Notes starting from April 1, 2009

Updated: May 5, 2009.

5.4% Safe Withdrawal Rate

Check the Year 30 SWR calculator [Year 30 SWR button on the left]. Enter P/E10=14 and an 80% stock allocation. Set the TIPS interest rate equal to 1%. Set the final balance to 0%. This tells you the Safe Withdrawal Rate when using a money market fund or Certificates of Deposits as opposed to TIPS.

Today’s Safe Withdrawal Rate is 5.4%.

Invest 80% of your funds into an S&P500 index fund and place 20% into a money market fund or CDs. Calculate 5.4% of today’s balance. Withdraw this amount initially and increase withdrawals later to match each year’s inflation. Sell stocks to the extent necessary to maintain this allocation.

Except for determining the inflation adjustment, this is about as simple as you can get with stocks. It will provide income for 30 years minimum.

You can do considerably better with more sophisticated strategies. But this is great if you need something simple, yet reliable.

Dividend Stocks for Income

Dividend investors: here is a site just for you. Check it out.

Dividend Stocks for Income

Just Starting Out?

Want to retire early? Need to save? Visit Rob Bennett’s Passion Saving site. His approach is different. He stresses motivation. His approach works.

Here is a sample article from his site.

Rob Bennett’s New Money Management Advice

Evaluating Something Simple

My Something Simple portfolio was supposed to provide a continuing withdrawal rate of 6% (plus inflation). Since then, we have experienced the October 2008 meltdown.

Evaluating-Something-Simple

A Ten Percent Withdrawal Rate

The Something Simple portfolio has fallen in price. If you invest in it today, you can withdraw ten percent of your original balance each year. The risk is reasonable.

A Ten Percent Withdrawal Rate

Second Thoughts

Michael sent me a Letter to the Editor pointing out the differences in yields reported from different sites. Upon close inspection, the 8.18% yield that I used for DVY is in question. If we were to use 5.31% instead, the withdrawal rate would be 8.6% plus 3% per year for inflation.

Locating Something Simple

Here is my original Something Simple article along with Practicing for Retirement, which features the portfolio.

Something Simple
Practicing for Retirement

Peak to Valley DVY

DVY’s quarterly dividend amount decreased 35.4% from peak to valley. This is a very conservative number. It is not the number that I should have reported.

Professor Robert Shiller uses the dividend amount from the most recent twelve months in his S&P500 dividend data. I should have reported DVY results using a similar calculation.

In terms of the trailing twelve months, DVY’s dividend has declined from $2.5323 on 6/25/2008 to $2.1785 on 3/26/2009. The reduction is 14% so far.

Yahoo Briefcase Closed

Yahoo has closed out its briefcase. As a result, I have put up a button on the left with S&P500 returns and I have provided graphs [Graphs button] that show real, annualized, total returns versus valuations.

Graphs Corrected

I have corrected a series of graphs on Returns versus P/E10 and 100E10/P. [Graphs and More Graphs buttons.] I had used the wrong calculator in making the original graphs. It had dummy S&P500 numbers from 2005 through 2009.

VII Makes Sense for Accumulators

Valuation Informed Indexing Makes Sense for accumulators even in Today’s Market.

I dollar cost averaged for 30 years using the Investment Strategy Tester [Strategy Tester button on the left]. I started with $1000 and invested $1000 every year. I looked at fixed stock allocations of 60%, 80%, 90% and 100%. I looked at Valuation Informed Indexing with P/E10 thresholds of 10-18-30 and allocations of 100%-80%-20%-0%. I assumed a 2% interest rate for TIPS.

I looked at P/E10=14 Normal Market and P/E10=14 Bear Market.

In all instances, a stock allocation of 100% had the highest upside potential. But Valuation Informed Indexing did best on the downside.

Valuation Informed Indexing does what it is supposed to do. It produces competitive returns at all times while protecting the downside.

Even Better VII Results

You can enhance your returns during accumulation by setting the P/E10 thresholds to 18-30 and the allocations to 100-20-0%. This is especially obvious in the later years. You protect against downside risk when valuations are high. You seek maximum gains when valuations are reasonable.

The earlier algorithm is superior if you already have a significant balance. You need to protect against losses within the first decade. If so, use P/E10 thresholds of 10-18-30 and allocations of 100-80-20-0%.

Never Accept Single Outcome Predictions

Too many people look for a single outcome prediction. We just don’t know the future that well. Looking forward, we must prepare for a full range of possibilities.

That is why the calculators [buttons on the left] include a full range of outcomes and their probabilities. That is why I looked at the possibility of being out of the market for an extended period of time when I first examined the delayed purchase approach. That is why I looked for the downside risk when investing in dividend stocks.

Never accept a single number. You need to know the full range of outcomes.

Sneak Preview

Rob Bennett has just posted a truly outstanding RobCast. It tells us about Risk Tolerance in the Real World.

This is scheduled for tomorrow (April 27th). Enjoy a sneak preview. Listen to it over and over again.

Rob Bennett’s RobCast Page Twelve

Short Term Predictions

You cannot trust short term predictions based on numbers alone. I brought up the Scenario Surfer to see how likely it is that P/E10 will fall below 10 within the next decade. I made 10 runs. Here are the results:

P/E10 falls below 10 in years: 10, 6, 2, never, never, never, 9, never, never, 5.

You need to allow for the possibility that P/E10 will drop below 10. But you cannot be assured that it will. You need to prepare for both outcomes.

Style Drift

Index fund enthusiasts overstate their case. They compare their funds with how well other funds have done after the fact, lining up managed funds against the closest equivalent index. A managed fund can do better ONLY by securities selection within a tight straight jacket.

Consider balanced funds that adjust allocations with valuations. Consider funds that follow opportunities as they arise. They all get rejected because of Style Drift.

Be leery of sales pitches.

Don’t Chase Yield

From the Income & Dividend Investing discussion board at Morningstar:

Follow El Lobo’s advice instead. Order stocks by yield and then look for reasons not to buy. El Lobo reports that this process is not all that difficult.

It Isn’t Just Total Return

Retirees need a steady source of income. Price fluctuations reduce Safe Withdrawal Rates when selling shares to generate income. This is similar to dollar cost averaging, but in reverse. You sell more shares when prices are low.

Today’s P/E10 level is 15.

Bring up the Year 30 SWR [button on left] Retirement Risk Evaluator. The 30-year Safe Withdrawal Rate with an 80% stock allocation is 5.08% (plus inflation). Bring up the Stock Returns [button on left] Predictor. The Year 10 most likely real return is 5.61%. The Year 30 most likely real return is 6.54%. Clearly, demanding safety lowers the amount that you can withdraw.

Now bring up the TIPS Table [button on left]. A 3% TIPS real interest rate supports withdrawals of 5.10% (plus inflation) for 30 years.

Clearly, lowering volatility increases the Safe Withdrawal Rate.

The total return is not influenced by the sequence of returns. The Safe Withdrawal Rate is influenced greatly.

Along the same lines, dividend strategies do well because dividend income is much more reliable and steadier than capital appreciation.

For retirees, total return tells part of the story, but not all.

May 2009 Highlights

I have just posted my annual May Highlights.

May 2009 Highlights

Key Insight

Rob Bennett has posted another great RobCast: It's Not William Bernstein vs. Rob Bennett, It's William Bernstein vs. William Bernstein.

Rob once again asserts that “Passive Investing is Emotional Investing.” He has been saying this for quite a while. But it wasn’t until just now that I recognized how brilliant his insight happens to be.

Rob Bennett’s RobCast Page Thirteen

Inflation and P/E10

Professor Robert Shiller uses the real (inflation adjusted) price and earnings when calculating P/E10. His January 2009 P/E10 value was 15.12. If he had used nominal prices and earnings (unadjusted), his value of P/E10 would have been16.75.

The S&P500 was 865.58 in January 2009.

Notes Index starting from November 23, 2007