Notes starting from July 18, 2009

Updated: August 9, 2009.

Two in the Bush

Today’s stock prices are only slightly above historical norms. P/E10=16. Using the Stock Returns Predictor [button on left], the most likely real, annualized, total return over the next decade is 5.0% per year.

The market has better than a 50% chance of falling in half. Government policies seem to be making matters worse. If the market does fall to P/E10=8, the most likely Year 10 return will jump to a mouthwatering 14.5% per year real, annualized, total return.

Decide for yourself whether to keep some money on the sidelines, waiting for a better opportunity. It is a matter of good returns that you can count on (albeit with a rough ride getting there) versus fabulous returns that might fail to materialize.

July 2009 Inflation

Remember last summer’s gasoline prices? That short term anomaly stills shows up in the official numbers. Retirees may feel the effect of lower housing prices, but that is not reflected in today’s reports.

“The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in June before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the last 12 months the index has fallen 1.4 percent, as a 25.5 percent decline in the energy index has more than offset increases of 2.1 percent in the food index and 1.7 percent in the index for all items less food and energy."

BLS-July2009-Release

Financial Services

Dividend investors favored banks because of their high dividends at a reasonable payout ratio. They felt protected because of the following:

1) Government regulation,
2) Audited books and
3) Great credit ratings.

Exactly what went wrong is unclear. Sometimes, you just get blindsided.

I don’t like over-diversification. But there is the need for a degree of diversification.

Why DVY?

I started following DVY when I first built my Income Stream Allocators. I needed to characterize the income stream from dividend paying stocks. We have some information from the S&P500 index, but it is not oriented toward dividends.

For retirees, maintaining a steadily growing income stream is vital.

As young as it is, DVY is the first Exchange Traded index Fund oriented toward a steadily rising dividend income stream. There are other dividend oriented index funds and ETFs. But they are focused on capital appreciation.

The Valuation Informed Indexing Advantage

Valuation Informed Indexing offers a tremendous advantage. Here are some numbers based on the most likely values of P/E10 from Year 2000 to Year 2030.

The Valuation Informed Indexing Advantage

More about the VII Advantage

Valuation Informed Indexing has almost always shown an advantage when compared to owning 100% stocks. Exceptions were rare until the 1990s stock price run up. With the October 2008 meltdown, we have seen a return to normalcy.

The average 10-year advantage of Valuation Informed Indexing was 2.4% per year from 1921-1980. From 1981-2000 the bull market run up favored an all-stock portfolio by 3.4% per year (average). It peaked at 10.9% in Year 1990. Valuation Informed Indexing has now regained the advantage.

Simple Valuation Informed Indexing

Valuation Informed Indexing offers an advantage over buy and hold. Here is what a simple variant delivers in terms of Safe Withdrawal Rates. Typically, you make only one or two allocation shifts in a 30 year period.

Simple Valuation Informed Indexing

Simple VII Sensitivity Study

Valuation Informed Indexing offers a tremendous advantage over buy and hold. Here is a sensitivity study. It shows what happens to a simple variant. This time, I used a Bear Market exit point of P/E10=15 instead of 10.

Simple VII Sensitivity Study

Switching C Variants

I optimized stock allocation switching for today’s valuations on the Investment Strategy Tester. I call this Switching C. I have added variants SwC15 and SwC10.

Switching C Variants

Current Research R

I have opened up Current Research R. It quantifies how much Valuation Informed Indexing improves performance.

Current Research R: The VII Advantage

Allocation Switching Graphs

I have posted graphs of Year 10, 20 and 30 real, annualized, total returns for SwAT2, SwOptT2 and Switching C. I compare them to a fixed allocation portfolio of 50% stocks and 50% TIPS. View them in the More Graphs section.

More Graphs

Understating the Advantage of VII

In his latest Letter to the Editor, Rob Bennett tells us how we have understated the advantage of Valuation Informed Indexing over Passive Investing (fixed allocations). We have failed to consider leverage when stock prices are low.

So get out the Scenario Surfer and the Investment Strategy Tester. Let’s have some fun.

August 1, 2009 Letters to the Editor

P/E10=18 Almost

Both Switching C and Switching D have you cutting your stock allocation to 20% when P/E10=18. Consider cutting your stock allocation soon.

Valuation Informed Indexing Details

Here is an outstanding audio about Valuation Informed Indexing by its creator, Rob Bennett.

RobCast: Nine Valuation-Informed-Indexing Portfolio Allocation Strategies

6% for the Early Retiree

You just have to read this. I answer a letter from Michael.

August 1, 2009 Letters to the Editor

You Need an Anchor

I have been looking at varying allocations based on annual price changes alone. Doing so is difficult, at best. Using P/E10 is a whole lot easier. It provides an anchor. It is a reference with predictive value.

Notes Index Starting from June 25, 2009

Notes Index starting from November 23, 2007