Perhaps because of the proliferation of personal finance websites focusing on early retirement, I’ve noticed a lot of talk lately about safe withdrawal rates. I think this is absolutely terrific, as financial independence is one of the single most empowering life goals one can pursue! But greater exposure also has its downsides, as core assumptions such as the portfolio options, withdrawal method, and retirement length don’t always scale the way you might think and misconceptions can quickly propagate.
Withdrawal rates are an intellectual passion of mine, and I’m always looking for opportunities to contribute to the conversation. And with the recent boon in global portfolio data, I’m finally able to address one of the biggest questions that I’m starting to see more frequently these days.
Does the 4% rule apply outside of the United States?
You never quite know what the reception will be like when you post data into the internet void, but I wanted to thank everybody that has taken the time to contact me regarding the latest global site update. Your feedback and encouragement are valuable and extremely appreciated!
Judging from the number of Merriman fans I’ve heard from in the last few weeks, it’s clear that a few assets like international small and value are quite a bit more popular than perhaps I previously understood. I definitely got the message, and while it took a bit longer to assemble the right type of data that I can personally vouch for, I’m happy to report that the Merriman Ultimate is back. And it marks the return of several assets as well — World Small and World Value.
Investors have a real knack for over-thinking things. There are those who imagine themselves as master traders controlling hundreds of variables at once like rocket scientists or professional sound mixers and squeezing out every last decimal of performance. And of course there are inexperienced types who also imagine investing works like that but who lack the confidence to even start learning. Personally I believe this complexity myth is disruptive to the well-being of both sets of people, and nowhere do I see this more than in the simplest of investing topics — cash.
I remember my mom used to say that she knew that my brother was up to something not when he was loud, but when he was silent. I guess somewhere along the line I must have picked up that family characteristic, as my recent bout of less-frequent posting has been masking a crazy amount of activity behind the scenes.
Ever since I first launched Portfolio Charts I’ve been critically aware of the distinctive United States focus of the site and, to be honest, of most investing discussions in general. The single most common request I’ve received is to add tools for investors around the world, and considering the glaring hole in international investing data out there I totally understand the desire. But that absence of data is both an opportunity and a roadblock, and making good on my goal to be more than just a US resource has been a daunting task.
Well I’m pretty persistent when I set my mind to something, and I’ve been completely immersed in this project for the last few months. New data sources, entire new fund models, portfolio updates, asset juggling, calculator modifications — it seems that every time I thought I had it all figured out I found a new project that opened up. Today I’m happy to announce that the long hours have finally paid off, and I’m really excited to share the results.
Bring out your loonies and shake your pounds — Portfolio Charts is going global!
If you’ve ever built a motorcycle from scratch, you can appreciate how the process is nothing like an IKEA instruction manual. Getting the final product just the way you like it is a journey that takes time and often requires seeking out new information and components at various steps along the way. But the reward of squeezing out those extra few horsepower or getting the ride just the way you like it is very high, and well worth the extra effort over simply buying the easy option off the dealer lot.
While mechanical engineering is my background, these days I spend a lot more time playing with financial data than nuts and bolts. But the fundamental thought process is still the same. I like to think of the site and all of the underlying calculations as my own intellectual garage where I can try out new ideas, and I’m always looking for opportunities for improvement.
I’m always on the lookout for ways to improve the tools on Portfolio Charts, and Siamond really came through with his latest update to the Simba spreadsheet. Buried in the heaps of interesting returns data is something really cool — direct calculations for safe and perpetual spending rates for a given investing period. Based on an equation from a Morningstar white paper, they are particularly elegant compared to my old method and allow me to significantly improve the speed and stability of the Withdrawal Rates calculator. And by doing so they open up a great deal of additional data that was previously too laborious to manage.
Well I’m a sucker for new data, and in the process of updating the calculator mechanics behind the scenes I took the opportunity to revisit an old question I’ve been wrestling with for a while.
How do you calculate a 40-year withdrawal rate when the worst start date for a particular portfolio was less than 40 years ago?
Perhaps you’ve noticed the tag line for Portfolio Charts:
a picture is worth a thousand calculations
While obviously a play on words to a common phrase that figuratively captures the descriptive power of images, some may not be aware that in the context of the site it is actually quite literal. Lots and lots of calculations go into every image, and I thought it might be fun to illustrate just how deep the rabbit hole goes.
I once knew a guy who was really into woodworking. One of the more fascinating things about him was that he not only made his own furniture but also was quite proud of his collection of hand-made woodworking tools. I once asked him why he preferred those tools to mass-produced alternatives. Among several reasons, “They do what I want”.
Some casual investors may wonder why I spend so much time investigating things like modeling mid caps and figuring out how to measure the error of older international bond data in backtesting calculations. While I certainly find this kind of information intellectually interesting, I admit that it sometimes becomes a chore and I can see why most people steer clear. The upside to all the groundwork, however, is that it expands my collection of tools and allows me to do what I want — explore interesting portfolios previously off limits simply due to lack of data.
Like, for example, the 7Twelve Portfolio.
I don’t know about you, but in my neck of the woods the weather has been absolutely beautiful lately and unseasonably warm for a February day. The sunny days have made me start to think ahead to the garden in my back yard and how I might want to improve it this year. Some of that will require a bit of cleanup, and some is about finding new plants to complement what did well last year. I don’t naturally have a green thumb, but I’ve found that persistence is a virtue. Every year the garden is a little better than before.
In that same spirit, as part of the necessary site data cultivation effort I just finished updating the Stock Index Calculator with new data.
In the late first century, a Latin poet named Juvenal described something thought to be unlikely as “a rare bird in the lands and very much like a black swan”. At the time, black swans were thought to not exist at all and the idea was preposterous. The clever turn of phrase was both memorable and descriptive, and by the 16th century “black swan” was a common expression in London to describe the idea of impossibility. Of course there was a looming problem with this saying, and in 1697 Dutch explorers discovered that black swans really do exist in western Australia. What once was used to describe something impossible quickly changed meaning to connote ideas thought to be impossible that are later discovered to be real.