Tag: safe withdrawal rate

How to “Lie” with Personal Finance – Part 3: Diversification

December 10, 2025 – Welcome to another post on the ERN blog. This is the third installment in the “How to Lie with Personal Finance” series (please also check out Parts 1 and 2). As always, this is not an instruction manual for deception, but precisely the opposite: it points out the misunderstandings circulating in personal finance. Think of it as an homage to the classic book “How to Lie with Statistics.” On the program today are the lies and misunderstandings surrounding diversification. Don’t get me wrong, I worked in finance, math, and statistics long enough to appreciate the beauty of diversification. But diversification seems to be one of the more misunderstood and misrepresented concepts in the personal finance world. I want to highlight some of those misunderstandings in today’s post.

Let’s get started…

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Can we increase the Safe Withdrawal Rate with Momentum/Trend-Following? – SWR Series Part 63

November 12, 2025 – Hello, readers! Welcome to another installment of the Safe Withdrawal Rate Series. Please see this landing page for an introduction to the Series and a summary of all the other parts so far. After a long hiatus from writing due to my busy travel schedule during the summer and lots of other commitments, I’ve found my groove again and put together something that has been on my mind for many years: Is there an asset allocation strategy that could have improved historical safe withdrawal rates? Specifically, could we devise an asset allocation strategy that shifts weights between different asset classes in a way to improve investment results? Of course, that’s easier said than done, but there are some interesting ideas out there. One such approach is to tactically shift asset class weights based on asset return momentum. Some people also refer to this flavor as “Trend-Following.” If you want to sound really techy and fancy, you’d also call this “Tactical Asset Allocation” (TAA), “Managed Futures,” or “Commodity Trading Advisers” (CTA) strategies; however, these three terms often encompass many other dynamic asset allocation strategies, not just momentum.

In any case, maybe a momentum strategy can help us avoid some of the worst historical asset market disasters if we could sell equities early enough during a bear market. How much Sequence Risk could we eliminate? By how much can we raise our safe withdrawal rate if we could have reliably avoided some of the worst historical asset market disasters? Let’s take a look..

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Can we increase the Safe Withdrawal Rate with Small-Cap Value Stocks? – SWR Series Part 62

June 2, 2025 – Welcome to another installment in my Safe Withdrawal Series, please check the landing page for all posts so far. Today’s topic is about Small-Cap Value (SCV) stocks and whether they should have a prominent role in retirement portfolios. Some financial experts recommend adding Small-Cap Value to your retirement portfolio, which will miraculously and automatically increase your safe withdrawal rate from 4% to 5% or even 5.5%.

In today’s post, I first would like to present some simulations using historical data. Those simulation results look pretty impressive. Thus, investors in 1926 who had somehow been aware of the Fama-French research, published almost 70 years later (maybe through time travel!?), could have done remarkably well.

Of course, if you are familiar with my blog, you will know that I am skeptical of SCV. I’ve written two posts, one in 2019 and one last year, where I outline my main concern: the Small-Cap Value engine that generated extra returns worth several percentage points between 1926 and about 2006 started sputtering about twenty years ago, and it’s unlikely that now when everybody is aware of SCV, we will repeat those impressive investing results so easily. Thus, I also want to provide some simulations that factor in more realistic small stock and value premia going forward. Alas, once we scale back those factors’ return expectations, your retirement portfolio will have very little to gain from small-cap value stocks.

Let’s take a look…

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Why the Wheel Strategy Doesn’t Work – Options Series Part 12

September 17, 2024 – Welcome to another installment of my Options Trading Series. Please click here for the Options Landing Page for more details about the strategy. People frequently ask me how I deal with losses when I trade my options strategy. My approach is that a loss is water under the bridge, and I run the same strategy going forward, albeit with a slightly smaller account size. I’ve been trading my put options strategy since 2011, and this approach has served me well in several significant equity drawdowns, most recently in the 2022 bear market.

However, some of the options traders who have found my blog over the years must be big fans of the so-called “Wheel Strategy” (or “Options Wheel” or other related terms) and ask me all the time if it wouldn’t be better to take possession of the underlying, and then sell covered calls until I recover the loss. This strategy is often marketed as a great risk management tool and a surefire way to claw back losses.

I’ve previously dismissed this idea and given short and curt answers. But since the issue keeps coming up, I want to publish a more detailed post explaining why I don’t think the Wheel Strategy holds up to all the hype on the internet. Let’s take a look…

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Safety First – SWR Series Part 61

May 16, 2024 – Welcome to another Safe Withdrawal Rate Series installment. Please see the landing page of the series for a guide to all parts so far. In Part 60, dealing with the “Die With Zero” idea, I mentioned working on an upcoming post about the “Safety First” approach, and I finally got around to writing that post. What is Safety First? It involves using asset allocations different from those in the Trinity Study or my SWR Toolbox (see Part 28). For example, we could use Treasury Inflation-Protected Securities (TIPS) as a default-free and CPI-hedged investment option. However, TIPS are no hedge against longevity risk. An annuity hedges against longevity risk; though the most common annuity option, a single premium immediate annuity (SPIA), is usually not CPI-adjusted. Also, for the longest time, low interest rates rendered the Safety First approach all but useless because neither TIPS ladders nor annuities generated enough income for a comfortable retirement. You would have been better off taking your chances with the volatility of a 60/40 portfolio.

In other words, there is no free lunch. You don’t get peace of mind for free. Rather, you likely pay a steep price for that safety by giving up most, if not all, of your portfolio upside and/or bequest potential. However, since interest rates started rising again in 2022, the entire fixed-income interest rate landscape looks more attractive now. Could this be the time to reconsider Safety First? Let’s take a look…

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100% Stocks for the Long Run?

February 12, 2024 – Last week, I wrote about how equities historically outperformed bonds by a comfortable margin. So, the principle of “stocks for the long run” is still valid. Does that mean a portfolio with 100% stocks is a good long-term strategy? That’s a recommendation from another finance research paper that’s gotten a lot of publicity lately. Three finance professors claim that a 100% stocks portfolio, 50% domestic and 50% international stocks, would have consistently outperformed all other conventional wisdom asset allocations, e.g., 60/40, glidepaths in target date funds, etc. Quite a sweeping claim! They claim they have the empirical evidence to prove it.

I have my doubts, though. Let’s take a look…

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Stocks are STILL a great long-run investment!

February 5, 2024 – Two recent papers in the personal finance area have caused enough of a stir that I’ve gotten numerous requests for comment. I noticed that if I compile all my notes, calculations, simulations, and replies, I already have more than half of a new blog post. So, today I would like to share my results with my other readers who might also wonder what to make of those new research ideas. The first paper claims that the famous “Stocks for the Long Run” mantra is all wrong because stocks don’t outperform bonds as reliably as Jeremy Siegel and many prominent finance pundits claim. The second paper effectively claims the opposite, namely that a 100% equity portfolio, half domestic and half international stocks, handily beats any bond portfolio and all diversified stock/bond portfolios, including life-cycle, i.e., target date funds. Thus, the authors claim they have upended decades of personal finance conventional wisdom on stock/bond allocations, diversification, and target date fund glide paths.

Well, isn’t that ironic; both papers can’t be right! So, which one is right? Or are they both wrong, and conventional wisdom prevails? I started this post and wanted to comment on both papers in one single post but then ran out of space. So, I had to split my material into two posts. Today, I share my thoughts on the first paper and on whether stocks are still a good long-run investment in light of the new data. But stay tuned for the follow-up post, likely later this week or early next week!

Let’s take a look…

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How Crazy is Dave Ramsey’s 8% Withdrawal Rate Recommendation?

November 12, 2023 – If I wanted to comment on every piece of bad advice in the personal finance community, my quiet, relaxed early retirement would be busier than the corporate career I left in 2018. So, I usually stay out of the daily Twitter/X spats. Last week, though, an incident caught my attention, and it was egregious enough that I weighed in. In a recent Dave Ramsey show (original video here, starting at the 1:13:50 mark, Twitter discussion here), Dave doubled down on his recommendation of the 8% safe withdrawal rate in retirement, calculated as 12% expected equity returns minus 4% inflation (his numbers, not mine – more on that later). And several people pinged me and wanted me to comment. Safe Withdrawal Rates are my wheelhouse, given that I wrote a 60-part series looking at the topic from almost every angle I can think of. So here is my analysis, more detailed than I could do in a tweet: Don’t use a 8% Withdrawal Rate! That recommendation is crazy in more than one way. Let’s see why…

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How useful is the “Die With Zero” retirement approach? – SWR Series Part 60

October 6, 2023 – There’s been a lot of chatter about the Bill Perkins book “Die With Zero” and its approach to life and retirement planning. Most recently, just yesterday on the awesome Accidentally Retired blog. After several readers asked me about my views on the “Die With Zero” idea, I finally relented and decided to write a piece in my Safe Withdrawal Rate Series on the topic.

I’ll briefly describe the areas where I agree with Perkins. But then I also go through all of the fallacies in this approach. Let’s take a look…

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Social Security Timing – SWR Series Part 59

September 5, 2023 – Welcome back to a new blog post in the Safe Withdrawal Rate Series! It’s been a while! So long that some folks were wondering already if I’m all right. Nothing to worry about; we just had a busy travel schedule, spending most of our summer in Europe. First Italy, Switzerland, Austria, and Germany. Then, a cruise through the Baltic Sea from Sweden to Finland, Estonia, Latvia, Poland, Germany again, and Denmark. But I’m back in business now with a fascinating retirement topic dealing with Social Security timing: What are the pros and cons of deferring Social Security? If we set aside the ignorant drivel like “you get an 8% return by delaying benefits for a year” and look for more serious research, we can find a lot of exciting work studying this tradeoff. Earlier this year, in Part 56, I proposed my actuarial tool for measuring the pros and cons of different Social Security strategies, factoring in the NPV/time-value of money consideration and survival probabilities. A fellow blogger, Engineering Your FI, has done exciting work studying this tradeoff using net present value (NPV) calculations. And Open Social Security is a neat toolkit for optimizing joint benefits-claiming strategies.

But those calculations are all outside of a comprehensive Safe Withdrawal Rate analysis. How does Social Security timing interact with Sequence Risk? For example, can it be optimal to claim as early as possible to prevent withdrawing too much from your equity portfolio during a downturn early in retirement? In other words, if you’re interested in maximizing your failsafe withdrawal rate, you may feel tempted to pick a potentially suboptimal strategy from an NPV point of view. Sure, you underperform in an NPV sense on average if you claim early. But hedging against the worst-case scenarios may be worth that sacrifice.

Let’s take a look…

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