Notes starting June 13, 2006.
Updated: July 9, 2006.
The Lower Latch and Hold Threshold
Latch and Hold dramatically improves the upside of (stock allocation) switching when starting in times of typical and bargain level valuations. Latch and Hold retains the advantage of switching versus fixed allocations in times of high valuations.
This time I looked at the lower threshold.
The Lower Latch and Hold Threshold
Additional Constraints with Latch and Hold
Latch and Hold dramatically improves the upside of (stock allocation) switching when starting in times of typical and bargain level valuations. Latch and Hold retains the substantial advantage of switching over fixed allocations in times of high valuations.
Benjamin Graham recommended stock and bond allocations between 25% and 75%.
I have looked at new conditions with Benjamin Graham’s constraint in mind.
Additional Constraints with Latch and Hold
Current Research I: Latch and Hold
Latch and Hold has been a success from the start.
I have now gathered my Latch and Hold findings together. I will be building a simple, spreadsheet calculator in the near future. I will make it available via my Yahoo Briefcase.
My most recent article presents equations and results when the balance at year 30 is close to zero. I will be adding articles with equations and typical results with Constant Terminal Value Rates and Half Constant Terminal Value Rates in the near future.
The year 30 balance for withdrawals at the Constant Terminal Value Rate equals the original balance (plus inflation). The year 30 balance for withdrawals at the Half Constant Terminal Value Rate equals one half of the original balance (plus inflation).
Current Research I: Latch and Hold
Dividend Investors
Here are the Final Comments from Latch and Hold Equations CTVR. They appear in the latest Current Research I: Latch and Hold.
These data cover a variety of conditions. Viewed as a whole, they tell us a lot about the sensitivity of latch and hold to precise details. This lets us know what is reasonable to expect, looking forward.
I will use these results to generate simple, easy to use spreadsheet calculators.
These results favor dividend-based strategies when starting at today’s valuations. Yields from carefully selected dividend portfolios easily match these Coin Toss Rates (50%-50% odds). They easily beat these Safe Withdrawal Rates.
Latch and Hold Equations CTVR
Current Research I: Latch and Hold
The Accumulation Stage
As a rule, you are better off investing entirely in stocks initially. By year 15, it makes sense to start preserving capital. When you get within 5 or 10 years of retirement, it becomes vitally important to preserve capital.
There are exceptions, especially now, during a time of high valuations. There is a tremendous downside risk. For those starting out today, even dollar cost averaging into stocks is hardly worth the effort. It can take twenty years before dollar cost averaging pays off. There are better ways to invest.
Here is an edited compilation from five posts.
Accumulation Stage: Edited
Idiot Switching
I read an article recently that showed that timing never works, regardless of the details. I marvel at how much cleverness it takes, possibly unknowingly, to force such a conclusion.
This got me to thinking about how our results could be distorted and whether our procedures would catch the errors.
I set about building a ridiculous algorithm. I call it Idiot Switching. I put it through its paces. This is what I found.
Idiot Switching
Edited: Idiot Switching
Latch and Hold Spreadsheet A
I have added LH Spreadsheet A, which calculates the withdrawal rates of the Latch and Hold portfolios in Current Research I: Latch and Hold. You enter P/E10 and the percentage balance of your portfolio at year 30.
[For ease of use, the spreadsheet also converts P/E10 into current S&P500 values and displays the result.]
Look in the Latching Calculators folder in my Yahoo Briefcase.
Yahoo Briefcase
Typical Values of P/E10
My choice for the typical value of P/E10 is 14.
Here are the numbers.
Typical Values of P/E10
Growth with Switching
There seems to be a high level of interest in switching in the accumulation stage.
We have been told repeatedly that buy and hold is always best. It isn't true.
Buy and hold (i.e., fixed stock allocations) is obviously inferior during retirement. Typically, it reduces your Safe Withdrawal Rate by 1%.
It is not so obvious during accumulation. Ignoring valuations can be costly. I have built a simple spreadsheet calculator that allows you to play with the numbers. This is not nearly so useful as our Accumulation Stage: Edited study. But you get to put in your own numbers.
I have added a Growth with Switching calculator to the Lucky 7 Calculators folder. It shows what happens after 30 years if you switch among 100% stocks, 50% stocks-50% TIPS and 100% TIPS according with P/E10 at the beginning of each decade.
Yahoo Briefcase
Accumulation Stage: Edited
Special Note about Mean Reversion
Rob Bennett has made an important discovery. Mean Reversion occurs faster when you adjust for valuations.
Special Note about Mean Reversion
Rob Bennett's Mean Reversion Discovery
No New Discovery This Time
Normally, I specify a single withdrawal rate. Then I see what happens to portfolio balances. This time, I looked at what happens when you withdraw at each portfolio’s Historical Surviving Withdrawal Rate. I was hoping to find something useful, something to tell us when everything is going OK.
I was hoping to find something new. I didn’t.
No New Discovery This Time
Looking a Little Bit Harder
Recently, I reported that I made No New Discovery This Time. This time, I dug a little bit deeper. There is a story to tell after all.
Looking a Little Bit Harder
The Stock-Return Predictor
The Stock-Return Predictor is officially up and running. Rob Bennett has announced this in a press release.
The Stock-Return Predictor Press Release
Rob Bennett has introduced the Stock-Return Predictor in his Financial Freedom Blog article of July 5, 2006.
Rob Bennett's Web Site
Rob Bennett has added helpful explanatory material at his site. I have provided only a brief summary. You can access my version using the Stock Returns button as well as from the link below. Both calculators are identical.
The Stock-Return Predictor at Rob Bennett's Site
The Stock-Returns Predictor at This Site
Calculator I
I have added Calculator I.
It is the same as Calculator H except that I have removed withdrawal rates with 0% stocks and 10% stocks and I have added TIPS withdrawal rates at years 10, 15, 20, 25, 30, 35, 40, 45 and 50.
Some people express concern that the Government could play games with inflation statistics, reducing the ability of TIPS to counter inflation. Keep in mind that all of the numbers are adjusted by identical amounts. The performance of a TIPS-only portfolio would still be the same relative to a portfolio with stocks.
You may download this calculator from the Big Project folder in my Yahoo Briefcase. It is Calculator I.
NOTE: I have often found it necessary to refresh my Yahoo Briefcase several times in order to get a display.
Current Research H: The Big Project
Yahoo Briefcase
Earlier Notes
Here are our earlier Notes.
Early Notes
Be sure to read A Note about Statistics at the bottom of the following link.
Notes through November 29, 2005
This references a couple of MUST READ articles. It has a couple of its own as well.
Notes through January 13, 2006
SWR Success, Dividend-Based Design Example, Top Notch Letters, Historical Perspective: Dividends and Earnings, The Story Behind the Numbers, Individuals Pick Winners, Dollar Cost Averaging Today, More Comments about the February 5, 2006 Letter to the Editor, Diminishing Returns, Bible Study, Problem Downloading Calculators?
Notes Starting from January 14, 2006
Great Letters, Deflation and I-Bonds, Asset Allocation and Long-Term Returns: An Empirical Approach, Valuation-Informed Indexing (Lucky 7) Calculators, Valuation-Informed Indexing (Lucky 7) SWR Translators, Mean Reversion Theory, Building Blocks, Two Baselines, Extracting Information, What Do I Really Think About Dividends?, Allocate 25%, TIPS Yields Are Moving Higher, Adopting a New Approach, What If There Is A Bubble?, Volatility and Your Timeframe, Oops!, P/Ex Data.
Notes through April 18, 2006
Revisiting P/E10, Revisiting P/E10: Dividends, NFB Closed, Links Repaired, The Big Project, Calculator D, Long-Term Stock Returns, My Most Recent Articles, Dividend Calculators A and B, Dividend Growth Sensitivity Study, Three Powerful Advantages of Dividend Strategies, Calculator H, CTVR Calculator A, Dividends and Constant Terminal Value Rates, HCTVR Calculator A, May 2006 Highlights, Investment Traps, Variable Terminal Value Rate Calculator A, Variable Terminal Value Rate Calculator B, Why People Ignore Valuations, Latching Calculators, Latched Threshold Survey, Investing for Dummy --The Six "Must Know" Rules, Early Success with Latch and Hold, Continued Success with Latch and Hold, Adding Constraints to Latch and Hold, Time To Catch Up Calculator
Notes through June 12, 2006