January 14, 2009 Letters to the Editor

Updated: January 20, 2009.

Reality Checker and longer periods than 30 yrs

I received this letter from Michael.

Hi John - you have us waiting with such anticipation for the Reality Checker! Saw your most recent Note where you indicate than a 30 yr SWR using it is 5.2% in a Bear Market and 5.7% in a Normal one...curious how it changes for longer periods, say 45 or 60 or forever? Wouldn't think it decreases much but curious on your findings...thanks.

HERE IS MY RESPONSE

Here are the results for Year 30 balances other than zero:

For a P/E10=14 Bear Market:

4.8% for 50% of the original balance at Year 30 (worst case).
4.4% for 80% of the original balance at Year 30 (worst case).
4.0% for 100% of the original balance at Year 30 (worst case).

For a P/E10=14 Normal Market:

5.1% for 50% of the original balance at Year 30 (worst case).
5.0% for 80% of the original balance at Year 30 (worst case).
4.5% for 100% of the original balance at Year 30 (worst case).

You can stick Year 30 segments together to get a continuing withdrawal rate. You do not really know what the market will be like at Year 30, but this is a conservative estimate. If the returns are unfavorable leading to Year 30, which is typical of lower confidence limits, the following market conditions should be excellent.

Under this assumption:

4.0% (plus inflation) produces a continuing portfolio far into the distant future with a P/E10=14 Bear Market.

4.5% (plus inflation) produces a continuing portfolio far into the distant future with a P/E10=14 Normal Market.

Again, these numbers are conservative estimates.

Info re: Valuations

I received this letter from Curt.

I like your site -- thanks. I have a couple of questions:

1. Where can I find the latest data for the P/E10 ratio, to plug into the calculator to calculate likely 10-year returns?

2. I am following Hussman, at hussmanfunds.com. He uses a similar approach to tactical asset allocation, analyzing when stocks are historically under-valued and recommending a higher allocation to stocks at that point. Are there any other websites that address this issue? If I can follow several sites, then I am more likely to get good information on when it might be appropriate to lighten up on stocks, as valuations rise.

Thank you.

HERE IS MY RESPONSE

Thank you, kindly.

I keep P/E10 up to date. Start with the default value. Then use the slider to put in several values of P/E10. Click on "Calculate" each time. Use whichever value comes closest to matching today’s S&P500 index level.

There are many sources of the latest value of the S&P500 index, including Marketwatch.com and Morningstar.com and, most of the time, Yahoo Finance.

I very much like Dr. Hussman’s commentary. He attempts to determine what is prudent in the short run as well as assess valuations. Another site of interest is John Grantham’s GMO site. He includes confidence intervals and market segments with his Year 7 predictions. I believe that you will like Ed Easterling’s Crestmont Research site as well. For a non-quantitative overview, I recommend Rob Bennett’s PassionSaving.com.

Dr. John Hussman’s Web Site
Jeremy Grantham's GMO Web Site
Crestmont Research
Rob Bennett’s Web Site

Just wanted to thank you

I received this letter from Jacob.

Just wanted to thank you for all the great information. Your website will help a lot of people out. It is very nice of you to share all this great information for free.

I came to conclusions similar to yours on investing, after becoming disillusioned with the Modern Portfolio Theory method of investing. What I decided to do would best match your Delayed Purchase strategy on your Five Great Choices page.

I'm a relatively young investor, age 33. I became interested in investing a few years ago when I decided I needed to take investing, in my 401k, seriously. I stumbled onto the BogleHeads.org web site a year or two ago and immersed myself in the MPT and Slice & Dice strategies.

Something that always bothered me about this strategy was that you were always buying no matter what the situation was in the stock market and the economy. Years ago when the Dot Come bubble occurred I knew that we were in a bubble. I work in IT and knew for a fact that many of the companies going public were worthless. However, when I found the MPT way of doing things I went ahead and agreed with them that it is impossible to time the market, even though I knew from my own life experience that it isn't true. You can't time the market perfectly, but you don't need to. It's never too early to jump off the boat and swim to shore, if you can plainly see a waterfall up ahead...

During this recent real estate bubble I also knew things weren't right, but I ignored common sense and held to the belief that I can't time the market. I followed the advice that the best strategy is to construct an asset allocation of stocks and bonds and simply buy them, no matter what, as long as you maintained your desired allocations percentage wise. Well, needless to say I came out of last year kicking myself for not paying attention to common sense.

In my search for a better way, I decided that I wanted to get away from reliance on share price appreciation as much as possible. This led me to a dividend focused investing strategy. I also decided that I never wanted to get caught flat footed in another bubble again. This led me to using dividend yields and PE/10 as a way of judging when a stock fund was overpriced or worth buying. I decided that if I ever found myself in a situation where stocks were overpriced I would simply put my money into and intermediate bond fund and tips.

The absolute worst thing you can ever do is to over pay for stocks. You are much better off buying bonds and being happy with a real return of 2%.

Anyway, again, thanks for the great web site!

HERE IS MY RESPONSE

I greatly appreciate your comments. Thank you.

You are at an excellent age for investing. Look for some outstanding buying opportunities over the next 5 to 10 years.

Again, thank you for your kind words.

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