Scenario Surfer Tips

The Scenario Surfer shows you each year’s starting value of P/E10. You can find out the current value of P/E10 if you know the current level of the S&P500 index. Simply use the Stock Returns Predictor.

All amounts are real dollar amounts. That is, all amounts are in terms of today’s dollars.

Retirees

Limit withdrawals to 4.5% to 5.0% of the original balance (plus inflation) when starting from a P/E10 level above 20.

Benjamin Graham varied allocations according to valuations. Benjamin Graham recommended allocations of both stocks and bonds (TIPS) between 25% and 75%. This minimizes regret.

Modify Benjamin Graham’s advice to allocate 20% to stocks when P/E10 is above 20, between 20% and 80% when P/E10 is between 14 and 20, and 100% when P/E10 is below 12.

Historically, a stock allocation of zero has been best whenever P/E10 has been above 26. Statistically, however, looking forward, it can take a decade or more for stocks to become attractive when starting from today’s valuations.

Avoid killer price drops. Limit stock allocations when P/E10 is above 20.

Take advantage of the slow variation of stock prices. A trend can last several years. Within the P/E10=14 to 20 region, don’t automatically reduce stocks according to formula as prices rise. Don’t automatically add stocks when prices drop. (Reference: Latch and Hold studies.)

Young Accumulators

You make deposits by entering negative withdrawal amounts. Dollar cost average to build up a nest egg.

Until you have a sizeable balance, allocate either 0% to stocks (P/E10=20 or higher) or 100% to stocks (P/E10 below 20).

Approaching Retirement

Start by entering your initial balance and add deposits by making (smaller) negative withdrawals.

As your capital grows, pay more and more attention to capital preservation. Start acting more and more like a retiree as you come within a decade of your planned retirement date. Pay attention to valuations. Avoid a killer 40% loss in a single year or a 60% loss over two years.

Have fun.

John Walter Russell
October 10, 2007