Valuation-Informed Indexing

Updated: January 1, 2007.

I am opening this new section to investigate Rob Bennett's Valuation-Informed Indexing or VII, which I refer to as Lucky-7. I shall add numerous posts to build upon Rob’s foundation.

I am highly impressed with this new creation.

Rob came up with Valuation-Informed Indexing on his own. He has been very generous to credit me as a co-developer. Needless to say, I have supplied many bits and pieces of information. But it is still Rob’s creation.

You can read about Valuation-Informed Indexing at Rob’s web site, www.PassionSaving.com
Valuation-Informed Investing

You will also want to read Rob Bennett's Eighteen Tenets of The New Buy-and-Hold investing paradigm.

Basics of The New Buy-and-Hold
The New Buy-and-Hold
Eighteen Tenets of the New Buy-and-Hold

Here are the twelve tenets of Valuation-Informed Indexing. I will be writing articles related to each.

1) The first tenet of Valuation-Informed Indexing is that planning is key to effective money management.

Planning or Dreaming?
What Should You Do?
What Should You Do: Addendum?

2) The second tenet of Valuation-Informed Indexing is that planning must be at least partly numbers-based.

Numbers-Based Planning
The Story Behind the Numbers

3) The third tenet of Valuation-Informed Indexing is that the historical stock-return data provides the best numbers-based guidance available on how stocks will perform in the future.

Best, but Not Perfect
SWR Success

4) The fourth tenet of Valuation-Informed Indexing is that it is far too soon in our examinations of the historical data to be reaching dogmatic conclusions.

Stupid Assertions

5) The fifth tenet of Valuation-Informed Indexing is that it is important to distinguish between the Accumulation Stage of our investing life-spans and the Distribution Stage of our investing life-spans.

Accumulation and Distribution Stages
Accumulation Stage: Edited

6) The sixth tenet of Valuation-Informed Indexing is that in the real world (in contrast to the theoretical world studied by academics) the distinction between the Accumulation Stage and the Distribution Stage is not always entirely clear.

Complex Funding Profiles

7) The seventh tenet of Valuation-Informed Indexing is that the conventional safe withdrawal rate methodology is analytically invalid for purposes of determining safe withdrawal rates.

Analytically Invalid Methodology

8) The eighth tenet of Valuation-Informed Indexing is that valuations matter.

Valuations Matter
Refusing to See the Obvious
Edited: Refusing to See the Obvious

9) The ninth tenet of Valuation-Informed Indexing is that there is no one optimal stock allocation.

No Single Best Allocation

10) The tenth tenet of Valuation-Informed Indexing is that a revolution is needed in our understanding of what sorts of investing strategies are most likely to lead to long-term investing success.

Investment Strategies
Rob Bennett’s Coming Revolution Article
Dollar Cost Averaging Today
Dollar Cost Averaging Today: Edited
DCA Today: The Point of Frustration

11) The eleventh tenet of Valuation-Informed Indexing is that buy-and-hold investing is a far more complicated and difficult (but effective!) strategy than it is often portrayed to be.

Buy-and-Hold is Not Easy

12) The twelfth tenet of Valuation-Informed Indexing is that the primary driver of investing decisions is emotion, not reason.

Blinded by Emotions

Valuation-Informed Indexing (Lucky 7) Calculators

I am placing a series of simple calculators into my Yahoo Briefcase. I call them Valuation-Informed Indexing (Lucky 7) Calculators. Or Lucky 7 Calculators for short.

Unlike my research calculators, these will be simple to use. In essence, they present the formulas that I have already generated in a more convenient form.

These calculators are small, typically using 20 to 30 KBytes.

I believe that it would be easy to host these calculators at a more convenient location. Unfortunately, doing so is beyond my software capabilities.

These are the titles of the calculators that I have placed into my Lucky 7 Calculators folder:

1) Balances with 0% TIPS
2) Balances with 1% TIPS
3) Balances with 2% TIPS
4) Dollar Cost Averaging
5) Gummy Slices Stocks
6) Safe Withdrawal Rates
7) Stock Returns
8) TIPS
9) Time To Catch Up
10) Growth with Switching.
11) Stock Returns Adjusted

Yahoo Briefcase

Remember that I have written a NOTE for those who have problems downloading calculators from my Yahoo Briefcase.

Problem Downloading Calculators? NOTE

I developed new formulas for the following calculators:

1) Balances with 0% TIPS
2) Balances with 1% TIPS
3) Balances with 2% TIPS

I have summarized the conditions and equations in Balances with TIPS Calculators.

Balances with TIPS Calculators

I have added some pictures to my Lucky 7 Calculators folder. They show how real, annualized stock returns vary with P/E10. They are Microsoft Word documents.

There seems to be a high level of interest in switching in the accumulation stage.

We have been told repeatedly that buy and hold is always best. It isn't true.

Buy and hold (i.e., fixed stock allocations) is obviously inferior during retirement. Typically, it reduces your Safe Withdrawal Rate by 1%.

It is not so obvious during accumulation. Ignoring valuations can be costly. I have built a simple spreadsheet calculator that allows you to play with the numbers. This is not nearly so useful as our Accumulation Stage: Edited study. But you get to put in your own numbers.

I have added a Growth with Switching calculator to the Lucky 7 Calculators folder. It shows what happens after 30 years if you switch among 100% stocks, 50% stocks-50% TIPS and 100% TIPS according with P/E10 at the beginning of each decade.

Yahoo Briefcase
Accumulation Stage: Edited

Valuation-Informed Indexing (Lucky 7) SWR Translators

I am placing SWR Translators into my Yahoo Briefcase. I call them Valuation-Informed Indexing (Lucky 7) SWR Translators or Lucky 7 Translators for short. They are easy to use.

SWR Translators are an alternative to Monte Carlo models. You supply an estimate of the real, annualized, total return of your portfolio (not just your stocks).

I have put the following capabilities into my Lucky 7 Translators folder:

1) SWR Translator. It calculates 30-Year Safe Withdrawal Rates and 30-Year Coin Toss Rates (50%-50% Odds) for portfolios HSWR50 and HSWR80.

2) HSWR50T2 SWR Translator. It calculates 30-Year Safe Withdrawal Rates and 30-Year Coin Toss Rates (50%-50% Odds) for portfolio HSWR50T2.

3) Year 10 SWR Translator. This calculates 10-Year Safe Withdrawal Rates and Year 10 Percentage Balances for portfolio HSWR50.

These SWR Translators are small, typically using 20 to 25 KBytes.

Yahoo Briefcase

Remember that I have written a NOTE for those who have problems downloading calculators from my Yahoo Briefcase.

Problem Downloading Calculators? NOTE

Investing for Dummy --The Six "Must Know" Rules

Rob Bennett continues to add to the Valuation-Informed Investing section at his web site. He has just published Investing for Dummy -- The Six "Must Know" Rules.

Here they are:

1) The first Investing for Dummy rule is -- Stocks Rock!
2) The second Investing for Dummy rule is -- You Don’t Need to Beat the Market.
3) The third Investing for Dummy rule is -- Emotions Trump Numbers.
4) The fourth Investing for Dummy rule is -- Buy-and-Hold is Harder Than It Looks.
5) The fifth Investing for Dummy rule is -- Valuations Matter.
6) The sixth Investing for Dummy rule is -- Timing Works.

Investing for Dummy -- The Six "Must Know" Rules

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