Notes starting from October 8, 2007

Updated: November 20, 2007.

Free Lunches for Everyone

Have you ever heard someone say “and that would be a free lunch” as a proof of an investment argument? I have. Repeatedly.

Free Lunches for Everyone
October 2, 2007 Letters to the Editor

General Topics

I have decided not to continue updating General Topics. It has become nothing more than a second copy of my New Posts section.

Simplified Automatic Allocator

I have placed a Simplified version of the Automatic Allocator into my Yahoo Briefcase. Look for Simp Auto Allocator in my Allocators folder. My Yahoo username is jwr19452000.

Yahoo Briefcase

Scenario Surfer

The Scenario Surfer is up and running. Press the button on the left or use the link below.

Scenario Surfer

Nearing Retirement

I just ran a real life condition on the Scenario Surfer. I started with $500000 ten years before retirement. I started with a P/E10=26 bear market. I varied allocations with P/E10. I made no contributions during the first ten years.

My balance at Year 10 was $632797. It would have been $568045 with a 20% fixed stock allocation. It would have been $491882 with a 50% fixed stock allocation. It would have been $405664 with an 80% fixed allocation.

I withdrew (an inflation adjusted) $40000 per year through Year 15. My balance grew to $747903. After that, I withdrew (an inflation adjusted) $50000 each year through Year 30. I ended up with a balance of $1242728.

In contrast, the 20% and 50% fixed stock allocation portfolios went bankrupt in Year 28. The 80% fixed stock allocation portfolio went bankrupt in Year 27.

Remember, the first decade was before retirement.

The Scenario Surfer shows you the way to a comfortable retirement in contrast to an early bankruptcy.

Accumulator

I dollar cost averaged into the Scenario Surfer, starting with $10000 and making annual deposits of $10000 each year for 20 years. [In the Scenario Surfer, these were withdrawals of $-10000 each year.] I varied allocations between 100% stocks and 100% TIPS at 2% interest in accordance with P/E10.

At Year 20, my balance was $393993. This compares with $282796 with 20% stocks, $309089 with 50% stocks and $328993 with 80% stocks.

At that point, I withdrew $20000 per year for the remaining ten years. I varied allocations with P/E10.

At Year 30, my balance was $345454. With a fixed allocation of 20% stocks, my balance would have been $175007. With a fixed allocation of 50% stocks, my balance would have been $232120. With a fixed allocation of 80% stocks, my balance would have been $275805.

P/E10 at that point was 11, which is very favorable for a 100% stock allocation.

Dollar cost averaging reduces the effect of valuations, but it does not eliminate it entirely. The high withdrawal rate (almost 6%) is sustainable at times of favorable valuation (low P/E10). Because of the dollar cost averaging during the first twenty years, the market went from unfavorable valuations, as it is today, to favorable, as it will be in the future.

Twenty years of dollar cost averaging with $10000 each year leads to a nice $20000 per year supplement to Social Security and pension income later on.

[All amounts are adjusted to match inflation.]

On later runs, I found that varying allocations in accordance with P/E10 did not always produce the best results. It did, however, consistently produce satisfactory results.

Valuations During Accumulation

For those starting to save today, the outlook is bright.

Valuations During Accumulation

A Story for Accumulators

I collected two sets of data on the Scenario Surfer. They tell a story. Listen closely.

A Story for Accumulators
October 20, 2007 Letters to the Editor

Another Story for Accumulators

I have collected more data on the Scenario Surfer. It improves our understanding.

Another Story for Accumulators

Changing the Threshold

I have collected more data on the Scenario Surfer. This time, I changed the threshold for Dollar Cost Averaging.

Changing the Threshold

Adding a Second Threshold

There is still a lot to be learned from the Scenario Surfer. This time, I added an upper threshold for Dollar Cost Averaging. It worked well.

Adding a Second Threshold

Struggling during Maintenance

Between accumulation and withdrawals, there is maintenance. There are no deposits. There are no withdrawals. Today’s marketplace is tough. We learn this from the Scenario Surfer.

Struggling during Maintenance

Lessons from the Scenario Surfer

It is still early, but we have learned a lot from the Scenario Surfer.

Lessons from the Scenario Surfer

TIPS Table

Erwin has asked some excellent questions about the TIPS Table (button on the left).

October 20, 2007 Letters to the Editor
TIPS Table

Not Total Return

Retired? Nearing retirement? Focus on the income stream, not total return.

Not Total Return

The Rule of 25 Article

I received a Letter to the Editor about my Rule of 25 Article.

October 20, 2007 Letters to the Editor
The Rule of 25

Scenario Surfer Generator

I have built the Scenario Surfer Generator. It allows you to generate credible sequences of cumulative stock returns and P/E10 as a function of the initial valuation. It incorporates two forms of Mean Reversion. It uses the same algorithms as the Type 2A Bull Bear Retirement Trainer.

SWR Calculators Starting September 5, 2006

The Next Thirty Years

I brought up the Scenario Surfer Generator to get an idea of how the next thirty years in the stock market might to play out.

It is a time for caution. At the same time, the market could still reward the reckless. Both are consistent with the past.

The Next Thirty Years

The Next Thirty Years Addendum

I looked at my data again. We need to protect ourselves from being locked out of stocks entirely.

The Next Thirty Years Addendum

Outstanding Tutorials

Visit Morningstar’s Income & Dividend Investing discussion board. Read El Lobo’s outstanding thread on Retirement Withdrawal Strategies.

Morningstar

International Dimension

Great question. I wish that I had a better answer.

November 20, 2007 Letters to the Editor