Retirement Planning Insights

Here are some of our more important findings:
1) Valuations are critically important when investing.
2) The best measures of valuation are P/E10 and P/D10.
3) P/E10 is better when dividend cuts are a real possibility.
4) P/D10 is better when the quality of dividends is assured.
5) The rebalancing bonus is an illusion.
6) Rebalancing portfolios is a very BAD idea.
7) Shifting allocations in accordance with valuations is an EXCELLENT idea.
8) For most investors, short-term timing fails.
9) Valuation-based intermediate-term timing works exceedingly well.
10) Dividend-based strategies are best.

Here are some other findings:
1) We should always insist on timeframes and confidence limits.
2) Conclusions from shorter timeframes often fail when extended to longer timeframes. For example, the clear-cut effects of valuations at Years 10, 20 and 30 are hidden when extrapolating from monthly and/or single-year data.
3) R-squared does not tell us the entire story. We need to know about confidence limits (and/or such things as standard deviations and variances).

Here are some significant dangers:
1) The history of almost all new asset classes is too short to be reliable.
2) Even a sound investment approach can fail after it becomes a fad. Its advantages will return after a few years of underperformance. A good example of this is the “Dogs of the DOW.”
3) Dividend-based strategies are becoming a fad. Although I expect them to remain superior, I do not expect them to maintain as much of an advantage as in the past.

Here are some lessons learned from the Retirement Trainers:
1) By practicing on a Retirement Trainer, you can improve your results substantially.
2) Always pay attention to valuations.
3) You can learn how to beat the best strategies that I have developed using the historical sequence calculators.

Here are some lessons for people still in the accumulation stage:
1) Until you have a substantial portfolio, you should be 100% in stocks or 100% out of stocks, depending upon valuations.
2) At today’s valuations, [I believe that] it is best to be out of stocks entirely, regardless of portfolio size.
3) Except when valuations are exceedingly high (P/E10=20+) or when you are within 5 to 10 years of retirement, [my findings show that you should] invest entirely in stocks (as opposed to commercial paper and TIPS at real interest rates below 3%).
4) Practice on a Retirement Trainer. This helps during accumulation. NOTE: Deposits are negative withdrawals.
5) If you are starting today, you need to consider going from a 0% stock allocation to a 100% stock allocation in a few years. You can learn how to do this best by practicing on a Retirement Trainer.

Have fun.

John Walter Russell
September 17, 2006