Notes starting from March 25, 2007

Updated: April 17, 2007.

Taken At Face Value

I have taken the Morningstar Dividend Investor newsletter at face value. I have assumed that its portfolios meet their goals. I have put its numbers into the Income Stream Allocator. This is what the portfolios do for retirees.

I include a sensitivity study.

Taken At Face Value

The Cost of Capital Appreciation

Retirees give up very little income in the hope of capital gains.

The Cost of Capital Appreciation

Switching with Dividend Payers

I conducted a brief optimization of switching with Value D and Equal D stock portfolios. I have reported my results in Current Research K: Dividend Slices.

With high dividend payers, the best switching algorithm is very close to using a 75% stock allocation when P/E10 is less than 17 and 25% when it is greater than 17.

Today’s Year 30 Safe Withdrawal Rate with Value D stocks (similar to Large Capitalization Value stocks with the highest yields) is 4.05%. If valuations were normal, the Year 30 Safe Withdrawal Rate would be 5.01%.

Today’s Year 30 Safe Withdrawal Rate with Equal D stocks (similar to Small Capitalization Value stocks with the highest yield and with equal dollar allocations) is 5.02%. If valuations were normal, the Year 30 Safe Withdrawal Rate would be 5.79%.

Current Research K: Dividend Slices

More about Dividend Payers and Switching

I have determined optimal conditions for Slices A (no dividends) and B (lowest 30% among dividend payers). I based this on Year 30 Historical Surviving Withdrawal Rates.

The earlier conclusion remains: when sliced according to dividend yields, a single threshold does well.

This is the latest in Current Research K: Dividend Slices.

More about Dividend Payers and Switching

Woody Allan's Take on the Efficient Market Theory

Here is a thought provoking article from the PassionSaving web site.

This is my favorite:

“Rationalization #9 for Continuing to Believe in the Efficient Market Theory After Learning That It’s Not True -- You Might Mess Up Anyway.”

“Say that you abandon the good old Efficient Market Theory and replace it with some more realistic investing model. Does it follow that you will obtain good results with your investing choices from that day forward? It does not..”

Woody Allan's Take on the Efficient Market Theory

I Saw My Doctor Again

He is doing great.

I had recommended up to 25% of his portfolio be placed into hobby stocks. He invested much less.

His hobby stock's price rose by a factor of six.

I Saw My Doctor Today
Allocate 25%
Allocate 25% Addendum

Gentle Failure Mechanisms

Our TIPS baselines and dividend strategies share one thing in common. They have gentle failure mechanisms. At worst, they could result in your cutting back to 70% of your original buying power.

Gentle Failure Mechanisms

What Do I Really Think About Long-Term Timing?

Long-term timing raises today’s traditional Year 30 Safe Withdrawal Rate to 5.4% (plus inflation) of your original balance. It raises today’s traditional continuing Safe Withdrawal Rate to 4.9% (plus inflation).

Dividend strategies do better.

What Do I Really Think About Long-Term Timing?

Income Stream Innovations

To see the latest in Income Stream investing, visit the Income & Dividend Investing discussion board at Morningstar.com.

Read Conversation #1853 by SCMariner about "Best Growers....." Scroll down to paragraph 24 with ElLobo's "OK, folks, here's the skinny."

Keep in mind that ElLobo assumes that you have already screened your candidate investments before implementing his process.

Then go back and read the entire thread. It is well worth the effort.

April 7, 2007 FOLLOW UP

Be sure to read statsguy’s post 89, “A thought while catching up...”

Here is a sample:

“I think that an investor in this situation needs to focus on PRICE as well as dividend growth. For example, it would not be a good idea to go out and buy the 43 stocks listed in this conversation... because most of them are very highly expensive at their current share price..”

Morningstar

Expanded Allocator

I have built an expanded version of the Income Stream Allocator. It includes 5 income streams and a cash management account.

Expanded Allocator

Using Weighted Averages

I examined using weighted averages on the Expanded Allocator. They almost always work well for the first 15 years. Sometimes, weighted averages work well for more than 30 years.

Using Weighted Averages

Letters

Remember to check our Letters to the Editor from time to time. We have had some good ones recently.

Use the button on the left side.

Retirement Risk Evaluators

Rob Bennett and I have completed our “Retirement Risk Evaluators.” These calculators present a full picture. They show the likelihood of success at different withdrawal rates. You will be able to choose Year 15 and 30 portfolio balances other than zero.

At this site, press the Year 15 SWR and Year 30 SWR buttons on the left. Combine this with the Stock Returns Predictor and my TIPS Table to plan for extended retirements.

I have a brief introduction at this site. I refer to my original development material. Rob Bennett has a more detailed introduction. It is written for the general public.

Rob Bennett’s versions of my Year 30 SWR and Year 15 SWR calculators:

PassionSaving Risk Evaluator
PassionSaving Year 15 Risk Evaluator

We know quite a bit about traditional approaches. You can use them to diversify risk. They make good baselines. They provide us with great insights.

To see an example of how to use these calculators, read Designing a 45-Year Retirement.

Designing a 45-Year Retirement

Valuations and Income Streams

The Year 30 Retirement Risk Evaluator shows us why it is best to focus on the income stream in today’s market.

Valuations and Income Streams

Expanded Allocator Insights A

In this initial investigation, I find that I can increase the Income Stream substantially. The reason? My Expanded Allocator is much easier to use than my Income Stream Allocators.

Expanded Allocator Insights A

Inside the Box Thinking

It is amazing to see how much people are willing to ignore.

Retirement success depends upon a lot of things: valuations, portfolio composition and strategy. In every case, the answer can be that success is assured or failure is likely. There is no reliable rule of thumb. It depends on valuations.

Yet, even at today's valuations, it is easy to obtain a continuing safe withdrawal rate of 5% (plus inflation). It takes an income oriented approach.

The flaw with traditional thinking is that you do not have to live with the probability distribution of prices. You can choose to focus on dividends and income streams. Doing so, you can reap most of the market's long term Investment Return--even today.

Expanded Allocator Insights B

I tried a variety of allocations to determine the value of fine grain optimization. It is not much.

Expanded Allocator Insights B

Expanded Allocator Insights C

This time, I examined mortgages.

Once again, the BEST combination consisted of the extremes: one investment with a high initial income and the other with the fastest growth rate at a lower initial yield.

Expanded Allocator Insights C