Notes starting from March 8, 2009

Updated: March 30, 2009.

Wait Five Years?

The market is in free fall. What if we just stop worrying about it, wait, and invest heavily five years from now? Would we be better off?

Here are the answers from the Investment Strategy Tester and the Scenario Surfer.

Wait Five Years?

Waiting on DVY

I am eagerly waiting on DVY’s payout numbers at the end of this month.

So far, the income stream from my combination of DVY and PFF as a Retirement Practice portfolio has held up exceedingly well. I want to know whether it will continue to do so.

DVY is an Exchange Traded index Fund favoring dividends. PFF is an Exchange Traded index Fund of preferred stocks. I combine the two as a blend. DVY is for dividend growth. PFF is for high initial income without growth.

PFF has continued to hold up in spite of its heavy investment in financial services.

DVY also has a heavy allocation of financial stocks, although not as much as PFF. But DVY consists of common stock as opposed to preferred stock. PFF distributes income monthly. DVY distributes income quarterly.

Practicing for Retirement

Invest Early

Should we wait for a stock market bottom? Not always. Sometimes it pays to invest early.

Invest Early
March 15, 2009 Letters to the Editor

Market Valuations During U.S. Recessions

Here is an excellent article about valuations by William Hester of the Hussman Funds. I agree on most points.

Market Valuations During U.S. Recessions

Risk

Risk is the hidden flaw. It is not volatility.

You can account for volatility. Most often, you can reduce volatility by extending your time frame. That is something that you can handle. What you need to prepare for is the hidden flaw. Always look for a failure mechanism.

Here are a couple of articles from the past.

Risk Leads to Bankruptcy
Risk Tolerance

All-Stock Portfolios for Accumulators

I brought up the Investment Strategy Tester. I selected P/E10=8 Normal Market. I dollar cost averaged. I ran a variety of portfolios. I found that an all-stock portfolio was best regardless of the time frame.

Then I ran a variety of fixed allocation portfolios at P/E10=14 Normal Market and Bear Market. I learned a different story. An all-stock portfolio makes sense, but other portfolios make sense as well. They had less dispersion. Valuation informed indexing would have been a good idea.

Accumulators will do well by having a high stock allocation. Still, there is something to be gained by varying the allocation to protect the downside in today’s market (P/E10=13).

All-Stock Portfolios for Retirees

I brought up the Investment Strategy Tester. I selected P/E10=8 Normal Market. I started with $100000. I set the TIPS interest rate to 2%. I ran a variety of portfolios. I found that an all-stock portfolio was best regardless of the time frame. I found that the Safe Withdrawal Rate was 8.6%.

The Year 30 Retirement Risk Evaluator (Year 30 SWR button on the left) shows a 9.98% Safe Withdrawal Rate for 100% stocks and P/E10=8. The Investment Strategy Tester is more conservative. It shows that a 10% withdrawal rate is Unlucky, but not the Worst Possible outcome.

At these withdrawal rates, I would be satisfied with 8.6% (plus inflation). However, with P/E10=8, it is likely that you would be able to lock in a 10%+ (plus inflation) withdrawal rate in the form of dividends from quality providers.

The story is different today (P/E10=13). At today’s valuations, the Year 30 Retirement Risk Evaluator (Year 30 SWR) favors an 80% stock allocation. The Investment Strategy Tester shows that Valuation Informed Indexing does better.

The End of an Era

Professor Peter Ponzo (retired) is shutting down his Gummy Stuff site. It was the quality product for all of those interested in the mathematics behind finances. I will miss his contributions. So will many others.

Gummy’s (Peter Ponzo's) Web Site

Gummy’s site is being archived.

Archived Gummy Stuff Site

Idiot Switching in a P/E10=14 Bear Market

I examined a series of single threshold allocations shifts between 100% and 0%. I refer to this as Idiot Switching. It has merit at times of high valuations.

Idiot Switching in a P/E10=14 Bear Market

Two Level Switching in a P/E10=14 Bear Market

I examined two threshold allocation shifts at today’s valuations.

Two Level Switching in a P/E10=14 Bear Market
March 23, 2009 Letters to the Editor

RobCast #80 (71 minutes) -- March 23, 2009 -- There Is No Free Lunch! Or Is There?

Rob Bennett has been on a tear with one outstanding RobCast after another. Tune in to learn the truth. Listen to his latest: There Is No Free Lunch! Or Is There?

Rob Bennett’s RobCast Page Ten

Investment Strategy Tester

The Investment Strategy Tester is officially online at both Rob Bennett’s site and my own. Rob has included an excellent write up to help you understand what is going on. I recommend it highly.

Scroll down after you get to his site.

Rob Bennett’s Strategy Tester

Retirement Practice Portfolio Takes a Hit

DVY’s dividend has dropped to 0.43768 per share, down from a peak of 0.67784 per share from March 25, 2008, a drop of 35.4%.

So far, PFF has held up well in spite of being invested 80% in financial services.

I expect this to continue. To see why, read Michael’s letter DVY just announced its dividend...

March 23, 2009 Letters to the Editor

P/E10 Button

I have put up a P/E10 button (on the left side) in response to Larry’s Letter to the Editor. Learn how to determine today’s P/E10. You need to know the S&P500 index level.

Notes Index starting from November 23, 2007