same either way, and it doesn't matter which units you choose to work in.

Assuming a single stock portfolio, these statements are the same thing:

1. Each year, sell 4% of your remaining shares in the portfolio
2. Each year, sell 4% of the remaining market value of the portfolio

With many different stocks in the portfolio, you'd want to modify that to read 4% of each position, but it doesn't matter if you express "4% of each position" in its present market value or its share count. The proceeds and remaining balance measured in share count or market value would be the same, regardless of how you choose to think about it.

the future can easily be far, far worse than anything seen in the past. Why would anyone believe otherwise? The future hasn't happened yet.

Could a catastrophe happen? Sure. Rampant inflation, nuclear war, another pandemic, social revolution; the possibilities are endless. Considering catastrophe when retirement planning is pointless. If such a catastrophe unfolded we’d be looking at a very different organization of society than the one we currently assume is natural. I dare say that capitalism, the system on which our retirement planning rests, might no longer exist. So, as a basis for retirement planning this line of thinking is pointless.

Where you have been helpful in thinking about retirement plans in the past is expectations for future returns on investment. I think the expectation that 8% is natural and to be expected is probably wrong. We might see flat to very low returns for decades, or might even experience a prolonged recession like Japan has for 30 years.

On the other hand, we seem to be entrenched in a period of intensified exploitation where working people are seeing flat to declining standards of living in the midst of a productivity revolution. If all those economic gains are being captured by the owners of capital then there is no reason to expect lower returns on capital going forward.

If you’re planning to live in a capitalist society for the rest of your life then a reasonable set of assumptions would be lower returns that historically expected to more of the same. Anything else is a bet on the end of capitalism, and you don’t survive that as a holder of capital no batter how good your assumptions are.

more eloquently put than my explanation to my family. "If it all goes to hell in a handbasket" we're all in hell together....."

On the other hand, we seem to be entrenched in a period of intensified exploitation where working people are seeing flat to declining standards of living in the midst of a productivity revolution. If all those economic gains are being captured by the owners of capital then there is no reason to expect lower returns on capital going forward.

So you're saying there is no reason to expect lower returns on capital going forward, because current returns on capital are assisted by intensified exploitation of working people to the point where their standards of living have suffered?

So you're saying there is no reason to expect lower returns on capital going forward, because current returns on capital are assisted by intensified exploitation of working people to the point where their standards of living have suffered?

I’m saying this might be what we’ve witnessing, and that the high rates of return occurring since Reagan declared open season on unions. Amazon’s suit to kill the NRLB would effectively end unions in America.

If the next half century holds the same fate for workers as the last half century, there is no reason to think the good times for capital will soon end.

My only point is that there are structural reasons to think that this time is really different … until it isn’t. And that might depend of the activism of working people.

I’m saying this might be what we’ve witnessing, and that the high rates of return occurring since Reagan declared open season on unions. Amazon’s suit to kill the NRLB would effectively end unions in America.

I would suggest that the union bashing wasn't really a big factor in the crushing of the share of US GDP going to workers.
The two bigger effects were, I believe--

* Monopolization. In most US industries, concentration has soared along with margins, seemingly due to "lassez faire" regulation of M&A. The share of business and gross profit going to the largest 2-3 firms in an industry has risen almost without exception. Why compete when you don't have to? Merge with that rival and everybody wins!
* Competition from non-US workers. In effect, the typical worker in the US was historically not forced to compete with non-US workers, but now they do. Even very small firms are multinationals now: it's easy to get components from the global marketplace.

It isn't all bad. This raises the income of a whole lot of very poor people in the world, and reduces the income of some people in the rich world, as the two converge a bit. If you think about it, there is no rational reason in the long term to think that (say) an auto worker in Detroit should be able to purchase with an hour's wages something at Walmart that took someone in another country with comparable skills 8 hours to make, let alone assume that it is his/her birthright.


Rails are of course an exception. The guy working on a US train is a US worker. His job is more affected by Baumol's cost disease. If the productivity of some sectors soars (say, tech bros), that drives up the wages of people in industries where productivity is stagnant (usual examples are things like teaching, orchestra musicians, nursing, cleaning, and (so far) drivers). Consequently it would be rational to expect the real wages in rails to rise over time at a rate comparable to the "good" industries, even if rail productivity goes nowhere.

Jim

"His job is more affected by Baumol's cost disease..."

Yay Jim

So far this morning I've made it through the NYT, the WSJ, The Atlantic, and some of the FT without learning anything of note.

But I'd never heard of Baumol's Cost Disease, despite finding on review of the subject that the original paper came out some time after I'd learned to read.

Appreciate the chance to connect a few neurons in new ways.

-- sutton
whose only economics "training" was reading a copy of Mankiw's textbook in my 40s

It isn't all bad. This raises the income of a whole lot of very poor people in the world, and reduces the income of some people in the rich world, as the two converge a bit. If you think about it, there is no rational reason in the long term to think that (say) an auto worker in Detroit should be able to purchase with an hour's wages something at Walmart that took someone in another country with comparable skills 8 hours to make, let alone assume that it is his/her birthright.


But there *is* rational reason. And for a Detroit US citizen is *is* his/her birthright.

"no rational reason"?
Except that the duty of a government of a country is to look out for its own citizens.
The US should look out for US citizens,
France should look out for French citizens,
Germany should look out for German citizens,
India should look out for Indian citizens,
China should look out for Chinese citizens,
etc.

Neither the governments of France nor Germany nor India nor China have a duty to look out for the interests of US citizens. And vice-versa.

But there *is* rational reason. And for a Detroit US citizen is *is* his/her birthright.
...
The US should look out for US citizens

I would make a fine distinction there.

Sure, the US can redistribute its national income and wealth in whatever way best suits the population, as can any other country. That might including paying some people quite a bit more than the actual value of what they're doing, taking that money from someone else in the same country. The national pie might also be slightly bigger or smaller depending on the choices made, but choices they are.

But it's quite a leap from there to "I have the right to be paid many times as much as the people making the stuff I want to consume." One logical consequence of that view is that it's the government's job to actively ensure that there are always lots of very poor people elsewhere in the world, as it's the only way to defend that "right" against the risk of widespread prosperity. Not a policy goal I would endorse!

I think people have a lot of very valid desires, but not nearly as many of them are validly seen as "rights" as popular belief would have it.

Jim

But it's quite a leap from there to "I have the right to be paid many times as much as the people making the stuff I want to consume." One logical consequence of that view is that it's the government's job to actively ensure that there are always lots of very poor people elsewhere in the world, as it's the only way to defend that "right" against the risk of widespread prosperity.

Not at all.

There was a joke about a Canadian and an American talking at a bar, the Canadian said "When we Canadians think of American we think about your racism and income equality and insularity. But I am curious, when you Americans think of Canada, when do you think about?"

The American replied, "We don't think of Canada at all."

Heh, google came up with this article's headline, "Even Canadians Think Americans Are Toxic". The typical American response to this would be: "Oh no! ... anyway...."


It it a government's job to take care of its citizens. EVERY government's job, to THEIR OWN citizens.

It is not zero-sum. If one person or country is rich, that does not mean that another country is poor because of that. We wish others well, but their station in life is up to them.


None of which has anything to do with Berkshire Hathaway.
I do kinda wish that I had sold some BRK at 9:33 this morning. ;-)

If you think about it, there is no rational reason in the long term to think that (say) an auto worker in Detroit should be able to purchase with an hour's wages something at Walmart that took someone in another country with comparable skills 8 hours to make, let alone assume that it is his/her birthright.

I'm thinking about the birthright of Alice Walton and her siblings to collect nearly $1 billion annually in dividend income from selling crap to autoworkers who deserve less.

One logical consequence of that view is that it's the government's job to actively ensure that there are always lots of very poor people elsewhere in the world, as it's the only way to defend that "right" against the risk of widespread prosperity. Not a policy goal I would endorse!

This is absolutely ridiculous and can only make sense if you ignore the giant chunk of national income that flows,as a birthright, to owners of capital, a la Alice Walton. Poverty wages in Bangladesh are not the result of high wages of autoworkers but rather are a consequence of the high dividends received by Alice Walton. How does widespread prosperity result from the redistribution of income from wages and salaries? It must also come from the redistribution of income from returns on capital.

If you think about it, there is no rational reason in the long term to think that (say) an auto worker in Detroit should be able to purchase with an hour's wages something at Walmart that took someone in another country with comparable skills 8 hours to make, let alone assume that it is his/her birthright.
...
I'm thinking about the birthright of Alice Walton and her siblings to collect nearly $1 billion annually in dividend income from selling crap to autoworkers who deserve less.

Kinda not the same subject, though, right?

Unless your thinking was this: Because A is seen (by you) to be taking advantage of B, then B certainly deserves the right (not just opportunity) to take advantage of C.
In this case A being Ms Walton, B being overpaid manual workers in rich countries, and C being underpaid workers in sweat shops.
All three being, well, people.

Jim

A is benefitting directly from the exploitation of C through dividends earned on the product of poorly payed labor of C, while B benefits indirectly from the low priced commodities afforded by A’s exploitation of C. A and B benefit, and share a national interest in continuing this relationship.

Your mental model is missing A altogether and attributes the suffering of C to the undeserved largesse of B, the real unearned largesse being hidden from view in the hands of A. The relative earning gap of B and C might be reduced if A could see their way to offering a greater share of total income to C, since said total income is concentrated in the hands of A.

In different terms, you’re attributing the cross national inequality of workers incomes to the maldistribution of wages without considering how returns to capital play in understanding this maldistribution.

Your mental model is missing A altogether

Absolutely. But it's entirely irrelevant to my point.

B and C live in different places and get paid different amounts, for a wide variety of reasons. That's the issue at hand: It never really made sense in the grand scheme of things, and some of the big reasons for the disparity are going away. The reason that this issue is more relevant than in the past is that a person providing labour now has to compete with people in many different places in the world, not just his/her home town. The shipping container got invented, and it isn't going to go away.

If B is getting paid a lot more per hour than C, that's great for him, and again, it might be for a wide variety of reasons. If I lived in the same country as B I might even be happy to see income distribution in our mutual country so that can happen. But it is not his/her right to get paid more than C, and most especially not a right to get paid more than the actual value of what is getting done.

i.e., it's particularly a concern in this case:

Imagine that B (Bill) adds nuts to the bolts on widgets. A widget with the bolt added is worth $1 more than one without. He is not the fastest guy in the world, so he adds 10 bolts per hour. His labour is adding $10 to the value of the employer's inventory, and therefore adding $10 to the sum total of the wealth of the world. Added information: this work can be done pretty much anywhere in the world. But Bill lives in the US. What should Bill be paid per hour? Stop and ponder the question, seriously.

On the one hand, a basic "living wage" of $15+ would be nice for him. Or maybe he has a great union and he gets paid $55/hour. But the labour he is providing is demonstrably worth only $10. This is true of essentially all jobs: they have only a certain value to the world. The only variable is really how obvious that number is.

Now, maybe he would like to get paid $15 or $55, and maybe I would even support an income redistribution scheme to let him get considerably more than $10, taking the money from somebody else in Bill's country. (if it's a company, then that industry is going to suffer and produce less, hurting global wealth). But I can't see my way to the notion that it's Bill's "right" to get paid a lot, and in particular NOT a right to get paid more than $10 for that value added. Especially since C, a very nice fellow, is ready willing and able to do it for considerably less, making the world better off. Everybody everywhere is better off if Bill does something else for a living.

Yet, due a quirk of history, B lives in a town with fabulous unions where he and his mates have been conditioned to think that a job like his is worth $55/hour, and that he has the right, goldarnit, to be paid at least that much because his dad was. He is going to have to learn, one way or another, that it ain't so. The period of basic manual jobs (as at GM) getting substantially above-median wages was, I think, a one-time historic anomaly unlikely to be repeated except in the most transient of times and places. My cousins worked at GM Diesel most of their working lives and got paid way more than I did (until the plant closed in 2012--surprise, surprise). But economically unsustainable jobs like that are unlikely to be common in future.

Jim

Jim,

I appreciate your attempt to teach me economics, but your example bears no relationship to reality and doesn't even work out mathematically. How can a worker generating $10/hr in value demand $55/hr in wages? Even if this was an entirely worker controlled enterprise, it would go out of business in a week.

You repeatedly talk about how profit rates have been running above historical averages, and that the continued expansion of the share of corporate profits to total gdp cannot continue. This is the reason why you believe stock markets are overvalued and the elevated PE ratios cannot continue to expand indefinitely. It's also the reason Buffett believes Berkshire cannot continue to grow at much better than the rate of GDP. Figure 1 in this report captures what you have been saying very nicely:

https://cdn.pficdn.com/cms/pgim-fixed-income/sites...

Corporate America has been benefiting from not just the growth of the economy, but the growth of its share of the economy relative to labor's share as well. Worker's share of GDP has fallen from 58% in the early 1970s to 53% today, while capital's share has risen from 15% to around 20%. The economic gains of capitalists have largely come through the wage repression globalization has wrought on the American working class. It has been a very effective policy of redistribution. And this only considers the distribution of total income within a nation. We haven't even begun to think about this at a global scale.

The point here is that you yourself have acknowledged the shift in class shares of the national income. Wealth flows from the low wage regions of the world economy to the centers of profit accumulation. The working class in those centers of accumulation benefit from this regional concentration of global wealth through higher wages. It makes political sense for the accumulator class because an overabundant population of politically restive poor people would make life difficult for owners of capital in these national centers of accumulation.

Your disciplining of the American working class for its unrealistic and undeserved claims upon national income makes no sense if you abstract from capital's increasing share of that national income. Is capital's claim on an ever increasing share of the national income somehow justifiable and deserved, while labor's is not? The real cause of poverty in Bangladesh, or any of the other low wage regions of the world economy, is that capital has used the economic and political weakness of these post-colonial societies to extract surplus rates of profit from their workers. The wage gap between American and Bangladeshi workers could be narrowed either by wage repression in the US (which has been happening for 40 years) or through the redistribution of income away from capital and toward global workers through higher wages paid to those workers, or both. We're starting to see that wage inflation in China, which has a strong state, but that makes China less attractive to western based capital.

Greedy workers in Detroit are not the cause of global inequality in wages. The wage pie is not static, it can grow both through global gdp growth and through a more equitable distribution of income between capital and labor. Global capitalist enterprises like Walmart or Apple have more to say about wage levels in low income countries than auto workers in Detroit.

Phil

I appreciate your attempt to teach me economics, but your example bears no relationship to reality and doesn't even work out mathematically. How can a worker generating $10/hr in value demand $55/hr in wages? Even if this was an entirely worker controlled enterprise, it would go out of business in a week.

We agree!
Yet it happens all the time, for sure, at every pay level. If you live in a rich country, there are probably people within a few miles of you getting paid today more than the demonstrable economic value of their work. There are some amazing contracts out there, which is the original discussion, and also sometimes jobs that simply don't produce value at a rate higher than the local minimum wage.

There aren't as many places like this as there used to be, because the (for example) well paid US manual workers who had negotiated such deals are finding their jobs drying up. For the reason you cite: the firms don't do well in that situation, so they look to find a cheaper way to get the same task done. The simplest solution in the last few decades was to outsource the task to someone in a different place (city, state, country etc) where the same work could be done for lower wages.

Greedy workers in Detroit are not the cause of global inequality in wages. The wage pie is not static, it can grow both through global gdp growth and through a more equitable distribution of income between capital and labor.

This may all be true, but it is emphatically not the point I have been making. The discussion of the split between capital and tax and labour is a worthwhile one, but not the one I'm talking about today, it is entirely unrelated.

Consider for a moment the division of the labour pie alone, whatever size it may be at the moment. The observation is the simple fact that some employees demand high wages, and some don't. There is no need to be judgmental about it. Because goods (and services) are vastly easier to transport than they used to be, there is a large levelling effect going on. The people in the low-wage towns are getting paid lots more, which is really great, and people in the high-wage places are getting less, which sucks for them. Some of them were getting preposterous amounts due to quirks of history, and that wasn't ever going to last. My original point is that their position was an untenable one destined to go away, and that they are mistaken thinking that they have a "right" to their traditionally disproportionate share of the labour pie.

For the subset who are definitely not producing as much value as they are charging, the global pie will be bigger if they go do something else.

I am not trying to "discipline" the American working class, just pointing out that some pay traditions were always nonsensical and consequently destined to go the way of the dodo. Besides, people are people everywhere. If I'm going to make the leap from merely observing the situation to expressing an opinion, it would be that a bit more pay equality is probably a really good thing.
https://ourworldindata.org/grapher/distribution-of...

Jim

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