Notes starting from October 25, 2008

Updated: November 18, 2008.

Overlapping Sequences

If you look closely at the SWR Translator Graphs, you will notice a small variation about the trendline in the Year 14 data when the total return is small. The relevant years are very close together. These data show the effect of overlapping sequences (or rolling 30-year periods) and year to year correlations. The variations about the trendline are very small. Notice, also, that these worst case outcomes were just a little bit lucky.

Do not be overly concerned about stock market data that use rolling periods. The randomness in the data is far greater than the slight error caused by data overlap.

SWR Translator Graphs

Today’s Year 30 SWR

Check out the Year 30 SWR (button on left side) with P/E10=15. It is 5.1% (plus inflation) with a high stock allocation.

Now is the time to start buying stocks. GRADUALLY. Better prices are likely, but not necessarily right away. It pays to wait.

TIPS are yielding 3%+

TIPS are now yielding more than 3% (plus inflation) at all maturities (midday October 28, 2008).

This is an outstanding opportunity to lock in high returns for the fixed income portion of your portfolio.

Dave has added his remarks. See the October 26, 2008 Letters to the Editor.

October 26, 2008 Letters to the Editor

An Easy 5% Continuing Withdrawal Rate

Look at these dividend yields.

High Quality Stocks

BMY 6.03%
JNJ 3.00%
PFE 7.23%
MRK 4.91%

KO 3.45%

PG 2.48%

SO 4.89%
DUK 5.62%

GE 6.36%

Dividend Yield Exchange Traded Fund

DVY 4.70%

Reaching a 5% continuing withdrawal rate that keeps up with inflation is getting easy. You can do even better with a dividend blend. Consider my practice portfolio, DVY and PFF.

UPDATE:

The dividend blend practice portfolio has a 6.4% (plus 3% annual inflation) continuing withdrawal rate if started today (November 3, 2008).

RobCast #25

RobCast #25: The Only Thing Worse Than Short-Term Investing Is Short-Term Investing That Pretends to Be Long-Term Investing.

Rob Bennett continues with his audio programs. This is among his best. He gives an overview of modern investing. It is suitable for a general audience. It is not limited to investing experts.

This RobCast lasts 73 minutes.

Rob Bennett’s RobCast page 4

Caution at High Withdrawal Rates

If you use a liquidation strategy, be very careful when the Safe Withdrawal Rate is high. The Scenario Surfer tells us that the difference between a portfolio’s lasting 30 years and going bankrupt at Year 21 can be razor thin. The problem is that there is little room to recover IF you make large withdrawals when the market turns sour.

Dividend strategies avoid this problem because they never sell shares to generate income.

ElLobo’s Observation

On a Morningstar discussion board, I recently mentioned that PFF has a 9% current yield, but without growth. ElLobo stated that if you withdraw 6% and reinvest the remaining 3%, you will have a continuing withdrawal rate of 6% (plus 3% inflation). If you withdraw 5% and reinvest the remaining 4%, you will have a continuing withdrawal rate of 5% (plus 4% inflation). He is right.

PFF is an Exchange Traded index Fund that invests in preferred stocks.

Gummy’s latest on Safe Withdrawal Rates (Quick and Dirty)

Once again, Gummy (Professor Peter Ponzo) has advanced the mathematical theory of Safe Withdrawal Rates. This time, he uses the annualized return to calculate Safe Withdrawal Rates in a closed form equation.

I would use this in conjunction with the Stock Returns Predictor (button on left). Use today’s P/E10 from your knowledge of the S&P500 level to determine the annualized return (most likely) at Year 10. Use this in Gummy’s equations.

This has applications similar to those of my Safe Withdrawal Rate Translator.

Gummy’s Safe Withdrawal Rate 2 (Quick and Dirty)

RobCast #27

RobCast #27: The Efficient Market Theory Is a Big Bunch of Hooey.

Rob Bennett’s key insight: the stock market is not instantly efficient. Allow yourself 30 years and it becomes efficient. A lot can happen in 30 years.

All of Rob Bennett’s RobCasts are suitable for a general audience.

Rob Bennett’s RobCast page 4

RobCast #28

RobCast #28: Common Sense is the "Problem."

This is very well done. It is a pleasant chat. It includes an overview of how Rob Bennett got to where he is today.

Rob puts everything into perspective. “Investing is not just numbers.”

Rob Bennett’s RobCast page 4

Why People Ignore Valuations

This article from May 30, 2006 tells us why high stock allocations make sense once again.

“What is the best stock allocation? In the past, there was a single answer: 80% stocks. Most often, it was the right answer. Valuations had little effect.”

Our research has advanced. You can do even better.

Now is a good time to increase your stock allocation to 40% or 50%. But do so slowly. P/E10=15 to 16. Expect prices to get even better.

Why People Ignore Valuations

Again, how low can it go?

The S&P500 has fallen below P/E10=15. It could fall to one half of this level. Reference: Professor Robert Shiller’s S&P500 online data. The bottom could come soon, but demographics favor its taking a decade. Reference: John Mauldin’s Bulls Eye Investing.

My own guess is that valuations will be overwhelmingly attractive in the not too distant future. Step aside from today’s falling knife and look for attractive opportunities within a year.

It still makes sense to start buying now. Aim toward a stock allocation of 40% or so. If P/E10 falls below 10, consider owning 100% stocks with an emphasis on dividend income. The bargains would be compelling.

Stock Buybacks

I don’t like stock buyback. This is why.

Stock Buybacks

Return of the Risk Premium

Stock prices have fallen sharply. Until recently, valuations had gotten so high that investors were paying a gambler’s premium. They paid extra for the opportunity to play. At today’s prices, stocks are once again a good investment. The risk premium has reemerged.

Allow a little time for prices to settle down. Then start buying, gradually. Stocks are once again attractive. They should have solid returns a decade from now. Prices will fluctuate in the meantime. But the odds are strongly in your favor.

Price Meltdown

In Irrational Exuberance Professor Robert Shiller showed convincingly that overvaluation is what causes stock prices to fall. There are lots of precipitating factors. But the press blames stock market crashes on only one, the latest to catch their attention. It is not the bailout. It is not the TARP (Troubled Asset Relief Program). It is not the election. The reason for the stock market meltdown is that stock prices were much too high.

Professor Shiller even developed the P/E10 measurement tool. It shows us how prices compare historically. The meltdown has returned stock prices to their normal range, not to extreme bargain levels.

RobCast #32

RobCast #32: The Good Form of Capitulation (No Depression Required!)

This is a fantastic overview of today’s stock market and related topics.

Rob Bennett’s RobCast page 4

Notes Index starting from November 23, 2007