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CAPE-Based SWR Results

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Diver4242
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When I use tools like the Early Retirement Now safe withdrawal spreadsheet to look at various scenarios, the results for CAPE >= 20 are always far worse than CAPE <=10 or CAPE >= 30. Why is that middle range so much worse? Because it's a bubble in the making, whereas >= 30 may be a bubble about to burst?

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earlyretirementnow.com
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Sometimes the 20-30 range can be worse than the 30+ range if your specific situation created worse results during the mid-60s than the 1929 peak.

Hard to understand why the <20 is doing worse than the 20-30 range. What's your asset allocation %?

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Diver4242
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@earlyretirementnowcom It's 64/32/4, stocks future at 8%, bonds 4%, cash 2%, retirement horizon 420 months, 5% final value target. Cape >20 SWR shoots up at a 45 degree angle after 3.5%. Cape >30 shoots up almost straight at 4.25%. I'll attach a screenshot.

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earlyretirementnow.com
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@diver4242  Strange. How do the supplemental cash flows look like?

Also, minor issue: Never use 8%/4%/2% as future returns. These are REAL, inflation-adjusted figures. You don't want to use future returns that are significantly higher than historical!

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Diver4242
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Is it because of limited data with CAPE >30? We've only got Black Tuesday, 1999, and (gulp) today at 37+. In the SWR chart, CAPE >20 and CAPE >30 intersect at 4.5%, at which time CAPE >30 shoots up beyond CAPE >20, but I'd expect it to have a lower SWR for all rates.

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earlyretirementnow.com
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@diver4242 Yes, there were only 3 times where the CAPE was >30.

I'm more concerned why the CAPE<20 looks so pessimistic.

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Diver4242
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@earlyretirementnowcom I created a fresh copy using the newest version of the Google sheet. I only changed the AA to 64/32/4, then when I changed the retirement horizon from 720 to 420 is when I saw the dramatic diversion between CAPE >20 and CAPE >30. So it's something to do with that.

Also here's an article that gives some context and cautions to using CAPE https://www.lynalden.com/shiller-pe-cape-ratio/

Thanks for your help! Bill

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earlyretirementnow.com
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@diver4242  Yeah, I'm familiar with the CAPE.

Hard to gauge what is wrong. It likely has to do with your supplemental cash flows.

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Diver4242
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@earlyretirementnowcom I don't have any supplemental cash flows. I just created a copy of your sheet, changed the AA to 64/32/4 and the horizon from 720 to 420, and saw this CAPE problem happen. Do you know why?

Thanks Karsten! 

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earlyretirementnow.com
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@diver4242  In the sheet there are some supplemental CFs already prefilled as examples for Social Security (look in the rows far below). Are they still there or are all supplemental CFs zero?

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Diver4242
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@earlyretirementnowcom Ah, thanks Karsten. I didn't scroll down enough to see those. With the supplemental income taken out, CAPE 20 and CAPE 30 are the same until 3.25% SWR, then CAPE 20 is worse until they converge again at about 3.6% SWR, where CAPE 30 gets far worse.

But then when I change the retirement horizon from 720 to 420, I see the same anomaly as before - CAPE 20 is much worse than CAPE 30 until they converge around 4.2% SWR.

So it's something to do with that. Thanks for your help! Bill

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earlyretirementnow.com
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@diver4242

I looked into this more and determined the following:

There were 59 months in the sample with CAPE>30. 3 around the Great Depression and the rest around the Dot-Com bust. Not counting the 2020/21 values because they are not considered as retirement starting dates in the sample.

Around the Dot-Com bust, the really bad SWR only materialize for a select few months (Aug/Sep 2000), while some of the other months had a CAPE>30 but a not so awful SWR. This causes the relatively low failure rate of the 4% Rule conditional on CAPE>30. Given that we have so few observations and they are all concentrated around only two market peaks, use this with extreme caution! 

I will take out that column with the CAPE>30 for that reason! Instead, I calculate the stats for CAPE>20 and SPX at all-time-high.

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Diver4242
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@earlyretirementnowcom Fascinating! Thank you, and that sounds like a good blog topic 🙂

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earlyretirementnow.com
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@diver4242 I will certainly mention that issue in the next SWR-themed post. 

Thanks for bringing this up! You're the best! 🙂

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Ralf
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 Ralf
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Hallo Forum, Hallo ERN,

ich habe hier einen interessanten Artikel gefunden.

https://www.project-syndicate.org/commentary/making-sense-of-soaring-stock-prices-by-robert-j-shiller-et-al-2020-11/germance Black and Farouk Jivraj - Project Syndicate (project-syndicate.org)

Kann diese herangehensweise in der Cape Berechnung deiner

" Safe Withdrawal Rate Serie" ev. eine signifikante Rolle spielen?

 

LG

Ralf

 

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earlyretirementnow.com
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@ralf Yes. Almost from the beginning, I've used the Shiller CAPE to condition the SWRs and failure probabilities, see Parts 3 and 18.

What Shiller says here, "high CAPE is less worrisome if interest rates are also low", may alleviate some of the worries about an impending stock market crash. But it actually makes the current environment more dangerous in the SWR context. Both parts of your portfolio are set up for lenient returns in the next few years. 

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