When to take a "snapshot"?
I tried to ask this question before but wasn't clear enough about what I was asking. So here it is again.
Over the last 12 months, my investments have varied +/- 20% depending on the market fluctuations at any point in time. And I know people I work with who have seen even larger fluctuations (mostly downwards) over the same period.
My question: At what point does one put a stake in the ground and use ESPLANNER and its Monte Carlo simulations to determine spending level? Depending on the day I chose - and the corresponding value of my investable assets - during the last year (or even the last 6 months), the ESPLANNER Monte Carlo calculated spending level would vary considerably. At least by 20%. This makes me very nervous when I consider whether I could plan on spending at the lower calculated limit.
Thanks.
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kiwiste at gmail.com wrote:Over the last 12 months, my investments have varied +/- 20% depending on the market fluctuations at any point in time. And I know people I work with who have seen even larger fluctuations (mostly downwards) over the same period.
My question: At what point does one put a stake in the ground and use ESPLANNER and its Monte Carlo simulations to determine spending level? Depending on the day I chose - and the corresponding value of my investable assets - during the last year (or even the last 6 months), the ESPLANNER Monte Carlo calculated spending level would vary considerably. At least by 20%. This makes me very nervous when I consider whether I could plan on spending at the lower calculated limit.
Thanks.
Unfortunately, this isn't one that we can answer technically, so I'll trot out the economist's answer, "it depends". They're right in this case, it depends on what your research tells you will be happening over a long enough time frame to make ESPlanner the tool to use.
So, you're going to use a different set of economic assumptions if you believe that this recession (technical definition not-withstanding) is going to get better (slowly/quickly), get worse (slowly/quickly), etc. My personal guess is that the Bush Administration along with the out of control Laissez-faire capitalists have screwed the pooch badly enough to pretty much hose the economy so I don't expect things to get better fast, but I have no clue what the ultimate bottom point will be or how long it will take to get there before the turn-around. My guess is that it will be on the order of the big correction back in the late 80s but much longer in duration.
Now, on to the question that I can answer. Given my personal bias (that things are going to get much worse over time and get better slowly), I would develop 3 profiles. One is no change, one is a 30% loss in value (include your house and real estate, not just stocks, in this loss unless you're in an area in which the real estate really is holding value), and one is somewhere in between. I would have the pessimistic one recover very slowly, with expensive money, substantial inflation, and low rates of return, the intermediate one recover somewhere "in the middle", and leave the one that models my current investments alone. (I picked the 30% number because that's what I saw happen back in the big correction of the late 80s, about a 30% drop in the Dow. Of course the recovery was equally quick.)
Unless things are completely off the wall, these three profiles should define a cone within which you'll have to choose your spending. Economics is true in the long run, but you're trying to get the answers to, what amount to, short term fluctuations in the economy so the tools aren't going to help you as much as they would in more stable times.
In fairness I have to stick a disclaimer in here: I'm not an economist nor am I a financial planner so my guess as to what will be happening in the economy is based only on my complete faith in the Bush Administration's capacity for self-delusion and error, American Capitalism's capacity for over-whelming greed, and the American voter's complete self-involvement and inability to deal with long term problems (yeah, I'm pretty cynical) not from any deep study of the economy or market, but I think I'm on the money on how to use ESPlanner to figure out what your future holds given a variety of different assumptions.
Your response to that future depends on what sort of person you are. Optimistic types will more or less ignore the current mess, pessimistic types will start canceling spending and living off bread and water (or throwing themselves out of 20 story windows). I hope the rational response is somewhere in the middle, but where really is up to you.
Sorry I can't be more definitive and I apologize for the rambling nature of the reply. Hopefully other folks will chime in on the discussion as this is an interesting question.
Best,
Dick Munroe
Dick.... I like the way you described building a cone of possibilities (similar to the idea of standard deviation in statistics).
But even better, I liked your view of the reasons behind this troubled economy. You may be cynical, but those particular views are not cynical, they reflect a nearly undeniable reality that few deep-thinking and rational actors could assail. And while this is obviously not a political forum, a consciousness of the complexities of our financial system should be a required bit of enlightenment.
We may, however, disagree on the solution, which if I recall from another post of yours, you seem to believe is more an anti-goverment, anti-tax solution (correct me if I'm wrong), but indeed (though bureaucracy and corruption are not eradicable from any human enterprise), real government regulation (as in the pre-reagan, pre-W eras) is essential for consumer protecton against capitalist greed, and taxes (even though potentially misspent in capitalist driven incursions, etc.) is the only way to protect the poor, ill, destitute, etc. from inequalities of birth, brain, treatment, whatever. How this doesn't logically follow from your premises remains a profound mystery to benighted go-gooders like me.
but, in any event, keep up the diatribes, it makes reading all this financial stuff much more fun. best regards, charlie morgan
Charlie,
It kind of depends on what you mean by anti-tax. I'm not opposed to taxation per se. The current tax system is completely bogus (e.g., if you game the system just right you could get 100K in deductions and credits for buying an SUV for your busines, you could get $0 for purchasing a hybrid or other fuel efficient automobile). Not to start a flame war, but the one I'm in favor of is the fair tax not the least reason because it puts the IRS, tax lawyers, and the vast majority of accountants out of business and because (properly handled) it is the most progressive of taxes. Let's not carry on the argument here, we can do it off line or we can take it to a separate topic. I am, generally speaking, against government but there are functions which a government can and should perform and preventing the sort of melt-down that is currently in progress is a good example.
FWIW, I don't hold the Bush Administration solely responsible for the current mess. Congress and the gutless Democrats in it bear most of the blame since the Constitution gives Congress the power of the purse. Were congress critters less interested in perpetuating their stay in DC and more in actually leading then we might not have gotten here. So light the fuse and blow them all to hell-and-gone (or at least throw anybody with a vested interest in the status quo the hell out of office) and start over.
Nor do I believe the tight controls in place during the Nixon and to a lesser extent the Carter administration (Nixon was a Republican and he put wage and price controls in place, a notoriously left wing, commie, pinko thing to do) are any more correct than the excesses of the Reagan, Bush I, and Bush II regimes (Reagan and Bush II, both self avowed fiscal conservatives who quadrupled the national debt and borrowed more money than the all other administrations combined adjusted for inflation respectively on their watches). No amount of justification exists for any of these bogus fiscal policies. Where the center point is, I don't know, but I do know that what we have in place ain't working. I wish I was surer about what would work. I know tax policy is part of the problem (last time I looked the tax code was 6000+ pages in length). I know out of control spending (I'm talking about the Bush War here, not just domestic spending which is on the books up front) is part of the problem. Unfortunately the congress is busily voting bread and circuses and trying to distract with unimportant issues (focusing on steroids in baseball for crying out loud!!!) while the system falls apart around us.
What can be done?
I don't know. I do know that I, personally, can do little to affect things. So I, personally, have bolt holes where I can go and, basically, tell the rest of the world to go suck eggs. Not everybody can do this or wants to. I don't want to either but I think it may be necessary in my lifetime. In the meantime I vote, work for candidates who might change the system (none of the folks in this election cycle will significantly change the way the system works, but any Democrat over the best Republican IMHO, we can't afford 4 to 8 more years of Bush-like fiscal and social policy so I will probably be headed for Florida to work for the FDP in their IT department as I did in 2004), and prepare for the worst.
Best,
Dick Munroe
Dick..... have been away in Vermont (I like the way they do government and community), but enjoyed your reply, believe we could have a more penetrating discussion at some point, me as a social-democrat, you as something more libertartian, I think...but both of us with much to agree on about this disastrous course of our government (and while i'm a late baby-boomer, I've got three young girls, and am pissed off to murderous intent at moments when I see how their future, and the planet's, is being pissed away.... let's, $10,000,000/hour for this 'war').
But before Larry or someone else says cease and desist on the opinionating, I'll try to come up with some more worthy esplanner questions, and we can engage our views about the world in between the pragmatics of retirement planning.
thanks again. more to say and hear..... best, charlie