≡ Menu

Weekend reading: risky retirements

Weekend reading: risky retirements post image

What caught my eye this week.

I noticed an article in This Is Money this week featuring a reader upset that their pension hadn’t been life-styled into lower-risk assets as they’d hoped.

Instead, they wrote:

…my money remained in a fund rated moderate-high risk/high reward until March 2020.

At this point, I realised what had happened and asked for the switch to be made manually. The same month, I asked for my pension date to be moved forward five years to March 2025.

Shortly after, the stock market plummeted due to the pandemic and I am now entering retirement with a shortfall in my fund.

Judging solely on the facts presented, you can see why the reader is aggrieved.

The pension provider seems to have sent out literature describing a de-risking process that was never going to happen to this person’s fund, due to it being from some earlier vintage. Hence the confusion.

What’s more, the reader tried to take evasive action themselves but that ultimately come to naught too.

Apparently the case was investigated by the Financial Ombudsman, and the pensioner provider was not found to be accountable. I won’t second guess that ruling.

However there’s a bigger picture lesson here. It’s reminder that today’s pension freedoms so beloved by the likes of us Monevator types have come with downsides.

Not everyone wanted this job

Trying to manage a defined contribution pension – the biggest lump of money most of us will ever get near to – is daunting enough for most people when it comes to their saving and investing years.

But when it runs into the trickiest problem in finance – the switch to drawing down your pot – the risks multiply faster than you can say “who let the 47th into the war room?” 

Only a couple of years ago, the papers were writing horror stories about the dangers of life-styling pensions after the big bond rout. (The article above cites a nicely balanced one of its own from 2022).

But now global equities have wobbled, it’s understandable that some near-retirees might instead be wondering why they didn’t have a bigger safety cushion.

Unlucky for some

People underestimate how hard this conundrum is to resolve, because we want to believe in certainties.

But in my view it’s not even necessarily that the pension providers – or the investors – should be doing anything different, even though with hindsight there will always have been an optimum course to follow.

Rather, it’s that individuals are running into the maelstrom of sequence of return risk and the complexities of drawing down a pension as, well, individuals, rather than spreading the risks with others as under the defined benefit pensions of old.

We might understand some people will see their pensions plunge before retirement because they took too much risk. Shrug and say that’s on them.

Stock market crashes happen. These guys rolled snake eyes.

But, firstly, the typical person isn’t (sadly) a hyper-aware Monevator reader. And secondly, there but for the grace of God and all that.

Terribly unlucky things can happen in the stock market. Both to individuals and to entire countries and generations.

While the analogy isn’t perfect, you might as well say an overweight person should have seen their heart attack coming even while you splutter through your own deep pan pizza and play the percentages with your own arteries.

We’re not going to go back to defined benefit company pensions.

But thinking about all this, it’s easy to see a case for bigger private/pension partnership pensions – where millions of members together smooth the sequence of return risks.

The case for no-hassle annuities looks stronger these days too, as a way of simplifying drawdown.

But again, that’s because payouts are currently pretty good. If taking out annuities becomes all the rage and yet we slide back into a low-rate era again, you can guarantee that trend will overshoot the new reality.

Armed and dangerous

I sometimes wonder if we write too much about pensions, drawdowns, and so on these days. I just about remember being young, and I’m sure it’s all a bit off-putting to anyone under 40 who stumbles across Monevator, compared to if they saw an article about the fun stuff.

But this constellation of issues is why we keep returning to – or even belabouring – the subject. A little knowledge combined with a lot of responsibility for your own retirement is a dangerous thing.

We can try to do own own small part to address the knowledge deficit.

But the heavy personal responsibility part is here to stay.

Have a great weekend.

[continue reading…]

{ 0 comments }

How did Warren Buffett get rich?

There’s lots of advice on how Warren Buffett got rich

With the best will in the world, we must be nearing the final leg of Warren Buffett’s remarkable career as an investor.

We lost Buffett’s irreplaceable righthand man Charlie Munger in 2023, on the cusp of his centenary.

And at 94, Buffett cannot continue to tap dance to work forever.

Investors of all stripes will someday miss an advocate, an educator, and an inspiration.

Not to mention a titanic financial role model.

Buffett might still be the world’s richest person if he hadn’t started giving away his wealth a couple of decades ago.

Even so, he’s still worth a cool $154bn.

Who wants to be a billionaire?

Most Monevator readers will find Buffett’s generosity admirable – while being equally interested in getting the chance to be that generous ourselves.

And what really fascinates us about Buffett is that he got rich not by founding a continent-spanning supermarket chain or a globe-conquering social network, but by investing.

Can’t we do – at least a bit – of what Buffett did?

Alas it’s not so ‘simple’ as stockpicking your way onto the Forbes billionaire list.

If the devil’s greatest trick was to make the world believe he didn’t exist, then Buffett’s greatest ruse has been to make the world forget he was once a hedge fund manager.

I much admire Warren Buffett, both as a man and an investor. So don’t take my Biblical allusion too seriously.

Nevertheless, it’s remarkable how little you hear about the way Buffett’s early investing partnerships turbo-charged his wealth.

It was investing Other People’s Money via these partnerships that enabled Buffett to amass an initial warchest that he then multiplied many times over to become the world’s intermittently richest man.

Most pundits focus on how Warren Buffett got rich investing in Coca-Cola (“and you can too!”) or on how Buffett is really a businessman disguised as a stock trader, so you shouldn’t bother trying.

Academics have even sought to explain away Buffett’s market-beating achievements as a combination of factor investing and benefiting from cheap leverage.1 As if Buffett wasn’t a genius for figuring it all out decades before their backwards-looking analysis!

But regardless, the truth of how Buffett got rich lies somewhere between all these factors.

Stock picking would have made Buffett a millionaire. But his early business success in running money for other people is what enabled Buffett to become a billionaire.

Let’s take a closer look.

Secret 1: Buffett the City Slicker

Whether in best-selling biographies or the regular eulogies about his life, the fact that Buffett took a huge swathe of his partners’ gains to enrich himself is rarely mentioned.

That’s a bit like dropping the Wright Brothers from the history of flight. Or omitting Bilbo Baggins from The Lord of the Rings.

Because managing money for others is how Buffett’s wealth accumulation got its entry ticket into the major leagues.

After a precocious childhood selling newspapers and investing in his first shares when he was 11 – so far, so fitting the legend – Buffett began his professional investing career as an analyst on Wall Street.

Yes, fans of folksy Omaha – Wall Street. The infamous hive of scum and villainy!

Buffett first worked for Renaissance man and genius Ben Graham. His hero, Graham was also the biggest influence on Buffett’s investing style until Charlie Munger came along many years later.

Buffett’s initial salary was $12,000. That sounds very modest now but it is the equivalent of more than $142,000 in today’s money. Not bad for a 24-year old, even by the standards of modern trading desks.

Buffett’s high starting salary is the first aspect of his wealth accumulation that’s rarely dwelt on by stock pickers dreaming of becoming billionaires by putting £500 a month into an ISA.

On the other hand, the legend reasserts itself with the truth that Buffett did scrimp and save – and reinvested most of what he earned.

According to my thrice-read copy of The Snowball, by 1956 Buffett had amassed $174,000. He did this by compounding his teenage nest egg and his later savings with a concentrated share portfolio.

Arguably this is the closest his life story gets to what we’re told to do to emulate his success.

Buffett grew his wealth by 61% a year after going to college. And that $174,000 is equivalent to over £2m in 2025 dollars.

Secret 2: Buffett the fund manager

Buffett was a millionaire in today’s terms while still in his mid-twenties. We shouldn’t downplay that achievement.

But what laid the foundations for him to enter the ranks of the mega-rich were the private investment partnerships he next set up and ran – mostly for family and friends – between 1956 and 1969.

The terms of these partnerships varied. For the first partnership, the seven other founding partners put in $105,000. Buffett put in just $100.

Here’s his recollection of the deal, from The Snowball:

“I got half the upside above a four percent threshold and I took a quarter of the downside myself. So if I broke even, I lost money.

And my obligation to pay back losses was not limited to my capital. It was unlimited”.

Buffett felt an obligation to pay back losses partly because his early investors were the closest people in his life.

His wife’s father was one of them, for instance. His sister was another.

Halfway to Heaven

Buffett’s stipulation that would see him out of pocket if his returns fell below 4% is far removed from the typical hedge fund of today.

Some still charge a 2% management fee every year, regardless of performance.

And even the greediest hedge funds don’t claim ‘half the upside’.

For years the standard deal was 2% annual and a 20% performance fee – lower in recent times – as well as some sort of high water mark to theoretically protect investors from volatility that enriches the manager but not the customers.2

But Buffett took 50% of the upside – not 20%!

True, Buffett’s upside came only after the first 4%. Whereas most hedge funds today will take, say, 20% of anything they make (even interest on cash).

This is Warren Buffett we’re talking about here, though. He doesn’t do miserly returns for long.

Nice work if you can get it

In 1957, the three partnerships Buffett was operating gained 10%, against a market that was 8% lower.

1958 was better still. Again quoting The Snowball:

The next year the partnerships’ had risen more than 40% in value. Buffett’s fees so far from managing the partnerships, reinvested, came to $83,085.

These fees had mushroomed his initial contribution of only $700 – $100 contributed to each of the seven partnerships – into a stake worth 9.5% of the combined value of all the partnerships.

You don’t need to bust out a compound interest calculator to see how well the partnership fee structure was serving Buffett.

Sure, he needed to succeed with his stock picking to make decent returns for his partners.

But it was by leveraging other people’s money into those stock picks that Buffett made himself rich.

If Buffett had merely invested for himself the $700 that he’d put into the partnerships over those first two years, then he’d have grown it to…

…$1,078.

That’s 76-times less than what he made by investing for other people.

Gearing up his great stockpicking

My point is not that Warren Buffett isn’t a great investor.

He most certainly is one of the best – and arguably the GOAT.

Nor am I saying that Buffett was ripping off his early investors. He made most of them into multi-millionaires, and they probably never realised how much the arrangement protected their downside.

Most people care more about losing money than making it, so I believe the terms weren’t sheer avarice on Buffett’s part.

Nevertheless, it was the fees generated by his investing talent through the partnerships that made Buffett rich, not those pure stock picks themselves.

By January 1962, barely five years after he began, Buffett was a millionaire on paper, with his share of the partnerships’ assets valued at $1,025,000.3

The moral? If you want to get as rich as Warren Buffett, you don’t merely need to start early and grow old. Just investing like Buffett won’t do it, either.

Instead, to get very rich as an investor, you need to invest like Warren Buffett on other people’s behalf, and claim a good portion of the gains for yourself.

Rich folk history

Ironically perhaps, Buffett won a ten-year bet against hedge funds partly on account of their high fees.

And in recent years he has championed index funds as the best solution for everyday investors like you and me.

Once you know how well he did from high fees himself in his pre-Berkshire Hathaway years, you can’t help thinking there’s an element of ‘poacher turned gamekeeper’ to this.

(Which is certainly no reason to ignore his advice to invest passively. Quite the opposite!)

Some people have saluted how well Berkshire Hathaway has served its shareholders, compared to how most hedge fund managers milk their customers with the 2/20 structure.

The truth is more complicated. Just as Warren Buffett uses folksy analogies to make economic issues more understandable, his most ardent fans – if not the man himself – have also played us like a fiddle when it comes to seeing how he first got rich.

If Buffett was a private investor in his spare time, as per the myth – if he was a successful everyday businessman investing his excess cash, or maybe even a doctor or a teacher – then he’d very likely have become a multi-millionaire.

I doubt we would have heard of him, though.

The truth is out there

I don’t know if Warren Buffett reads Monevator (I wish…)

But since I published the first version of this article, Buffett has been less coy about his hedge fund days then he was when The Snowball was published.

For example, in publicity for a second authorised biography, Tap Dancing to Work, Buffett discussed his old partnerships with The New York Times:

Until 1969, Mr. Buffett operated a private partnership that was akin in some ways to a modern hedge fund, except the fee structure was decidedly different.

Instead of charging “2 and 20” — a 2 percent management fee and 20 percent of profits — Mr. Buffett’s investors “keep all of the annual gains up to 6 percent; above that level Buffett takes a one-quarter cut,” Ms. Loomis wrote. […]

“If you want to make a lot of money and you own a hedge fund or a private equity fund, there’s nothing like 2 and 20 and a lot of leverage,” he said over a lunch of Cobb salad.

“If I kept my partnership and owned Berkshire through that, I would have made even more money.”

Age before beautiful stock picks

Of course, getting to a ripe old age does a lot of the heavy lifting too when it comes to compounding a fortune.

As does starting early, as Morgan Housel noted back in 2017:

More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful.

But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.

$80.7 billion of Warren Buffett’s $81 billion net worth was accumulated after his 50th birthday.

Seventy-eight billion of the $81 billion came after he qualified for Social Security, in his mid-60s.

The bottom line is that it was by managing money for other people that Warren Buffett got very rich, very young.

And that early fortune gave him the capital he needed to subsequently become a billionaire, many many times over.

This article on how Warren Buffett got rich was updated in April 2025 to bring all the numbers up-to-date and to flag new developments in Buffett’s life. Comments below may refer to the previous text, so please check the dates.

  1. Using leverage means borrowing to invest. In Buffett’s case he uses the ‘float’ provided by premiums from customers of his insurance companies as cheap capital to invest. []
  2. This high water mark may prove useless in practice if a manager simply shuts down any funds that are underwater. []
  3. Around $11 million in 2025 money. []
{ 37 comments }

What’s the safe withdrawal rate danger zone?

What’s the safe withdrawal rate danger zone? post image

This is part two of a series about the safe withdrawal rate (SWR) for a portfolio in drawdown, and how to improve it.

Unfortunately I set the cause back a bit in the first part, when I showed that the UK safe withdrawal rate is quite dismal – just 3.1% for 30-year spans, versus the commonly cited and far cheerier 4% rule that’s derived from US data.

On the other hand, it’s possible to argue that all safe withdrawal rate strategies are excessively doom laden.

SWRs are founded on the historical worst-case. Normally things turn out brighter than that. Moreover 155 years of data for the 60/40 portfolio shows that the UK SWR was 4% or more some 88% of the time.

So mostly you didn’t fail if you followed the man with the moustache.

Anachronistic heuristics

The problem is your SWR is only knowable in retrospect.

Well, your heirs can know it. You’ll be past caring.

But for my part I’d like to find out if there’s a way to track retirement portfolio wellbeing in real-time.

Can we get advance notice if it’s on the path to the sunlit SWR uplands? Or if it’s plunging into the valley of death, despair, and cat food?

Just how soon can we tell whether withdrawing 4% – or whatever number – is draining our portfolio like it’s Dracula’s supper, versus doing no more damage than a flea who fancies a light snack?

Spot the dog

The way I’m going to tackle this initially is by asking what bad looks like.

Do the historical worst-cases have specific features in common? If so, this could point the way to spending more freely when your retirement dashboard isn’t ablaze with warning lights.

By the same token, if we can pinpoint the difference between a downward spiral versus everyday turbulence that doesn’t stall the engine, then we won’t have to spend all our time clutching worry-beads and praying to the investing gods.

It’d also be nice to avoid the trappings of dynamic withdrawal rates and other complications designed to preserve portfolios, if only because many people seem reluctant to use them.

Perhaps we can instead find simpler rules-of-thumb that operate on more of a pay-as-you-go basis.

Investing returns sidebar – All returns are real annualised total returns. In other words, they show the average annual return (accounting for gains and losses), are inflation-adjusted, and include the impact of dividends and interest.

The SWR haves and have nots

The chart below divides the UK’s notional SWR retirees into two camps: those that benefitted from a 4% withdrawal rate and higher, and those that, as I believe Keynes put it, “Had a ‘mare.”

Author’s own calculations. Data from JST Macrohistory1, FTSE Russell, A Millennium of Macroeconomic Data for the UK and ONS. March 2025

Team Unlucky’s SWRs fell below the 4% line. These include every retirement cohort from 1896 to 1916, bedevilled as they were by World War One and its economic aftershocks.

Then there’s the 1934 to 1940 crowd. I’m not sure what they had to complain about? World War Two wasn’t ideal, I s’pose.

But there’s more to it than that, as shown by the 1946 to ‘47 group who were sucked under too. Indeed, the UK’s most flaccid SWRs can’t simply be written off with pat reference to a couple of world wars.

1917 retirees, for example, enjoyed a bouncy 4.8% SWR – despite their golden years stretching through two global conflagrations, a pandemic, and a Great Depression.

Most surprisingly, the class of 1932 lived high on the 6.2% hog, despite the onrush of the Second World War.

Near misses

Two later cohorts skated close to disaster but didn’t quite fall through the ice.

The 1969-ers were on track for the worst result ever until they were bailed out by the wonder years of the 1980s. (1969 was also the low point for US portfolios priced in GBP, as we saw in the last article.)

1960 retirees also nearly came a cropper. They ran a similar gauntlet of stagflation, plus huge crashes in the UK stock and bond markets.

Aside from that, most of the other cohorts sit comfortably above 4% – albeit the Y2K-ers are having a nail-biter thanks to retiring on the eve of the Dotcom Crash, swiftly followed by the Global Financial Crisis, post-Covid inflation, and Lord knows what’s to come with Agent Orange at the controls.

So with that lot swept into the bucket of the SWR damned, what can they tell us about the different roads to perdition?

A bad start

Famously, sequence of returns risk is a major hazard for retirees. That is, a string of bad returns early in retirement is far more consequential than if you took the same hit in later years, with your clogs fit to pop.

Researcher Michael Kitces established that the first decade of equity real returns had the biggest impact on US safe withdrawal rates for 30-year retirements.

Kitces found that a couple of down years at the beginning of retirement actually had a fairly low correlation with SWRs – down in the vicinity of 0.28.

The average 10-year real return for equities was much more predictive: producing a 0.8 correlation with the 60/40 portfolio’s safe withdrawal rate.

The correlation then dropped to 0.45 for 30-year annualised real returns. That’s because the final years of retirement exert less influence on the overall outcome.

The upshot is you don’t have to sweat a few years of bad returns when you’re fresh out of the gate – especially if markets bounce back quite quickly, as they did after the GFC.

Across-the-pond life

However, what’s true for the US often doesn’t hold for the UK. So I performed the same test on Blighty’s data set and discovered that our danger zone is the first 15 years.

The table below shows us the correlation between real annualised returns over various time periods and 30-year UK safe withdrawal rates for 60/40 portfolios:

  Equities –Bonds– 60/40 portfolio
1 year 0.38 0.4 0.43
5 years 0.65 0.62 0.7
10 years 0.79 0.78 0.85
15 years 0.84 0.85 0.92
20 years 0.78 0.82 0.88
30 years 0.63 0.7 0.73

The UK’s track record tallies with Kitces finding that the first few years don’t tell us much about the path we’re on.

However we’ll probably have a very good idea after 15 years. A 0.92 correlation indicates that our portfolio returns during the first half of a 30-year retirement are likely to have a decisive impact upon the overall amount of spending the portfolio can support.

The first decade is highly informative, too.

And while the correlation of SWRs with the UK’s 30-year annualised return is much less by comparison, it remains high enough that the hindmost years clearly count for something.

Later on we’ll see that extreme events in the latter half of certain retirements can still deflect their course, for better or worse.

To sum up the above: A couple of bad years at the beginning of a retirement aren’t worth fretting about (unless they’re apocalyptic). However, ten to 15 years of poor returns are likely to lock you into the low SWR dungeon. If that happens then your portfolio probably won’t last unless you rein in spending.

What do we mean by poor 15-year returns?

Exactly what kind of lacklustre 15-year return is associated with which bleak SWR?

This scatter plot graph enables us to pick out the patterns:

The WOAT2 SWRs (red lozenge, ranging from 2.85 to 3%) are associated with 15-year annualised returns of 0% to -6%. So if you average more than 0% per year (inflation-adjusted) in the first half of your retirement, then you’re probably not going to scrape the depths in the endgame.

Next, let’s look at the same chart again, but refocus our red lozenge to take in almost the entire negative return cluster:

This view suggests that if your initial 15-year returns are negative then you can pretty much rule out a 4% SWR. Indeed, you could be heading into horrible history territory.

There is one exception. The green arrow points to the 4.15% SWR achieved by the class of 1960. They got that despite chalking up grim -3.2% 15-year real returns.

Stick around and I’ll show you under the bonnet of that journey in the next post in the series. (Consider that a warning!)

Suffice to say, I wouldn’t bank on that miracle happening again if I was clocking -3% 15-year returns.

Alright, let’s take a final goosey at the scatter plot. This time the red lozenge of fate falls upon what you could have won with weak positive returns.

Scraping a 1-2% real return puts you in a wide band where the SWR outcome is likely to lie somewhere between 3% and north of 5%.

Lastly, bagging the 4% long-term average return for a 60/40 portfolio (green lozenge of destiny) is associated with a 4.5 to 5.5% SWR.

Incidentally, the 15-year annualised return for Year 2000 60/40 retirees was 3.2%. The trendline suggests that – if they’d been doing this analysis in 2015 – they could have hoped for a 5% SWR while fearing the worst downside result of just over 4%. By my reckoning, this cohort is on course for a 4.5% SWR, assuming they average a 0% return over their remaining five years to 2030.

The story so far…

Our scatter plot provides some guidance as to the historical dispersion of outcomes.

Although it must come with the usual tug of the forelock to uncertainty.

History does not span all there is to know. For example, all bets are off if World War Three rips humanity a new one tomorrow.

SWR Cluedo

Let’s now chug on our thinking pipe and line up our main suspects in the mysterious case of the battered SWR.

Whodunnit? Was it inflation? In the grocery store? With the shocking price of bacon?

Here’s the movements of 15-year average inflation and SWRs during the periods in question:

We have our culprit, officer!

Clearly the worst SWRs go hand-in-hand with high average inflation (orange line). While falling inflation corresponds to the SWR heights.

Not so fast! It’s curious that peak inflation is not associated with the most calamitous SWRs. And some cohorts scored amazing SWRs while inflation was doing its worst. For example, 1977 delivered a 9.8% SWR despite tussling with 7.5% average inflation for the first 15-years of its cycle.

High inflation is a trouble-maker then, but it doesn’t act alone.

Let’s layer on 15-year annualised real returns in blue:

This chart gives us a better picture. Especially when you train your eyes on the blue plunges below the grey 0% returns line.

The slump associated with World War One3 is by far the deepest.

World War Two is relatively mild by comparison. Hence only seven cohorts slipped below the 4% SWR line (1934-1940) whereas fully 21 did under the malign influence of the First World War (cohorts 1896-1916).

Still, we can also see that the 1946 to 1947 brigade fell below par despite positive returns. Whereas 1960 kept its nose above water while coping with a sharp below-zero dive.

A tale of two retirements 

Those latter results help show that the second half of the portfolio’s lifespan does matter.

Both the late Forties crew and the Sixties swingers were in trouble by the end of the first 15 years – with the 1960-types looking slightly more precarious. But then the 1960 cohort enjoyed a double-digit romp to the finish line. Essentially, they were bailed out by 13% miracle-gro returns for the last 15 years. (Still, even then they only managed a 4.2% SWR.)

In contrast the fate of the Forties mob was sealed by mediocre returns in the 1960s (2.6% annualised). The crash of 1973-74 finished them off but they were already on life support.

What do I take from that? That the 1960 journey is the exception that proves the rule. They needed a Hail Mary to sustain a passable SWR and they got it.

But if your portfolio was looking similarly anaemic after 15 years, it’d be more rational to assume the 1946-47 outcome and cut back your spending accordingly. (Or to think about annuitising the bulk of your portfolio, or to take out a reverse mortgage, depending on your options.)

Looking for a sign

Behind-the-scenes of this post, I’ve spent some time delving into the individual paths taken by the UK’s many retirement runs.

I’ve found it tremendously helpful to look beyond the standard worst-case SWR scenario in search of common signs of distress that anyone could monitor to avoid spending down their portfolio too quickly.

And I think I’ve found some useful pointers! I’ll share those in the next post.

Take it steady,

The Accumulator

Bonus material: Why use the UK’s safe withdrawal rate history?

It’s important to recognise that neither the UK, nor the US, nor the World is locked onto any particular safe withdrawal rate path.

As I alluded to earlier, if we nuke ourselves to Kingdom Come then the global SWR goes to zero.

That’s that. Do not pass the Great Filter. Do not collect $40,000.

But let’s be positive. Let’s assume we don’t face a future being bent into paper clips by our AI overlords. Then we’re left with a range of possibilities which the past can help us scope.

The problem with the US safe withdrawal rate is that it looks fortuitous. It’s based on a timeline in which America won the 20th Century.

The World portfolio fails to match the US SWR, as does every other country except Denmark. (See Wade Pfau’s paper: Does International Diversification Improve Safe Withdrawal Rates?)

Huh? Tiny Denmark? Conquered by Nazi Germany Denmark? Yep, and South Africa was Top Five, beating out many more powerful and economically successful countries.

Explain that. 

More significantly, Pfau found that no country – not even the US – could replicate William Bengen’s original 4% SWR finding.

Why? Because Bengen, the author of the 4% rule, relied upon a dataset containing better US historical returns than the one used by Pfau. Both archives are well credentialed. Both offer a version of the past. But the differences between the numbers reveal there’s nothing inevitable about the 4% rule – even if you invest solely in the US.

Should US assets exhibit a moderately worse sequence of returns in the years ahead than they did in the past, then future American investors may have to anchor on a 3% rule – or something nastier still.

That’s a plausible outcome. Hence retirement researchers have turned to international datasets and Monte Carlo studies to challenge the assumptions embedded in the US’s exceptional past returns. (I’ve previously used one such database to determine a World SWR of 3.5%.)

What’s interesting about the UK’s SWR history4 is that it enables us to envisage a future which is a little worse than the American past. One of geopolitical decline. One where they confront military catastrophe but avoid utter disaster. One in which inflation is stickier than the US has previously experienced.

It’s not hard to imagine.

The UK safe withdrawal rate is an antidote to excessive optimism. It helps us avoid clinging to the singular path taken by the US, as if inferior outcomes are not possible.

Aiming for a 3% SWR, say, gives you greater downside protection – or it can be the prompt for serious research into how to improve your withdrawal rate from that baseline. 

  1. Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. The Rate of Return on Everything, 1870–2015. Quarterly Journal of Economics, 134(3), 1225-1298. []
  2. Worst Of All-Time! []
  3. The blue line shows you the average returns for the 15-years beyond each data point on the chart. []
  4. The UK was ranked 8th out of 20 countries in Pfau’s paper. []
{ 66 comments }
Weekend Reading logo

What caught my eye this week.

Going on the comments I’ve heard and read this week, many stock market types have flopped into the Easter Weekend like a late-night drunk who only makes it as far as the living room sofa.

Relief! Sweet relief.

Of course, UK investors may have a four-day break from seeing their portfolios cosplay a fruit machine – US investors just three – but Trumpomania no more respects public holidays than it does anything else.

Today’s plot lines include Trump scapegoating US Federal Reserve chairman Jerome Powell and going after the New York attorney general, more fights over wartime-law deportations, the administration threatening to walk away from Ukraine again, and a new front opened up against Harvard.

Please do read my (quarantined) political links every week if you’re still complacent and want to learn more.

Diversified distractions

Markets are certainly not complacent – at least not about the economic engine of Trump’s project – as the whipsaw volatility and wholesale dumping of US assets in recent weeks has proved.

But there’s been a silver lining for those of us with vaguely diversified portfolios.

Which is that for the first time in a long time, we don’t feel like chumps for owning anything other than US stocks – or even just the Magnificent Seven tech giants.

It’s been a long time coming. But in a typically top-drawer post this week, Nick Maggiulli described such diversification as ‘the price of peace’, even while acknowledging that:

…when you have the best portfolio possible for a given time period […], you should still expect to lose money about once every four years (on average).

That might seem crazy but it’s true.

But underperformance and occasionally losing money are just the tip of the iceberg.

The real mental challenge of holding a diversified portfolio is watching some of your asset classes underperform almost every year.

Meanwhile Adam Grossman at Humble Dollar noted that though not everyone has celebrated diversification, well, not everyone has the investing chops of Warren Buffett and Charlie Munger.

For the rest of us:

What does it mean to build a sufficiently diversified portfolio?

For starters, it should be diversified along more than one dimension. Nearly every investor, in my view, should own a combination of stocks and bonds. In addition, holding cash can help carry a portfolio through years like 2022, when both stocks and bonds were down.

Next, look to diversify within bonds and within stocks.

Be sure to check out too this great post from Portfolio Charts on what has worked best before in the biggest drawdowns.

We don’t study such data to divine the perfect asset mix to survive a bear market. That’s an impossible goal.

No, the purpose of looking back is to understand why we need to try in order to best face the future.

Strategy versus tactics

The other major part of getting through a bear market is continuing to hold. Or perhaps to buy more.

This has always taken fortitude. But in recent years it’s also taken quick reflexes.

Okay, I guess 2022’s downturn dragged on a bit unless you owned a lot of US technology stocks.

But the Covid crash was over in a few weeks. And we’ve already bounced back a bit from the initial Trump tariff tantrum, though who knows for how long:

Note again too the benefits of diversification – for the UK, so far tis but a flesh wound.

Whether you should be holding, buying opportunistically, or even trimming risk if you’ve really got the wobbles will depend on your age, risk tolerance, and portfolio mix, as well as your overall financial goals.

In other words, it’s personal. That’s why you need a personal plan, not predictions or platitudes.

But here’s some more of this week’s buy-the-dip reading to get you thinking:

Have a great weekend all!

[continue reading…]

{ 32 comments }