Beware of Survivorship Bias When Investing
Money For the Rest of Us
J. David Stein
4.5 • 1.4K Ratings
🗓️ 15 February 2023
⏱️ 26 minutes
🔗️ Recording | iTunes | RSS
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Summary
Why long-term U.S. stock market outperformance could be because it has avoided major catastrophes. Does an over-reliance on historical U.S. stock returns when modeling retirement outcomes lead to spending rates that are too high?
Topics covered include:
- Why you might consider earthquake insurance
- What is survivorship bias and what are some examples
- Why the U.S. is an outlier when it comes to stock market performance
- Why the 4% retirement spending rule might be too high
- If the 4% spending rule is too high, what can retirees do instead to have enough for retirement
- Why the size and scale of the U.S. economy provide some resistance to catastrophes
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Show Notes
Survivorship Bias—Matt Rickard
The Financial History of Emerging Markets: New Indices by Bryan Taylor—SSRN
The (Time-Varying) Importance of Disaster Risk by Ivo Welch—Financial Analyst Journal
The 2.7% Rule for Retirement Spending by Ben Felix—YouTube
Related Episodes
250: Investing Rule One: Avoid Ruin
326: The New Math of Retirement Spending and Investing
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Transcript
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| 0:00.0 | Welcome to Money for the Rest of Us. |
| 0:03.4 | This is a personal financial show on money, how it works, how to invest it, and how to |
| 0:08.0 | live without worrying about it. |
| 0:09.8 | I'm your host, David Stein, today's episode 421. |
| 0:13.3 | It's titled Beware of Survivorship by Us when Investing. |
| 0:18.0 | I have an earthquake insurance policy that is up for renewal. |
| 0:23.2 | I bought it via policy genius about a year ago. |
| 0:26.5 | It's for our home in Tucson. |
| 0:28.6 | And as I saw the premium, I was tempted not to renew the policy. |
| 0:34.3 | After all, there has not been an earthquake in Tucson since at least 1931. |
| 0:40.3 | I changed my mind, though, after finding some data that suggested that even though there |
| 0:47.0 | hasn't been an earthquake, the probability of an earthquake with a magnitude greater than |
| 0:53.2 | 5 is close to 20% over the next 50 years. |
| 0:57.9 | And when I compare the cost of the premium, the annual premium is only 0.05% of my house. |
| 1:07.2 | Now I'm not completely rational when it comes to earthquake insurance because we don't |
| 1:11.7 | have earthquake insurance on our cabin in Idaho. |
| 1:15.4 | In Idaho, there's a 73% chance of an earthquake greater than 5.0 in the next 50 years. |
| 1:23.1 | But I've rationalized that decision by saying, well, it's just a cabin. |
| 1:27.2 | Our home in Tucson is made out of a doby brick. |
| 1:30.3 | Cabin is a log cabin, mostly. |
| 1:33.0 | Seems like it's more stable and most of the value or more of the value in their properties |
| 1:39.1 | in the land rather than the structure itself. |
... |
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