Notes starting from May 22, 2007

Updated: August 18, 2007.

Interesting Quote

From page 142 of Evidence-Based Technical Analysis (David Aronson):

“..Instead, EMH (Efficient Market Hypothesis) supporters took the low road to save their favored hypothesis by giving themselves the license to invent a new risk factor any time they needed to explain away findings that conflicted with their favored theory..”

“The precedent for this knowledge-regressive method of immunizing the EMH hypothesis against falsification had already been established by earlier flawed defenses of EMH..In response to this inconvenient evidence, EMH defenders claimed that low price-to-book ratios and low PE ratios were merely signals of stocks with abnormally high risk..What is key here is the fact that EMH advocates had not defined low price-to-book or low PE as risk factors in advance of the studies showing that stocks with these traits were able to earn excess returns..”

Price Peaks

Today’s holder of the S&P500 index can expect his balance to remain below 228.8% of its current purchasing power throughout the next decade even with dividends reinvested. The likely range of outcomes is below 153.5%. The most likely outcome is a loss throughout the entire decade.

Price Peaks

An Illusion of Numbers

This is one of my earliest articles. It is among the most important.

An Illusion of Numbers

Subtle Observation about Dividend Capture

The probability distribution of the income stream from dividend capture is largely independent of price fluctuations.

Subtle Observation about Dividend Capture

Building On a 45-Year Retirement

Previously, I showed how to reach Year 45 with a traditional approach using my calculators. You could withdraw 4.5% of your original balance (plus inflation).

This time, I paid closer attention to the human element. I introduced Benjamin Graham’s constraint. I kept both stock and bond allocations between 25% and 75%. You can withdraw 4.2% (plus inflation).

Building On a 45-Year Retirement
Edited: Building On a 45-Year Retirement

Starting at 5%

In Today’s Alternatives, I recommended starting at a 5% withdrawal rate as a matter of caution. Here is how an early retiree might go about it.

Starting at 5%

Starting at 5% with Risk

This is a variant of Starting at 5%. I changed the tradeoff between risk and reward.

Starting at 5% with Risk

Evidence-Based Technical Analysis

Evidence-Based Technical Analysis is a great overview. It deserves a general audience, not restricted to technical analysis and not restricted to data analysis.

Professor David Aronson explains the scientific method and how to analyze data. He has great quotes discrediting the Efficient Market Hypothesis. He presents several important observations from Behavioral Finance.

I have added my own thoughts as to how to improve the power of Professor Aronson’s statistical tests.

Evidence-Based Technical Analysis

Rock Bottom Withdrawal Rate

What is the worst case continuing withdrawal rate? The rock bottom is 2.77% per year.

Rock Bottom Withdrawal Rate

More Interesting Quotes

From pages 174 and 176 of Predicting the Markets of Tomorrow (James O’Shaughnessy):

“The most important thing to remember with any carefully chosen investment strategy is that there will always be times when they underperform other strategies or other segments of the market. It is only those investors who can keep their focus on the very long term who will be able to reap the rewards of a long-term commitment to an intelligent strategy. Successful investors must keep their guard up and resist the urge to let what the market is doing today influence their market decisions.”

From page 183 of Predicting the Markets of Tomorrow (James O’Shaughnessy):

“Because many of the large-cap growth ETFs use simple price-to-book methodologies to distinguish between value and growth stocks—with high price-to-book stocks assigned to the growth index—I do not recommend them. As we’ve seen in earlier chapters, I expect high price-to-book stocks to do horribly over the next twenty years. What’s more, a high price-to-book value does not make a growth stock.”

Monitoring the Dividend Blend

The Dividend Blend is our best approach so far. It combines growth, value and dividends. Combined with a delayed purchase, it lifts the continuing withdrawal rate to 6.1% of the original balance (plus inflation).

Better yet, the Dividend Blend is easy to monitor. Just create a spreadsheet or download my Expanded Allocator from my Yahoo Briefcase. Measure progress every few years. Make sure that the dividend amounts grow as well as needed. Make adjustments, favorable as well as unfavorable, when appropriate. Replace stocks whose prices have gotten far ahead of what they should be. Make sure that your total dividend amount continues to grow and manage the cash flow. You will avoid unpleasant surprises. You will assure success.

Read Today’s Alternatives for a good overview of your choices, including the Dividend Blend.

Today’s Alternatives

Compare the ease of monitoring the Dividend Blend with the difficulty and uncertainty of monitoring more traditional retirement portfolios.

Portfolio Safety Insights

Automatic Allocator

I have placed my Automatic Allocator into my Yahoo Briefcase in the Allocators Folder. It is a modified version of the Expanded Allocator. It simplifies calculations when using a Dividend Blend.

Fill in the blocks and read the surplus cash balances (the Real TIPS Balance) for years 0 through 50. In this version, each year’s real (inflation adjusted) WITHDRAWAL AMOUNT is the same.

Yahoo Briefcase

Back of the Envelope: Dividend Blend

Not everyone is comfortable using a spreadsheet calculator. Here is how to calculate a withdrawal rate for a dividend blend portfolio by hand. It is not exact. It comes close.

Back of the Envelope: Dividend Blend

Dividend Rule of Thumb

Today’s market valuations are sky high. Its dividend yield is under 2%. Not many high quality companies pay more than 3%.

It will be easy to find high quality companies that yield 4% to 5% when the market is fairly valued. High dividend stocks will pay even more.

As hard as it is to imagine, the stock market as a whole will yield 8% and more when prices fall to bargain levels.

P/E10, P/D5, P/D10 and Tobin’s q allow us more precision. Single year dividend payout ratios have trended down since before 1950. Still, if you want something easy to remember, keep this in mind. When valuations are normal, you can find yields of 4% to 5% all over the place, offered by high quality companies.

Excellent Discussions

There have been many excellent discussions at the Morningstar Income & Dividend Investing discussion board recently. [June 20, 2007.] Be sure to visit.

Morningstar Web Site

Honeymoon

I have been distracted recently.

I have almost finished James O’Shaughnessy’s latest book, which I will review favorably, but which could benefit from the latest findings at Rob Bennett’s PassionSaving site and this site. I will make my report and offer suggestions in due time.

I was a retired widower who never expected to remarry. But then I met Karen, who actually knew who Dr. J. Vernon McGee was. WOW! And it got better and better. Now, we are off on our Honeymoon.

Dividend Blend Rule of Thumb

Here is a rule of thumb for the dividend blend.

Dividend Blend Rule of Thumb

Scenario Surfer Status Report

The hard part of building the Scenario Surfer is over. I like what it does. It is powerful. It is well worth the wait.

Now we will make it easy to operate. Only then will we present it for public use.

Those familiar with spreadsheets can download earlier prototypes from my Yahoo Briefcase. Look under Retirement Trainers.

Yahoo Briefcase

Morningstar?

I am singing the Morningstar blues.

They upgraded their site and promptly got rid of me. I use Firefox. Morningstar no longer responds.

I have a workaround that allows me to READ Morningstar discussion boards but not to participate. At least, not for now.

I have some ideas. Maybe I will be able to join the discussions in the future.

Predicting the Markets of Tomorrow

Just buy the book.

Then read what Rob Bennett posts at his PassionSaving site and what I write at this site.

This is not James P. O’Shaughnessy’s best book. That was “What Works on Wall Street.” It is his most timely. It tells you what you need to know today.”

Predicting the Markets of Tomorrow Book

August 9, 2007 Letters to the Editor

I have just posted two Letters to the Editor. One asks what "TIPS" stands for. The other addresses the influence of taxes when making withdrawals.

August 9, 2007 Letters to the Editor

Data Mining Bias

This extends my discussion of Evidence-Based Technical Analysis. I write this to improve the understanding of the role of theories for coping with data mining bias.

Data Mining Bias

Doctor’s Visit

I visited my doctor today and introduced him to my new wife. All is well.

Doctor’s Visit

Saving For Retirement

Those who are still accumulating money for retirement are in an excellent position. Those who are already in retirement can do much better than conventional studies claim. Both should use the techniques developed at this site.

Saving For Retirement