Notes starting from April 7, 2008

Updated: May 6, 2008.

Ten Years to Retirement

I used the Scenario Surfer to examine the period just before and after retirement.

Ten Years to Retirement

The Magic of Mean Reversion

What is the Magic of Mean Reversion? Prices matter. Over short periods of time, everything seems random. By Year 10, the effect of valuation is readily apparent.

Rob Bennett on Market Timing

This is well worth reading again. From 2006, it will always be up to date.

Market Timing -- What Works and What Doesn't

Variable Withdrawals

Some people wish for a variable income stream during retirement. I have two ways to handle this.

The first is by using the Scenario Surfer. It allows you to define your withdrawals each year. The other is by using one of my early Income Allocators. They are available for free downloading from my Yahoo Briefcase. My Yahoo username is jwr19452000.

There is one thing that disturbs me. Those wishing for variable withdrawals always seem to want to withdraw more early, never later. I find that bothersome.

Yahoo Briefcase

Fixed Income Withdrawals

I brought up the Automatic Allocator. I entered $100000. I invested at 7% interest, but without any growth. This corresponds (roughly) to preferred stocks or high yielding bonds. I used 3% inflation and 2% TIPS. I followed El Lobo’s advice. [El Lobo is a prominent poster at the Morningstar discussion boards.] I withdrew 70% of the income. I reinvested the rest to keep up with inflation.

Sure enough, I was able to withdraw 4.9% (that is, $4900 in this example) plus inflation for 30 years. I could have withdrawn longer if I had reinvested the money in the preferred stocks or high yielding bonds instead of TIPS.

This shows that even fixed income investors can do much better than the traditional studies indicate.

The traditional studies claimed a safe withdrawal rate of 4% of the original balance (plus inflation). They required a high stock fixed allocation with annual rebalancing. The actual safe withdrawal rate is lower (3.3% to 3.8%), starting from today’s valuations. In contrast, high yield fixed income investors can withdraw close to 5% (plus inflation) even in today’s market.

More conservative investors might decide on 6% interest rates. They can withdraw 4.2%+ for 30 years.

For more on this subject, see the August 29, 2007 Letters to the Editor.

August 29, 2007 Letters to the Editor

Investment Traps

From May 22, 2006:

Investment Traps

Risk Tolerance

How many times have you read about risk tolerance? How often was the article to get you to buy more stocks? After all, wait long enough and stocks are best. It may take thirty years. But stocks will end up best…if you maintain a fixed allocation and if you are not making withdrawals.

Adjust allocations in accordance with valuations (e.g., P/E10 or the market’s dividend yield) and everything changes. Your risk goes down, way down, compared to sticking with a fixed allocation.

Adjust allocation in accordance with valuations during retirement and you are way ahead. It adds a percentage point to your withdrawal rate (e.g., from 4% to 5%).

A fixed allocation is folly these days. A little time on the Scenario Surfer will put you far ahead of your fixed allocation peers. Moreover, you can learn the latest value of P/E10 by taking advantage of the Stock Returns Predictor. It shows the current relationship between the S&P500 level and P/E10.

Preserving Capital

I believe that we are in a long lasting (secular) bear market. Because of this, I had maintained a large allocation in cash. I have now purchased a house with that cash to help out a neighbor. I am confident that this purchase will work out in all respects.

I had not intended to become a landlord. But I will take advantage this opportunity. Never overlook the value of having cash readily available.

Gazing at the Future

This helps explain why I believe that we are in a long lasting (secular) bear market. Take a look at this chart at the Crestmont Research (Ed Easterling) web site.

Gazing at the Future

Back To The Horizon

More from Crestmont Research:

“Several factors indicate that a period of decline may be upon us. This is confirmed by current forecasts by Standard and Poor’s, economists at the Congressional Budget Office, and others. It does not necessarily portend a decline in the market over the next five to ten years, although several plausible scenarios do include that possibility. More likely, we’re set for the typical period that follows super-charged eras like the 1980s and 1990s—when returns are roughly breakeven for a decade or two.”

Back To The Horizon

Excellent Discussion

There is an excellent discussion on Valuation Informed Indexing (VII or Lucky 7) at Rob Bennett’s Passion Saving web site. Rob is presenting an exchange of emails between himself and a reader named Alex Sutherland. Start with the April 29, 2008 blog entry, "You Have Not Addressed the Actual Problems Investors Face." Click on the “Today’s Passion” button and take advantage of the Permalink at the bottom of the page.

Rob Bennett’s Web Site

May 2008 Highlights

Each May, I report about the achievements of the previous twelve months. Read the latest.

May Highlights

Single Premium Immediate Annuities

Older retirees should consider Single Premium Immediate Annuities (SPIA). There are several low cost providers.

I visited the Vanguard site. I found that a 65 year old single man could get a lifetime annuity with an inflation clause at a rate of 6.45%. This compares favorably with 2% TIPS, which would supply a similar income for only 19 years.

Younger retirees do not need the life insurance benefit of a Single Premium Immediate Annuity. They believe that they will always have their full mental capabilities. They gloss over the advantage of no hassle income. They confuse the traditional low cost Single Premium Immediate Annuities with high commission Variable Annuities. To them, Single Premium Immediate Annuities do not make sense. For older retirees, they make a lot of sense.

Vanguard Annuities Section

More about Single Premium Immediate Annuities from the Vanguard site:

“Clients with medical conditions that may reduce their life expectancy may qualify for a ‘rated age’. A rated age is older than your actual age and based on your personal life expectancy as determined by a medical underwriter. A rated age applicant can either increase their income payments or reduce the premium amount needed to generate specific payment amounts.”

Today’s Long Lasting (Secular) Bear Market

The S&P500 index peaked at 1485 in August 2000. Adjusted for inflation, this would be 1810. In terms of buying power, the market has been drifting downward for almost eight years. It may continue to drift or it may drop sharply. Either way, I expect valuations to return to reasonable levels by 2012 and to bargain levels within a decade.

In spite of this, I recommend being prepared for any eventuality. You can learn how by training yourself on the Scenario Surfer.

Diversification

I am not a big fan of diversification.

Diversification

Read Rob Bennett's reaction in "Obtaining "Permission" to Ignore Valuations."

April 11, 2008 Letters to the Editor

Notes Index Starting from November 23, 2007