General Topics starting from June 27, 2006.
Updated: September 15, 2006.
Special Note about Mean Reversion
Rob Bennett has made an important discovery. Mean Reversion occurs faster when you adjust for valuations.
Special Note about Mean Reversion
Rob Bennett's Mean Reversion Discovery
Time and the Gordon Model
The Gordon Model makes its best predictions 5, 10 and 15 years into the future. It does not do as well at 20 and 30 years.
Time and the Gordon Model
Orders of Magnitude
The rebalancing bonus exists because of a misleading definition. It is an illusion. Very often, rebalancing lowers returns.
Returns from individual market slices add or subtract 2% to 3% from the market as a whole.
Variations caused by valuations are huge. At today’s prices, with P/E10=26, the most likely (real) return ten years from now is 1.3%. At historically typical prices, with P/E10=14, the most likely return after ten years is 6.3%. At bargain levels, but well above market bottoms, with P/E10=8, the most likely return after ten years is 14.5%.
Orders of Magnitude
Edited: Orders of Magnitude
Using Stock Return Predictions
According to the Stock-Return Predictor, the most likely return of stocks will be 1.3% (plus inflation) ten years from now. Today’s TIPS yield 2.5% (plus inflation).
Does this mean that we should invest entirely in TIPS?
No. Not necessarily.
Using Stock Return Predictions
Eye Opening Calculations with Compact CVTVR L
I have placed Compact Calculator CVTVR L into my Yahoo Briefcase. It is great for long-term planning.
Here are some examples of what it can do.
Eye Opening Calculations with Compact CVTVR L
New Standards for Financial Reporting
During my professional career, I was never allowed to get away without doing the following. Why do we allow "financial experts" to get away with anything less?
This is based on my “It’s about time...” series of notes.
New Standards for Financial Reporting
Designing a 45-Year Retirement
Here is an example of how you can use my 15-Year and 30-Year calculators back-to-back.
How about a 4.5% (plus inflation) withdrawal rate?
Designing a 45-Year Retirement
P/E10 Predictions
My first excursion into Monte Carlo modeling produced Retirement Trainers. There is a side benefit. We can learn how P/E10 is likely to behave in the future.
P/E10 Predictions
Bulls, Bears and P/E10 Predictions
Very recently, I looked into the future behavior of P/E10. I used the Monte Carlo model from my Retirement Trainers. My Monte Carlo implementation simulates Mean Reversion. My technique was inspired by Raddr’s original approach. I included Rob Bennett’s Mean Reversion discovery.
The predictions were generally reasonable, but overly pessimistic. Prices might remain high indefinitely, not returning to normal valuations. I attribute this to the lack of directional adjustments in my model. It makes no distinction between bull markets and bear markets.
In this study, I quantify the effect of long lasting (secular) market trends (bull markets and bear markets). This immediately improves our estimates provided that we get the overall direction right.
Bulls, Bears and P/E10 Predictions
P/E10 Predictions Revisited
I built Bull Bear Retirement Trainers A and B. They allow you to select the market’s direction: Bull Market, Neutral Market or Bear Market. They produce a realistic sequence of returns.
I have collected two sets of P/E10 data. The first assumes a Bear Market starting from today’s valuations, P/E10=26.0. The second assumes a Bull Market starting from P/E10=9.0.
P/E10 Predictions Revisited
Playing with the Toy
I simulated three “what-if” scenarios on my Bull Bear Retirement Trainer B.
I started with today’s valuations, P/E10=27.3 and today’s TIPS interest rate of 2.2%. I specified that we are in a secular Bear Market. I sought to maintain a 5% withdrawal rate.
Playing with the Toy
More Fun with the Toy
My new toy is the Bull Bear Retirement Trainer B. I revisited run 3 from my earlier study.
Using an identical sequence of returns, I approximated fixed allocations of 50% and 80% stocks. The 50% stock portfolio succeeded. The 80% stock portfolio did not.
My original approach was best. It was very easy. It was intuitive in light of my many investigations.
More Fun with the Toy
Great Fun with the Improved Retirement Trainer
I have finished building the Type 2 Bull Bear Retirement Trainer. It is fun. It is realistic. Now it is time to learn from it.
Great Fun with the Improved Retirement Trainer
Accumulation and the Retirement Trainer
I couldn’t help myself. My new Type 2 Bull Bear Retirement Trainer is fun. It is realistic. I couldn’t wait. I had to look at accumulation NOW.
Accumulation and the Retirement Trainer
Why Dividends Are Better
If you just looked at Gummy’s (Professor Peter Ponzo) Safe Withdrawal Rate formula, you would have no idea that withdrawing dividends is better than harvesting capital gains. It is.
What happens is that the statistical distribution CHANGES when there are dividends.
Why Dividends Are Better
Dividends versus Capital Appreciation
Which is more important to retirees? Dividends or capital appreciation? Or does it make a difference?
Answer: Dividends. They are much more reliable.
Dividends versus Capital Appreciation
E10 or D10?
Professor Robert Shiller’s P/E10 does a great job when calculating Safe Withdrawal Rates. Sometimes, using dividends (P/D10) is even better.
Edited: E10 or D10?
E10 or D10?
More PE10 Predictions
Here are more P/E10 predictions from my Type 2A Bull Bear Retirement Trainer.
I collected two sets of P/E10 data. Each set consists of eight sequences. The first set assumes a Bear Market starting from today’s valuations, P/E10=27.3. The second set assumes a Neutral-Bull Market starting from P/E10=8.0.
I use these sequences in my Simplified Retirement Trainer A. You can download it from the Retirement Trainers folder in my Yahoo Briefcase.
More PE10 Predictions
Yahoo Briefcase
Earlier General Topics
Using P/E10, Historical Perspective: Dividends and Earnings, The Story Behind the Numbers, Individuals Pick Winners, Dollar Cost Averaging Today, Year 10 Choices, What Do I Really Think About Dividends?, Allocate 25%, Investment Traps, Early Success with Latch and Hold, Continued Success with Latch and Hold, Adding Constraints to Latch and Hold, The Lower Latch and Hold Threshold, Additional Constraints with Latch and Hold, Idiot Switching, Typical Values of P/E10.
General Topics (starting from January 16, 2006)
General Topics (starting from September 20, 2005)
General Topics (starting from September 20, 2005)
General Topics prior to September 20, 2005
General Topics prior to September 20, 2005