Notes starting August 25, 2006
Updated: September 15, 2006
Retirement Trainer
I have built s Retirement Trainer. It automatically adjusts stock market returns in accordance with valuations. I have placed a copy (Retirement Trainer B) into my Yahoo Briefcase. It is in a new Retirement Trainer folder.
Play with this Retirement Trainer. Have fun. Enjoy yourself. Discover how well you react to the numbers.
Retirement Trainer Overview
Yahoo Briefcase
P/E10 Predictions
My first excursion into Monte Carlo modeling produced Retirement Trainers. There is a side benefit. We gain an insight as to how P/E10 will behave in the future.
P/E10 Predictions
Bulls, Bears and P/E10 Predictions
Very recently, I looked into the future behavior of P/E10. I used the Monte Carlo model from my Retirement Trainers. My Monte Carlo implementation simulates Mean Reversion. My technique was inspired by Raddr’s original approach. I included Rob Bennett’s Mean Reversion discovery.
The predictions were generally reasonable, but overly pessimistic. Prices might remain high indefinitely, not returning to normal valuations. I attribute this to the lack of directional adjustments in my model. It makes no distinction between bull markets and bear markets.
In this study, I quantify the effect of long lasting (secular) market trends (bull markets and bear markets). This immediately improves our estimates provided that we get the overall direction right.
Bulls, Bears and P/E10 Predictions
P/E10 Predictions Revisited
I built Bull Bear Retirement Trainers A and B. They allow you to select the market’s direction: Bull Market, Neutral Market or Bear Market. They produce a realistic sequence of returns.
I have collected two sets of P/E10 data. The first assumes a Bear Market starting from today’s valuations, P/E10=26.0. The second assumes a Bull Market starting from P/E10=9.0.
P/E10 Predictions Revisited
Great Article
Rob Bennett has posted a great article: "My Beef with Bull Markets." Numbers such as mine tell only part of the story. Human emotions dominate investing. Humans choose which numbers to believe. Humans choose which lessons to learn from their experiences.
Rob Bennett’s Beef with Bull Markets
Playing with the Toy
I simulated three “what-if” scenarios on my Bull Bear Retirement Trainer B.
I started with today’s valuations, P/E10=27.3 and today’s TIPS interest rate of 2.2%. I specified that we are in a secular Bear Market. I sought to maintain a 5% withdrawal rate.
Playing with the Toy
More Fun with the Toy
My new toy is the Bull Bear Retirement Trainer B. I revisited run 3 from my earlier study.
Using an identical sequence of returns, I approximated fixed allocations of 50% and 80% stocks. The 50% stock portfolio succeeded. The 80% stock portfolio did not.
My original approach was best. It was very easy. It was intuitive in light of my many investigations.
More Fun with the Toy
Why Dividends Are Better
If you just looked at Gummy’s (Professor Peter Ponzo) Safe Withdrawal Rate formula, you would have no idea that withdrawing dividends is better than harvesting capital gains. It is.
What happens is that the statistical distribution CHANGES when there are dividends.
Why Dividends Are Better
Improving the Retirement Trainer
First, I built the Retirement Trainer. It was my first excursion into Monte Carlo modeling. It included Mean Reversion. Then I introduced the Bull Bear Retirement Trainer. It introduced the ability to distinguish among long lasting (secular) Bull Markets, Bear Markets and Neutral Markets.
Now I have introduced a further refinement in my Type 2 Bull Bear Retirement Trainer. It is fun. It is realistic.
Improving the Retirement Trainer
Yahoo Briefcase
Great Fun with the Improved Retirement Trainer
I have finished building the Type 2 Bull Bear Retirement Trainer. It is fun. It is realistic. Now it is time to learn from it.
Great Fun with the Improved Retirement Trainer
Accumulation and the Retirement Trainer
I couldn’t help myself. My new Type 2 Bull Bear Retirement Trainer is fun. It is realistic. I couldn’t wait. I had to look at accumulation NOW.
Accumulation and the Retirement Trainer
Dividends versus Capital Appreciation
Which is more important to retirees? Dividends or capital appreciation? Or does it make a difference?
Answer: Dividends. They are much more reliable.
Dividends versus Capital Appreciation
E10 or D10?
Professor Robert Shiller’s P/E10 does a great job when calculating Safe Withdrawal Rates. Sometimes, using dividends (P/D10) is even better.
E10 or D10?
Edited: E10 or D10?
Type 2A Bull Bear Retirement Trainer
I am continuing to improve my Type 2 Bull Bear Retirement Trainer. It does a great job in Bear Markets. It doesn’t do a good job in Bull Markets. It fails to reach high valuations.
I examined a variety of alternatives. The simplest solution is best. Don’t use separate Bull Market equations. Use the standard (Neutral Market) equations except during Bear Markets.
Type 2A Bull Bear Retirement Trainer
Simplified Retirement Trainer A
I have generated a simplified version of the Retirement Trainer. This version uses previously calculated sequences. I have included two sets of eight. One set of sequences starts at today's valuations (P/E=27.3) and a secular (long lasting) Bear Market. The other set of sequences starts with bargain prices (P/E10=8.0) and a Bull Market.
Look for Simplified Ret Tr A in my Retirement Trainers folder.
Yahoo Briefcase
More PE10 Predictions
Here are more P/E10 predictions from my Type 2A Bull Bear Retirement Trainer.
I collected two sets of P/E10 data. Each set consists of eight sequences. The first set assumes a Bear Market starting from today’s valuations, P/E10=27.3. The second set assumes a Neutral-Bull Market starting from P/E10=8.0.
I use these sequences in my Simplified Retirement Trainer A.
More PE10 Predictions
Earlier Notes
Visit Notes Starting July 10, 2006 for links to all earlier notes:
Notes through August 21, 2005
Notes through November 29, 2005
Notes through January 13, 2006
Notes Starting from January 14, 2006
Notes through April 18, 2006
Notes through June 12, 2006
Notes starting June 13, 2006
Notes Starting July 10, 2006
Notes Starting July 10, 2006 covered the following topics:
It is about time..., Time and the Gordon Model, It is about time...continued, It is about time...more, The Copie Index, It is about time...number six, Compact Variable Terminal Value Rate Calculators, Orders of Magnitude, Using Stock Return Predictions, Eye Opening Calculations with Compact CVTVR L, New Standards for Financial Reporting, A Tip about my Yahoo Briefcase, Rational Pessimism and Tobin’s q, Super Variable Terminal Value Rate SVTVR Calculators, What does “3% + inflation” mean?, Tobin q Survey, Turning Points, A Helpful Theorem, Year 15 Calculator A, Designing a 45-Year Retirement, Retirement Trainer.
Notes Starting July 10, 2006