Notes starting from September 12, 2008

Updated: September 25, 2008.

Watch PFF

Preferred stocks make excellent candidates for the high yielding portion of a dividend blend. PFF is an Exchange Traded Fund collection of preferred stocks. [It is the equivalent of an index fund.] It necessarily holds a large percentage of financial stocks.

Preferred shares are protected in part against dividend cuts. They are not protected entirely. They are not protected against bankruptcy.

Early indications are that PFF is maintaining its income stream very well, considering the overall market environment (subprime crisis).

With a dividend blend, I am concerned about the income stream but NOT prices. I am not overly concerned with the total return.

How low can it go?

How far can the market fall? Today’s P/E10 is close to 21 and P/E10=15 is likely within 5 years. It might happen within one year. Today’s S&P500 index is almost certain to fall to 875. The odds are about 50%-50% that the S&P500 will fall below 580 at P/E10=10. Ouch!

This is why I favor a delayed purchase or Valuation Informed Indexing. Others, with immediate income needs, can do well with a dividend blend or a straight income approach. They just cannot depend on price appreciation. Those needing the highest degree of safety can use a TIPS ladder or similar approach with corporate bonds. Both beat the 4% (plus inflation) claimed as needed for a 30-year safe withdrawal rate in the traditional studies.

RobCast #11

RobCast #11: Today's Retirement Planning Tools Don't Work

Today’s retirement planning tools are quite primitive. There is a paradox built into the Old School Safe Withdrawal Rate studies. They cannot possibly be right. Rob Bennett explains the details in plain English.

Rob Bennett’s RobCast page 2

Developing Retirement Skills

Read “Practicing for Retirement.”

There are skills that retirees need to learn. Cash flow management is critical. This includes matching bills with sources of income. It also forms the rationale behind the dividend blend approach.

Practicing for Retirement

Great Links

Here are links to great financial sites.

CSU Fresno
EF Moody Retirement

Default P/E10

I have set the default value of P/E10 in the Stock Returns Predictor to 20 [end of day, September 17, 2008]. The S&P500 index has finally fallen out of the danger zone [P/E10 above 20]. It is now at the high end of the normal zone.

Bear Market Rallies

There are always bull rallies during a long lasting (secular) bear market. Now may be one of them. Take advantage.

Read these words of wisdom from Rob Bennett of PassionSaving.com.

The Case for Selling in a Stock Market Downturn

RobCast #12

RobCast #12: Market Timing -- What Works and What Doesn't

There is a tremendous amount of propaganda against Market Timing. Much of it is misleading. Quotes are taken out of context, twisted to say what they do not mean.

Valuation Informed Indexing is one form of Market Timing. It beats fixed allocations hands down. Rob Bennett explains why. It makes sense. It works.

Rob Bennett’s RobCast page 2

Wisdom from Benjamin Graham

Here are a couple of articles from 2006. They include extracts from Benjamin Graham’s The Intelligent Investor. They are worth reading again.

Historical Perspective
Historical Perspective: Dividends and Earnings

Two More from 2006

Here are two more articles from 2006. Diminishing Returns tells you how to avoid a common mistake. Mean Reversion Theory explains an important aspect about stock market investing. It cannot possibly be a random walk.

Diminishing Returns
Mean Reversion Theory

An Important Observation

I was updating Designing a 45-Year Retirement. I discovered something quite unusual. This is the lesson that I learned and what to do about it.

An Important Observation

A Must Read

Rob Bennett and Mike Kitces have been exchanging emails. Rob Bennett has posted several at his "A Rich Life" blog. Now we have an excellent article by Mike Kitces. I consider it a must read.

Michael Kitces SWR Article
Rob Bennett's A Rich Life Blog

Switching Graphs

Here are graphs of Switching A and Switching B 30-Year Historical Surviving Withdrawal Rates HSWR versus the percentage earnings yield 100E10/P.

Switching Graphs

RobCast #13

RobCast #13: Recessions Don't Cause Market Turmoil, Market Turmoil Causes Recessions.

I disagree that the stock market has always had this much influence. Not many middle class investors owned stocks in October 1929. But this RobCast is still worth listening to. It brings out many important points related to today’s economy and the business cycle.

Rob Bennett’s RobCast page 2

HSWR50T2 Graph

Here is a graph of HSWR50T2 30-Year Historical Surviving Withdrawal Rates HSWR versus the percentage earnings yield 100E10/P.

HSWR50T2 Graph

HSWR80T2 Graph

Here is a graph of HSWR80T2 30-Year Historical Surviving Withdrawal Rates HSWR versus the percentage earnings yield 100E10/P.

HSWR80T2 Graph

Graphs Section

I have gathered graphs together into their own section for convenient reference.

Graphs Section

Notes starting from November 23, 2007