Notes starting from January 24, 2009

Updated: February 7, 2009.

Training for Extended Retirements

You can use the Scenario Surfer to train for an extended retirement.

Break from one segment to the next at the twenty year mark. This is long enough for Mean Reversion to work its magic and for the market type to change. Record your balance and the latest P/E10 and note whether P/E10 is consistently decreasing. Then use these as the inputs for the next segment.

Even though the P/E10 match will not be exact, it will be close enough for training purposes.

Twenty year segments are appropriate for all market types. Using thirty year segments is suitable only when starting from a market extreme such as P/E10=8 or P/E10=20 or higher. The reason is that we need to introduce a market turning point at an appropriate time.

RobCast #56 (72 minutes) -- "Time" Is Not a Four-Letter Word

This is Rob Bennett at his best. Learn the truth about timing. Long term timing is good.

RobCast #56 (72 minutes) -- "Time" Is Not a Four-Letter Word

The Non Dividend Investor

The non-dividend investor misses the point. He believes that dividends are optional. He believes that dividends can be set aside for growth. We heard that message from Treasury Secretary Paulson as he encouraged the Bank of America BAC and other banks to trade their dividends for future growth. BAC shareholders have had their investments decimated.

Dividends, except when financed through borrowing, are a signal of good management. It shows that the company spends what makes sense and rewards shareholders with the excess. Dividend cuts are a sure sign of failure. Every time that I have held onto a stock after the announcement of a dividend cut, I have paid a price financially.

Dividend Cuts

I read an article from Yahoo Finance about today's dividend cuts. They are the worst in 50 years. The S&P500 dividends have fallen 8.4%.

Yes. That is bad news. Still, dividend cuts are far smaller than the price drops that we have seen. This is why retirees will do well to focus on income streams from dividends and interest as opposed to capital appreciation.

Today's stock prices have fallen to fair value. This is not guaranteed, but stocks are likely to fall another 20% to 50%. Wait for the dust to settle, then buy heavily. You will be able to get a tremendous value for your investment dollar.

It makes sense to have a stock allocation around 50% to 60% at this time. Stocks offer a great value in terms of what is almost certain to happen when measured 10 years into the future. Keep some powder dry. Expect to see some outstanding bargains.

Updated Stock Allocations for Today

Here is an update to the Preliminary Stock Allocations that I presented in my Notes starting from January 1, 2009. Use an intermediate allocation of 50% instead of 60%.

When P/E10 is below 8, allocate 100% to stocks. When P/E10 is between 8 and 10, allocate 80% to stocks. When P/E10 is between 10 and 18, as it is today, allocate 50% to stocks. When P/E10 is above 18, allocate 20% to stocks.

Notes starting from January 1, 2009

For Accumulators Today

This is the latest from the new calculator prototype.

If you dollar cost average today, your outlook is almost the same whether you use Valuation Informed Indexing or stick 100% in stocks. Assuming a P/E10=14 Bear Market, I found very little difference. The spread was a little bit wider with 100% stocks. It has just a tad more upside potential but it also has a tad more downside risk.

ADDENDUM

If we were in a Normal Market at P/E10=14, it would be better to invest entirely in stocks. The downside would be only a little worse than with Valuation Informed Indexing, but the upside would be a whole lot better. But we are still in a long lasting (secular) Bear Market.

P/E10 Sequences

I brought up the Scenario Surfer. I generated 20 years of P/E10 sequences. This gives us a glimpse into the likely future.

P/E10 Sequences
January 30, 2009 Letters to the Editor

Practicing for Long Retirements

Those planning to use Valuation Informed Indexing and to retire early should practice on the Scenario Surfer. Plan to work in twenty year segments.

When P/E10 is very high, as it was until recently, work with the full twenty years. Record your balance and determine P/E10 at the end. Use the final value of P/E10 to determine the nature of the next segment. Usually, it will be a Normal Market. Generate the next sequence on the Scenario Surfer with the closest P/E10 value and with the ending balance from the original sequence. Continue through year 60, if appropriate.

Act similarly, when P/E10 is very low. Plan to use the full twenty years.

When P/E10 is in the middle range, close to 14, as it is today, proceed more cautiously. Look for a turning point between Year 10 and Year 20. Begin the new segment from this turning point.

If P/E10 drops very low, very rapidly, go ahead and assume a turning point even if it is before Year 10. For example, some P/E10=14 Bear Market runs have P/E10 dropping below 8 within a year or two. Use an early date as a turning point.

Turning points usually occur within twenty years. The time from stock market P/E10 peak to peak or valley to valley has been around 30 to 40 years in the past. Cutting these periods in half, we would expect a turning point every 15 to 20 years. There is very little history regarding turning points themselves. The road down seems to be a little faster than the road up. But we cannot rely on this happening far into the distant future. On the other hand, there is a long history of bubbles throughout the world. Expect turning points to continue.

P/E10 Sequences A

I brought up the Scenario Surfer. I repeated P/E10 Sequences with a P/E10=14 Normal Market instead of a Bear Market.

My conclusion: start from very high or very low P/E10 levels for estimating turning points. Intermediate P/E10 levels are appropriate only for short periods of time.

P/E10 Sequences A

Turning Points A

I have previously examined P/E10 Sequences on the Scenario Surfer with P/E10=14. My conclusion was that I should start from very high or very low P/E10 levels for estimating turning points.

This time I looked at a P/E10=26 Bear Market. The turning point estimates are reasonable.

Turning Points A

Turning Points B

I have previously examined P/E10 Sequences on the Scenario Surfer with P/E10=14. My conclusion was that I should start from very high or very low P/E10 levels for estimating turning points.

This time I looked at a P/E10=8 Normal Market. The turning point estimates are not as good as I would like.

Turning Points B

Turning Points C

I was dissatisfied when I looked at a P/E10=8 Normal Market. The turning point estimates were not as good as I would like.

This time, I extended the period to a full 30 years. The results were much, much better.

Turning Points C

Turning Points D

I looked at a P/E10=26 Bear Market. I extended the period to a full 30 years.

Turning Points D

Notes Index starting from November 23, 2007