Notes
Updated: June 12, 2006.
New Search Feature
I have added a new search feature at the bottom of this page. It includes an index and a site map.
Revisiting P/E10
I did not start out assuming that P/E10 was a good measure of valuation. I checked a variety of measures and found that P/E10 was the best so far.
This time, I have examined variations on the number of years in the denominator. I looked at P/E1, P/E5, P/E10, P/E15, P/E20, P/E25 and P/E30.
Once again, P/E10 is best.
Revisiting P/E10
Revisiting P/E10: Dividends
Valuations have less relevance when estimating dividend amounts than prices. But they are relevant.
I checked a variety of measures. Even with dividends, P/E10 is best.
Revisiting P/E10: Dividends
NFB Closed
I note with sadness that the NoFeeBoards have closed down for the second time.
For much of its existence, the NoFeeBoards allowed posts with the kind of material that you see at this site. This attracted intense hostility. I have long maintained that, if anybody could make such a board work, it would be ElSupremo (ES). He did not succeed.
Did I miss something? Might it ever be possible? Perhaps. The essential ingredient is a keen interest in the subject matter. Although ES was supportive of our research, his main interest is index funds. It might be that someone else will be able to pull it off in the future.
Links Repaired
Over the last few days, I have been fixing links internal to this site. Our site provider has been upgrading his software. In the process, his software for internal links has become less tolerant. Everything that I set up with www no longer works. I had to replace it with http://www.
Fixing the links was easy. It is just that I have 267 pages. It takes time to check them out.
The Big Project
I am about to open up a new area of CURRENT RESEARCH. It is the result of several emails with Rob Bennett. I intend to build some more calculators. It will be a joint effort.
I envision a product in which you use a slider to enter the S&P500 index or P/E10, another slider to enter the TIPS interest rate and a third slider to enter your stock allocation.
The calculator would generate with graphs and tables of the Safe Withdrawal Rate, the Most Likely Rate and the High Risk Rate.
Among other things, you could see how the optimal stock allocation varies with P/E10 (valuations) and TIPS interest rates.
Calculator D
I have put Calculator D into my Yahoo Briefcase. It is part of the Big Project.
It is a compact calculator. It uses the exact equations for stocks and 2% TIPS. You simply enter a value of P/E10. It converts this into a current S&P500 index level. It displays a full set of withdrawal rates for each stock allocation in increments of 10%.
At the Safe Withdrawal Rate, you have about a 95% (one-sided) probability of reaching year 30 successfully. At the Reasonably Safe Rate, you have about an 80% chance of reaching year 30 successfully. At the Coin Toss Rate, your odds are down to 50%-50%.
All withdrawals are given as a percentage of your portfolio's initial balance (plus inflation).
Take the LINK to my Yahoo Briefcase. Select the Big Project folder.
Yahoo Briefcase
Long-Term Stock Returns
I have added a spreadsheet of S&P500 real, annualized, total returns to my Lucky 7 Calculators folder.
When asked for a single number, I report the long-term real, annualized, total return of the S&P500 as 6.8%.
If you go back before the modern era, this number drops to 6.3% to 6.6%.
Yahoo Briefcase
My Most Recent Articles
I received a Letter to the Editor asking what I recommend for those who are building wealth. I selected several articles and provided links. You may find this of interest if you are approaching retirement.
I have added a new calculator as part of the Big Project. Now you can compare ideal stock allocations with 1% TIPS and 2% TIPS. You can see how your ideal starting allocation varies with the initial valuation (P/E10).
You can read about the Big Project under Current Research. You can access my calculators from my Yahoo Briefcase. They are in the Big Project folder.
I have just added Calculators F and G. Calculator F adds 3% TIPS. With Calculator G, you enter P/E10 and the TIPS interest rate.
Be sure to read about the TIMING MISMATCH problem in the Current Research section.
Yahoo Briefcase
Dividend Calculators A and B
The Big Project continues.
I have added Dividend Calculators A and B to my Yahoo Briefcase. I based them on Dividend-Based Design Example. They allow you to estimate dividend growth. The estimates are in terms of the income stream, dividend amounts, not dividend yields, which vary with price.
All of the numbers include inflation adjustments (i.e., real dollars).
You can read all of the details under Current Research H.
I placed the calculators in the Big Project folder in my Yahoo Briefcase. I have listed them as Dividend Calc A and Dividend Calc B.
Dividend-Based Design Example
Yahoo Briefcase
Current Research H
Dividend Growth Sensitivity Study
I was asked about what happens to dividend growth projections when I limit my investigation to more recent times, starting in the mid-1950s.
There are differences. Fortunately, they tend to reinforce, not undermine, our previous use of the data.
Dividend Growth Sensitivity Study
Three Powerful Advantages of Dividend Strategies
Here are three powerful advantages of dividend-based strategies.
1) Dividends continue indefinitely.
2) Dividends isolate you from price fluctuations.
3) Dividend-based strategies have a gentle failure mechanism.
Three Powerful Advantages of Dividend Strategies
Calculator H
I have put Calculator H into my Yahoo Briefcase. It is in the Big Project folder. It adds SwAT and SwOptT portfolios to calculator G.
SwAT switches stock and TIPS allocations, subject to constraint A, which keeps both stock and bond allocations between 25% and 75%.
SwOptT switches stock and TIPS allocations optimally without the constraint.
The details are in Current Research H.
Current Research H
Yahoo Briefcase
CTVR Calculator A
Constant Terminal Value Rates (CTVR) are withdrawal rates that leave the balance at the end of a period identical to the initial balance plus inflation.
CTVR Calculator A is almost identical to Calculator H. It calculates 30-Year Constant Terminal Value Rates instead of rates that end with a zero balance.
Constant Terminal Value Rates are useful for young retirees. This Constant Terminal Value Rate Calculator is especially helpful when making comparisons with dividend strategies. Just understand that dividend amounts almost always grow substantially ahead of inflation over a 30 year period.
Current Research H
Yahoo Briefcase
Dividends and Constant Terminal Value Rates
Constant Terminal Value Rates (CTVR) are withdrawal rates that leave the balance at the end of a period identical to the initial balance plus inflation. They are especially useful for young retirees because withdrawals continue indefinitely.
CTVR withdrawals allow for the selling of shares. Most dividend-based strategies do not. This makes for an interesting comparison.
Dividends and Constant Terminal Value Rates
HCTVR Calculator A
Constant Terminal Value Rates (CTVR) are withdrawal rates that leave the balance at the end of a period identical to the initial balance (plus inflation). Half Constant Terminal Value Rates (HCTVR) leave a final balance of one-half of the initial balance (plus inflation).
HCTVR Calculator A is almost identical to CTVR Calculator A. It calculates 30-Year Half Constant Terminal Value Rates instead of 30-Year CTVRs.
Half Constant Terminal Value Rates are useful for retirees who have a reasonable chance of living longer than the 30-year planning period. They can look upon long life as a blessing even if their retirement portfolio disappoints.
For young retirees, this defines an intermediate level of risk. It is not as restrictive as a Safe Withdrawal Rate. They can relax their safety demands at the Constant Terminal Value Rate, while maintaining a high level of safety at the Half Constant Terminal Value Rate.
Current Research H
Yahoo Briefcase
May 2006 Highlights
Our roots date back to May 13, 2002, when Rob Bennett asked a simple question. It was not allowed to be answered. Now, it is May 2006.
May 2006 Highlights
May 2005 Highlights
Investment Traps
Here are four traps to avoid.
Investment Traps
Variable Terminal Value Rate Calculator A
I have added the Variable Terminal Value Rate Calculator A to my Yahoo Briefcase. It interpolates withdrawal rates for balances between 0% and 100%.
Constant Terminal Value Rates (CTVR) are withdrawal rates that leave the balance at the end of a period identical to the initial balance plus inflation. Half Constant Terminal Value Rates (HCTVR) leave a final balance of one-half of the initial balance (plus inflation). I use my 30-year Safe Withdrawal Rate calculator for balances of zero at Year 30.
This adds flexibility for traditional retirees who have a reasonable chance of living longer than the 30-year planning period. This allows younger retirees to look at intermediate levels of risk.
Yahoo Briefcase
Variable Terminal Value Rate Calculator B
My latest Variable Terminal Value Rate Calculator B identifies optimal stock allocations (subject to constraint B).
Constraint B is that stock and TIPS allocations are both between 20% and 80%. This is similar to Benjamin Graham’s constraint (Constraint A) that both stock and bond allocations remain between 25% and 75%.
I find it very interesting to see the strong influence of high valuations. When valuations are in the reasonable range (i.e., whenever P/E10 is less than 20), the optimal stock allocation is almost always 80%, the largest percentage that I allow. Low TIPS interest rates and high terminal value percentages also favor high stock allocations.
Today’s story is new. Today’s valuations are unusually high. Today’s P/E10 is 26.8. Requiring high levels of safety has a great influence at today’s valuations. It had minimal influence in the past.
I have included some computational details in Current Research H.
The calculator is in the Big Project folder in my Yahoo Briefcase.
I have just added Variable Terminal Value Rate Calculator C to my Yahoo Briefcase. It too is in the Big Project folder. I made an extra copy of the optimal allocations and withdrawal rates. I placed it in columns M through Q, rows 1 through 9 for convenience. Otherwise, it is identical to Variable TVR Calc B.
Current Research H
Yahoo Briefcase
Why People Ignore Valuations
Why Do People Ignore Valuations? In the past, it did not matter. It did not affect stock allocations. Today, it does.
Why People Ignore Valuations
Edited: Why People Ignore Valuations
Latching Calculators
I am building calculators that latch onto a high and/or low P/E10 threshold for a specified number of years. I have put my Latch and Hold LH01 calculator dated June 8, 2006 into my Yahoo Briefcase. These calculators will give us better insight as to what happens if you stick with an allocation for several years after P/E10 passes an extreme level.
LH01 is very large even though I placed it into a self extracting zip file. The new software starts in row 8000. It calculates an alternative for P/E10, which is found in row 186. I have not checked it out thoroughly. It may still have bugs.
Yahoo Briefcase
Latched Threshold Survey
I have just built Latch and Hold Calculator LH02. It tells us what happens if we extend the crossing of a P/E10 threshold by a fixed number of years. This is my initial survey.
Latched Threshold Survey
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
Early Success with Latch and Hold
I recently built Latch and Hold Calculator LH02. It tells us what happens to Historical Surviving Withdrawal Rates if we extend the crossing of a valuation (P/E10) threshold by a fixed number of years.
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.
Early Success with Latch and Hold
Continued Success with Latch and Hold
This extends my early investigations of 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 advantage of switching versus fixed allocations in times of high valuations.
This investigation shows that we can relax our requirements on the upper threshold.
Continued Success with Latch and Hold
Adding Constraints to Latch and Hold
Latch and Hold dramatically improves the upside of (stock allocation) switching when started in times of typical and bargain level valuations. Latch and Hold retains the advantage of switching versus fixed allocations in times of high valuations.
Earlier investigations showed that we can relax our requirements on the upper threshold. This investigation moves toward Benjamin Graham’s constraint on both stock and bond allocations to 25% to 75%.
We lose very little when we make the minimum stock allocation equal to 25%.
Adding Constraints to Latch and Hold
Time To Catch Up Calculator
I have added the Time To Catch Up Calculator to my Yahoo Briefcase. It is in the Lucky 7 Calculators folder.
It helps you decide whether to leave your money in stocks when you expect a major correction. For example, today's stocks are priced twice as high as normal. Would you be better off leaving your money in stocks, hoping that they will double before the next correction? Or would you be better off by putting your money into 2.5% TIPS?
Assuming that stocks deliver their long-term return of 6.8% (plus inflation) prior to the correction, it would still take 16.867 years before you could rest in comfort.
Yahoo Briefcase
Earlier Notes
Here are our earlier Notes.
Early Notes
Be sure to read A Note about Statistics at the bottom of the following link.
Notes through November 29, 2005
This references a couple of MUST READ articles. It has a couple of its own as well.
Notes through January 13, 2006
SWR Success, Dividend-Based Design Example, Top Notch Letters, Historical Perspective: Dividends and Earnings, The Story Behind the Numbers, Individuals Pick Winners, Dollar Cost Averaging Today, More Comments about the February 5, 2006 Letter to the Editor, Diminishing Returns, Bible Study, Problem Downloading Calculators?
Notes Starting from January 14, 2006
Great Letters, Deflation and I-Bonds, Asset Allocation and Long-Term Returns: An Empirical Approach, Valuation-Informed Indexing (Lucky 7) Calculators, Valuation-Informed Indexing (Lucky 7) SWR Translators, Mean Reversion Theory, Building Blocks, Two Baselines, Extracting Information, What Do I Really Think About Dividends?, Allocate 25%, TIPS Yields Are Moving Higher, Adopting a New Approach, What If There Is A Bubble?, Volatility and Your Timeframe, Oops!, P/Ex Data.
Notes through April 18, 2006.