New Posts
Updated: August 27, 2006.
The Lower Latch and Hold Threshold
Latch and Hold dramatically improves the upside of (stock allocation) switching when starting in times of typical and bargain level valuations. Latch and Hold retains the advantage of switching versus fixed allocations in times of high valuations.
This time I looked at the lower threshold.
The Lower Latch and Hold Threshold
Additional Constraints with Latch and Hold
Latch and Hold dramatically improves the upside of (stock allocation) switching when starting in times of typical and bargain level valuations. Latch and Hold retains the substantial advantage of switching over fixed allocations in times of high valuations.
Benjamin Graham recommended stock and bond allocations between 25% and 75%.
I have looked at new conditions with Benjamin Graham’s constraint in mind.
Additional Constraints with Latch and Hold
Idiot Switching
I read an article recently that showed that timing never works, regardless of the details. I marvel at how much cleverness it takes, possibly unknowingly, to force such a conclusion.
This got me to thinking about how our results could be distorted and whether our procedures would catch the errors.
I set about building a ridiculous algorithm. I call it Idiot Switching. I put it through its paces. This is what I found.
Idiot Switching
Edited: Idiot Switching
Typical Values of P/E10
My choice for the typical value of P/E10 is 14.
Here are the numbers.
Typical Values of P/E10
Special Note about Mean Reversion
Rob Bennett has made an important discovery. Mean Reversion occurs faster when you adjust for valuations.
Special Note about Mean Reversion
Rob Bennett's Mean Reversion Discovery
No New Discovery This Time
Normally, I specify a single withdrawal rate. Then I see what happens to portfolio balances. This time, I looked at what happens when you withdraw at each portfolio’s Historical Surviving Withdrawal Rate. I was hoping to find something useful, something to tell us when everything is going OK.
I was hoping to find something new. I didn’t.
No New Discovery This Time
Looking a Little Bit Harder
Recently, I reported that I made No New Discovery This Time. This time, I dug a little bit deeper. There is a story to tell after all.
Looking a Little Bit Harder
Time and the Gordon Model
The Gordon Model makes its best predictions 5, 10 and 15 years into the future. It does not do as well at 20 and 30 years.
Time and the Gordon Model
Orders of Magnitude
The rebalancing bonus exists because of a misleading definition. It is an illusion. Very often, rebalancing lowers returns.
Returns from individual market slices add or subtract 2% to 3% from the market as a whole.
Variations caused by valuations are huge. At today’s prices, with P/E10=26, the most likely (real) return ten years from now is 1.3%. At historically typical prices, with P/E10=14, the most likely return after ten years is 6.3%. At bargain levels, but well above market bottoms, with P/E10=8, the most likely return after ten years is 14.5%.
Orders of Magnitude
Edited: Orders of Magnitude
Using Stock Return Predictions
According to the Stock-Return Predictor, the most likely return of stocks will be 1.3% (plus inflation) ten years from now. Today’s TIPS yield 2.5% (plus inflation).
Does this mean that we should invest entirely in TIPS?
No. Not necessarily.
Using Stock Return Predictions
Eye Opening Calculations with Compact CVTVR L
I have placed Compact Calculator CVTVR L into my Yahoo Briefcase. It is great for long-term planning.
Here are some examples of what it can do.
Eye Opening Calculations with Compact CVTVR L
New Standards for Financial Reporting
During my professional career, I was never allowed to get away without doing the following. Why do we allow "financial experts" to get away with anything less?
This is based on my “It’s about time...” series of notes.
New Standards for Financial Reporting
Rational Pessimism and Tobin’s q
I found out about Rational Pessimism: Predicting Equity Returns using Tobin's q and Price/Earnings Ratios only in the last few days. I am impressed.
In this review, I show how this fits into my own research. In addition, I am opening up Current Research J: Tobin’s q.
AUGUST 13, 2006 UPDATE:
Tobin q Errors identifies our most important new findings.
Rational Pessimism and Tobin’s q
Tobin q Survey
Tobin q Errors
Tobin q Backup Material
Current Research J: Tobin’s q
Turning Points
History verifies that the stock market rises higher than expected and falls lower than expected. Our investigations of Tobin’s q and stock market returns tell us more. They tell us about the turning points.
Turning Points
A Helpful Theorem
To calculate withdrawal rates for various final balances, it is sufficient to know the withdrawal rates for final balances of zero and 100% of the initial balance. Rates for intermediate balances maintain the same proportions.
I have incorporated these findings into Super Variable Terminal Value Rate SVTVR calculator L. It is a simplified version of SVTVR K.
A Helpful Theorem
Designing a 45-Year Retirement
Here is an example of how you can use my 15-Year and 30-Year calculators back-to-back.
How about a 4.5% (plus inflation) withdrawal rate?
Designing a 45-Year Retirement
P/E10 Predictions
My first excursion into Monte Carlo modeling produced Retirement Trainers. There is a side benefit. We can learn how P/E10 is likely to behave in the future.
P/E10 Predictions
Bulls, Bears and P/E10 Predictions
Very recently, I looked into the future behavior of P/E10. I used the Monte Carlo model from my Retirement Trainers. My Monte Carlo implementation simulates Mean Reversion. My technique was inspired by Raddr’s original approach. I included Rob Bennett’s Mean Reversion discovery.
The predictions were generally reasonable, but overly pessimistic. Prices might remain high indefinitely, not returning to normal valuations. I attribute this to the lack of directional adjustments in my model. It makes no distinction between bull markets and bear markets.
In this study, I quantify the effect of long lasting (secular) market trends (bull markets and bear markets). This immediately improves our estimates provided that we get the overall direction right.
Bulls, Bears and P/E10 Predictions
Earlier New Posts
These are earlier pages of New Posts.
New Posts (original)
New Posts (Sept-Oct 2005)
New Posts (Nov 2005-Jan 2006)
Dividend-Based Design Example, Historical Perspective: Dividends and Earnings, The Story Behind the Numbers, Individuals Pick Winners, Risky Alternatives, Dollar Cost Averaging Today, Year 10 Choices, Diminishing Returns, Mean Reversion Theory, Building Blocks, Extracting Information, What Do I Really Think About Dividends?, Allocate 25%, Adopting a New Approach, What If There Is A Bubble? and Volatility and Your Timeframe.
New Posts though April 13, 2006
Revisiting P/E10, Revisiting P/E10: Dividends, Three Powerful Advantages of Dividend Strategies, Dividends and Constant Terminal Value Rates, May 2006 Highlights, Investment Traps, Why People Ignore Valuations, Latched Threshold Survey, Early Success with Latch and Hold, Continued Success with Latch and Hold, Adding Constraints to Latch and Hold
New Posts though June 11, 2006