Monday, January 9, 2012

Advisor Perspectives Column 3

I'm back home in Japan now. On the flight, I read Zvi Bodie and Rachelle Taqqu's new book, Risk Less and Prosper. It's a good and important book that I'm looking forward to writing a full review about when I get a chance in the coming days.  It's also pretty short (I miscalculated how long it would take to read and found myself without any more reading material with another 6 hours left in the air). 

For now, my third column at Advisor Perspectives is available. It is, "Safe Withdrawal Rates: A Do-It-Yourself Approach." It summarizes my new January article in the Journal of Financial Planning, “Capital Market Expectations, Asset Allocation, and Safe Withdrawal Rates, but it also includes lots of new material, such as a different example to explain the approach.

I think the Figure 2 in the column (not the full research article) is quite interesting, though I only used it to make a minor point. The figure shows the average (arithmetic) real stock returns and standard deviations for stocks in 19 countries and the GDP-weighted world portfolio between 1900 and 2010. It highlights how good Americans had it. Only Australians enjoyed both higher returns and less volatility. This figure is meant to highlight how difficult it is to develop expectations for future returns.  And not only that, but the volatility of future returns is also incredibly important when thinking about safe withdrawal rates.

The column and article are about providing an approach to see how safe withdrawal rates are impacted by different assumptions, so that we it not captive to the historical data averages most commonly used it studies.