Have you read the important notes? It’s a condition of reading this blog.
Technical Details
In the post I looked at what Safe Withdrawal Rates (SWR) would look like in a world without mean reversion of equities (and note that it’s quite possible that we already live there now).
I implemented a thought experiment from the Nobel prize winning economist Paul Samuelson who considered randomly drawing historical annual equity returns from a hat to create a new sequence of returns. Crucially, he considered replacement in drawing the individual returns.
This is the really key part. Since you then get a sequence of returns with historically ‘accurate’ annual returns and volatilities but you destroy any potential mean reversion.
Mean Reversion
Mean-reversion, or negative serial correlation, is a hotly debated topic, and there is no general consensus to my knowledge. Without doubt equity returns exhibit non-randomness, however there is no simple key to the mysteries of stock price evolution. Any signal is generally swamped by the noise, and no serious equity investor is a ‘chartist’.
The fact is that there are no rules for equities to follow and there is no inbuilt law of the universe that says that equities must outperform bonds, or even cash.