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SWR and Valuations
johndcraig 11-15-2005, 11:48 AM | Post #159734 | 
Recently Rob has generated much discussion of SWR. In earlier threads there has been much discussion of market valuations ala Bernstein's 4 Pillars book. There appear to be two opposing factions.

On the one hand is the "keep in simple" group whose principal proponents might be our latest authors, Mel, Taylor, and Michael. The main element of this approach is that, in the long run, nothing changes so, for example, 4% SWR estimates are the best to use because they have been shown to be safe in the past. Likewise, they assert that market valuations should never enter into determinations of assets allocations, because current market valuations are not relevant in the long run. Having enough income in retirement is a very serious subject, even possibly panic inducing to some that are relying on the 4% SWR and who are told that under today's valuations this may be overly optimistic. Many are very comfortable with the assurances of the "keep it simple" group and resent anyone suggesting otherwise.

On the other hand, we have those who say that current market valuations do matter, and your chances of success using a 4% SWR are not the same at the peak of a bubble (or today) as they are at other times. Implicit here is that when planning asset allocations, don't expect a continuation of the historical 7% equity real returns. Rob is of this view and he cites several others, including Bernstein, who agree. As has often been discussed, once one concludes that current market valuations matter, it is not only SWRs that are affected. Those building for retirement must also consider how overall market valuations might affect asset allocations, i.e., most would consider adjusting the equity fixed mix if their estimate of equity real returns changed from the historical 7% to 1%.

The "keep it simple everything evens out in the long run" approach is comforting and easy to follow, but personally, I think it a mistake to ignore Bernstein and the many other reputable authors who believe otherwise when planning for retirement.


Originally posted in thread: 45233
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