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Barrons, " What’s a ‘Safe’ Savings Withdrawal Rate? It May Be More Than You Think."

https://www.msn.com/en-us/money/other/what-s-a-saf...

“Bengen’s methodology assumes an allocation of 55% stocks, 40% bonds, and 5% cash.”
4.7% SWR for 30 years.

Quite different from Buffett’s instructions to his trustee.

“ Quite different from Buffett’s instructions to his trustee.“ I wonder if Buffett has updated his thinking with respect to 90 percent spy? I bet he would say equal weighted spy now or a high quality stock fund yielding about 4 percent?

“ Quite different from Buffett’s instructions to his trustee.“

“I wonder if Buffett has updated his thinking with respect to 90 percent spy? I bet he would say equal weighted spy now or a high quality stock fund yielding about 4 percent?”

Based on valuation? Equal weight is highly valued also. I don’t think he will have changed it. I’m sure he still believes in the USA.

And before someone says valuation isn’t a concern for his wife, in an interview he did say “anyone will do fine with that”.

And before someone says valuation isn’t a concern for his wife, in an interview he did say “anyone will do fine with that”.

I would take that comment as an approximation : )
Certainly anyone who doesn't really have enough money saved to be able to afford that strategy is not going to do fine, so it certainly doesn't work for "anyone". Admittedly it's not clear what their alternatives are, other than doing their best to pick their desired trade-off between a too-low income and running out of money too soon.

As for the 4% rule being applied to a SPY type portfolio, I wouldn't recommend doing it naively. The number of years it will last is a very strong function of valuation levels on the day of retirement. Some folks who do that will go broke because their initial estimate of the sustainable withdrawal rate will be too high, because valuations were high when they started the program. I would propose the single adjustment that the SWR be set to equal the cyclically adjusted earnings yield of the index, for example using ten years of inflation adjusted earnings. It would have been 4% at the start of 1996, and again in August 2002, but would have been only 2.1% in between at the market top in March 2000. About 2.6% at the moment. *

As a fun exercise, imagine you'd tried the traditional 4% rule with 100% Berkshire stock starting at its high valuation in June 1998.
Assuming the scheme was implemented as liquidating an inflation-adjusted 1% of your original portfolio value each quarter on the quarterly anniversary of the start date, you'd be down to 40% of your original (real) portfolio size less than 11 years later. Pretty stressful if you hope to live another 20+ years. Even with a fabulous underlying investment, a 4% rule starting with unusually high valuations can give surprising results.

It did stop dropping, you'd be up to 60% of the original real portfolio value now after 27 years.

Jim



* For those who think calculating something like CAEY (similar to the inverse of CAPE) on their retirement day is too hard:

A simpler rule, which is surprisingly good given its simplicity, is just to set your SWR equal to twice the S&P dividend yield the day you retire, and adjust that dollar amount for inflation thereafter. That would have given you 4.7% SWR for someone retiring at the start of 1996, 2.2% at the 2000 market top, and 3.4% if starting in August 2002, and 2.26% today. The key thing is that the SWR is a function of market valuation on retirement day...the calculation doesn't have to be perfect. (A slight improvement would be "twice the dividend yield you'd be seeing today if S&P dividends were still at their peak". This doesn't penalize those who retire in the middle of a "dividend recession").

Still too hard? For those who hate all SWR strategies because it's too hard to do inflation adjustments, but still hold SPY or something similar:

Every quarter, spend (a) whatever you got in dividends in the last quarter, plus (b) sell stock equal to the same amount. Dividends tend to rise with inflation, and dividend yields vary pretty well with market valuation levels, so this works surprisingly well. In terms of sophistication it's miles ahead of the recommendation that everyone use 4%.

“ And before someone says valuation isn’t a concern for his wife, in an interview he did say “anyone will do fine with that” If uncle Warren agreed with my idea, a quarterly zoom call right here where he takes 10 pre approved questions from long time partners,we might actually know his current thinking. Did Buffett know that one day the spy would be so over weight 7/8 tech stocks? I seriously doubt it.

or a high quality stock fund

I'm not sure if such a thing exists. Precious few stock funds have ever outperformed the S&P500 over the long-term. And choosing two or three funds out of tens of thousands is fraught with peril. Furthermore, sometimes when a fund outperforms the S&P for 10 or 20 or 30 years, it shuts down or stops accepting new money, or changes managers, etc.

or a high quality stock fund
...
I'm not sure if such a thing exists. Precious few stock funds have ever outperformed the S&P500 over the long-term.

Probably a good general rule of thumb.

However it's possible that a fund with a bit of a sanity filter, or tilt towards actual value (not to be confused with the "value" factor as sold which is often just slow growth), might not be such a terrible thing. The performance you want to consider is from shortly before a bubble peaks till a year after the bear that follows. Things that are painfully overvalued don't rebound all the way back. A fund that merely underweights those things wouldn't be so bad.

Berkshire is interesting in that it has a history of not only bouncing all the way back to the prior level, but also bouncing all the way back to the prior trend. It participates heavily in one of my favourite aphorisms: you make most of your money during a bear market, you just don't realize it at the time.

A scary observation that might come in handy at some point in the next few years: if there is a bear market or a real melt down, there will be a bottom. It will probably be pointy: sharp final drop, sharp rebound. After some short period of time, the bottom in retrospect will seem pretty certain: everything is bouncing like a bungee. At that point, the stuff you want to own for a few months is the worst possible crap, the stuff that sold off the worst during the melt down, often deserving it. Think: meme stocks. The stuff that you would normally want to short. Defensives during the slide, speculatives for a couple/few months after the bottom, then prudent stuff.

Jim

FNCTX beats SPY.

BRK-A beat both on CAGR.

But FCNTX had the best MaxDD, volatility, Sortino, Ulcer Index, UPI

FCNTX beat BRK coming out of the bottom on 3/2/2009

Mungofitch wrote:

a fund with a bit of a sanity filter, or tilt towards actual value (not to be confused with the "value" factor as sold which is often just slow growth), might not be such a terrible thing.

My best effort to find one of these for my LTBH money led me to SPGP, a self-describe "GARP" ("growth at reasonable prices") fund. It describes itself as seeking

"growth stocks that also contain quality and value traits, or growth at a reasonable price. Starting from the S&P 500, the underlying index selects 150 names with the highest growth score, derived from trailing 3-year earnings to price growth and sales to price growth. It then picks the top half of these based on a quality and value score, using financial leverage ratio, return on equity and earnings to price. The resulting 75 names are weighted by the growth score."

SPGP is obviously related to the emergence of "quality" funds, as distinct from "value." This seems to me a generally good development, though it will be hard to judge until the next bear/sideways market shows up.

I would be glad to know about suggested alternatives to SPGP, from those with a surer eye for such things than I have.

Baltassar

SPGP is obviously related to the emergence of "quality" funds, as distinct from "value."...


I had a peek. Seems to have some logic behind it. The performance has been good for a pretty long time, beating the S&P Equal Weight. Not proof of success, but at least a lack of proof of failure.

However, looking at the picks, it seems to me that they are looking very much at RECENT growth, perhaps too much. Delta Airlines, United Airlines, Royal Caribbean, GM, Lilly...they're on a tear now, but are not what I would call long term reliable. I would prefer to have my money in companies whose period of good growth is not THAT different from the length of time that they've been in their current line of business.

Lots of good picks, though. You could just buy them yourself. The whole list is published, with weights if you wanted them, and it's not the sort of thing you need (or even want) up to date info.
https://www.invesco.com/us/financial-products/etfs...

Jim

Interesting portfolio. Strategy seems to be to hold the best stocks in a particular industry, eg UAL (United) and DAL (Delta) rather than SAVE (Spirit Airlines) or RCL (Royal Caribbean) instead of CCL (Carnival) or NCLH (Norwegian). Credit card companies and insurance, not banks.

The industries themselves are in ho-hum and cyclical sectors. Lots of industrials and financials. I don't love it.

<<And before someone says valuation isn’t a concern for his wife, in an interview he did say “anyone will do fine with that”.>>

I would take that comment as an approximation : )
Certainly anyone who doesn't really have enough money saved to be able to afford that strategy is not going to do fine, so it certainly doesn't work for "anyone".

My comment was aimed at those who will inevitably say Buffett's wife will have so much money it doesn't matter what she invests it in.

Here's the full Buffett quote:
3/3/2014
BUFFETT: Well, I didn't lay out my whole will. There's hope for some of you who haven't been mentioned yet.
The-- but I did explain, because I laid out what I thought the average person who is not an expert on stocks should do.
And my widow will not be an expert on stocks. And- I wanna be sure she gets a decent result. She isn't gonna get a sensational result, you know? And since all my Berkshire shares are going-- to philanthropy-- the question becomes what does she do with the cash that's left to her? And I've been-- part of it goes outright, part of it goes to a trustee. But I've told the trustee to put 90% of it in an S&P 500 index fund and 10% in short-term governments. And the reason for the 10% in short-term governments is that if there's a terrible period in the market and she's withdrawing 3% or 4% a year you take it out of that instead of selling stocks at the wrong time. She'll do fine with that. And anybody will do fine with that. It's low-cost, it's in a bunch of wonderful businesses and it takes care of itself.

Here's a link to the video if interested, the snippet transcribed above starts around the 8:59 mark.
Buffett: "People react too much to short-term things" - full interview (cnbc.com)
https://buffett.cnbc.com/video/2014/03/03/buffett-...

As for the 4% rule being applied to a SPY type portfolio, I wouldn't recommend doing it naively. The number of years it will last is a very strong function of valuation levels on the day of retirement. Some folks who do that will go broke because their initial estimate of the sustainable withdrawal rate will be too high, because valuations were high when they started the program. I would propose the single adjustment that the SWR be set to equal the cyclically adjusted earnings yield of the index, for example using ten years of inflation adjusted earnings. It would have been 4% at the start of 1996, and again in August 2002, but would have been only 2.1% in between at the market top in March 2000. About 2.6% at the moment.

I agree, Buffett's strategy is not going to always work, valuation is a factor, and sequence of returns. And how do you decide when to pull from cash and when to sell some stock? But even starting in 2000 it hasn't done that badly. Our 2000 retiree naively pulling out his inflation adjusted 4% from 90% SPY/10% cash still has 4 years of withdrawals left.

https://testfol.io/?s=6JVCrp3zUoG

Advice to a trustee is very tricky. Would Buffett change it in light of SPY over-valuation? No, I don't think so. You can't change it once you're gone, after all.

Been struggling with this myself - what advice to leave for my trustee, who will not be an expert on investing? I'll be turning in my urn if they hand it over to a "helper" charging 1 or 2%.

FNCTX beats SPY.

BRK-A beat both on CAGR.

But FCNTX had the best MaxDD, volatility, Sortino, Ulcer Index, UPI

FCNTX beat BRK coming out of the bottom on 3/2/2009

Just don't hold it in a taxable account. That's where Berkshire really shines. So far, anyways.

My comment was aimed at those who will inevitably say Buffett's wife will have so much money it doesn't matter what she invests it in.

This remains emphatically my belief.

Not so much that it doesn't matter, but that the vanilla asset allocation alternative he advocates will be adequate all by itself for the "average person". The median US household retirement savings peak at something like $200k around retirement age. $20k of cash and $180k of SPY with dividends of $2k/year doesn't go far.

The suggested portfolio certainly has the advantage that it won't go bankrupt--that's pretty much impossible for an index until the US stock exchanges close. And admittedly there is no magic asset allocation that would make the insufficiency problem go away. But simply assuming that there aren't problems doesn't work. Most importantly, anyone with lesser means has to deal with longevity risk. Probably in a proactive way with some sort of pooled scheme.

As you note, his description is a bit sketchy. He makes no mention of when his widow should decide that "terrible period in the market" and use the cash, versus selling some stock, versus living on the dividends. Without nailing down that rule, having a cash pile is pointless. Certainly the will is likely to be clearer than the interview, but then it's probably not a public service to promote a half strategy.

For mere humans, these are big issues. Potentially "oops I have to live on dog food" issues.

Advice to a trustee is very tricky...
Been struggling with this myself - what advice to leave for my trustee, who will not be an expert on investing?

Indeed. I have to rewrite mine to stop advocating any US equity holdings. Naught to do with valuation levels.

Jim

Advice to a trustee is very tricky..... I'll be turning in my urn if they hand it over to a "helper" charging 1 or 2%.

I love this line. What a horrible thought. I've spent a fair bit of energy, and broken many of my vows not to give advice, trying to keep friends and family from being slowly robbed. I've seen far to many of them paying serious fees for basic indexed investments.

The whole list is published, with weights

Amazing! I had no idea. I've seen listings of top x holdings for ETFs, but never one that would let you replicate the fund.

The bias toward recent growth (they say they consider three years) may be owed to / connected with the fact that the fund rebalances every six months. I expect if they said they only checked up on themselves every year or two it would not make a good impression.

Really appreciate the comments.

Baltassar

<<Been struggling with this myself - what advice to leave for my trustee, who will not be an expert on investing?>>

Indeed. I have to rewrite mine to stop advocating any US equity holdings. Naught to do with valuation levels.

Care to share some general thoughts on what to recommend, Jim?

50% RSP / 50% Berkshire is out.

Care to share some general thoughts on what to recommend, Jim?

Best guess?
It's probably going to be a crude roll-your-own index. A big list of tickers to buy and forget until they fall out of an index.

Jim

It's probably going to be a crude roll-your-own index. A big list of tickers to buy and forget until they fall out of an index.

Yeah. I'm wary of cap-weighted indices, and though I like some otherly-weighted and selected ETFs right now, who knows if they will be around long-term.

2-3 years ago, I had my Mom’s WM people place her in 1/3 BRKB, 1/3 RSP and 1/3 QQQE as they were incentivized to place her in their own underperforming funds. This has done just fine. I should have insisted on this strategy years ago!

Today’s Whitney Tilson’s Daily has lots of discussion / recommendations along the lines of this thread….& as Jim has said, it may be worth listening/reading even though I may dislike his ubiquitous marketing presence on all the business channels & even a sports channel!

https://stansberryresearch.com/whitney-tilsons-dai...

ciao

A link in the Tilson Daily to this previous letter, “Financial advice to a recent college graduate” is an even better read & this interesting factoid….

“In their survey of millionaires, the factor that most closely correlated to whether someone was a millionaire was whether they answered "yes" to the question: "Is your spouse more frugal than you are?"


https://stansberryresearch.com/whitney-tilsons-dai...

ciao

2-3 years ago, I had my Mom’s WM people place her in 1/3 BRKB, 1/3 RSP and 1/3 QQQE as they were incentivized to place her in their own underperforming funds. This has done just fine. I should have insisted on this strategy years ago!

Since RSP started: RSP, SPY and BRK.b have all done about 11% CAGR
https://testfol.io/?s=aKLwXTXmTnN

Since QQQE started: QQQE, SPY and BRK.b have all done about 14% CAGR (RSP 12%)
https://testfol.io/?s=8ga73ObSvRC

Kinda funny, I thought.

AdrianC, easily amused.

Mid-cap trackers are still cap-weighted, but have a more even spread than the large-caps. IVOO (S&P 400) has largest holding of ~1%, compared to ~8% in the S&P500.

You could name a broker (or a shortlist)
1/3 in each of QQQ/QQQE (or some other tech thing), IVOO and VTIP
Sell some of the largest holding each year to top up the income.

SA

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