Notes starting from May 27, 2008

Updated: June 19, 2008.

Latest Research Findings (Price Drops)

Valuation Informed Indexing is a winner. It produces consistently good outcomes. It removes the sensitivity as to when price drops occur.

During accumulation when you are dollar cost averaging, there are two alternatives that make sense. One is to invest entirely in stocks all of the time. At year 30, the odds are about 20% that you will do spectacularly well. The odds are about 20% that you will have seriously underperformed Valuation Informed Indexing. Otherwise, the odds are that your results will be similar to Valuation Informed Indexing.

The other approach is to start with 20% stocks and 80% TIPS and wait until P/E10 falls below 15 for the first time. Then you switch to Valuation Informed Indexing. The resulting outcomes are almost identical to using Valuation Informed Indexing from the start.

Another story from my latest research is that the likelihood of P/E10’s falling below 10 is only about 50%-50%. Although it is reasonable to expect prices to fall to one half of today’s level (from P/E10=24 to P/E10=12), do not count on deeper cuts.

Current Research L: When Price Drops Occur

Current Research M: Weighted Earnings

I examine various earnings weights for P/Ex (P/E10 and others).

This is the result of a Letter to the Editor from P/E 10 Wonderer.

April 11, 2008 Letters to the Editor
Current Research M: Weighted Earnings

Reaching 6%

Remember that preferred stock and corporate bonds can act as the equivalent of 3% TIPS. Using them can lift your Safe Withdrawal Rate to 6%.

May Highlights Button

I have added a button on the left side for May Highlights. This is where I report each year’s progress.

Rob Bennett’s New Blog

Check out “A Rich Life.”

Rob Bennett’s Blog

DCA at Year 15

I looked at dollar cost averaging (DCA) while varying allocations in accordance with valuations (Valuation Informed Indexing VII). I measured progress at Year 15.

DCA at Year 15

Reacting to Price Drops during DCA: 50%

I examined what happens to a 100% stock investor after a 50% loss over two years. I assumed that he dollar cost averages. I assumed that he would cut his holdings to 50% stocks after such a blow.

A dollar cost averaging investor is likely to stick with a 100% stock allocation in today’s market because the bad years are likely to occur early.

Reacting to Price Drops during DCA: 50%

Reacting to Price Drops: Middle Years

I examined what happens to a 100% stock investor after a 50% loss spread over two years. I assumed that starts out with $100000. I assumed that he would cut his stock allocation to 20% after such a blow.

Reacting to Price Drops: Middle Years

Locking In Failure

I examined what happens to a 100% stock investor after a severe loss. I assumed that starts out with $100000. I assumed that he would cut his stock allocation to 20% if his balance fell below $80000.

A stock-only investor is in danger. He is likely to see his balance decline far enough for him to cut his stock holdings sharply. If so, he is likely to lock in failure.

Locking In Failure

6% for Early Retirement

Here are three ways to reach a 6% continuing withdrawal rate. They are suitable for your early retirement planning.

6% for Early Retirement

Variable Withdrawals

I am not a fan of variable withdrawal rates. Usually, the idea is to withdraw more now in the hope of future success, cutting back only if needed. What planners overlook is how deeply withdrawals can fall: down below 50% of the initial withdrawal rate after accounting for inflation.

Variable Withdrawals

Augmented Annuities

A single premium immediate annuity (SPIA) locks in success. But it gives up the ability to leave an inheritance.

In this study I split funds between an immediate annuity and an investment account. This allows you to capture the upside of investing with a high degree of safety.

Augmented Annuities

Worth Remembering: Orders of Magnitude

Valuations are by far the most significant factor affecting retirement outcomes. Here is a technical reference.

“Rebalancing has little to offer except, as we have discovered, when valuations are high and you have no way to discern value.”

“Individual market slices produce significantly different returns, of the order of 2% to 3% (annualized).”

“Valuations, as measured by P/E10, have a huge effect.”

Orders of Magnitude
Edited: Orders of Magnitude

Maintaining a fixed allocation and rebalancing is one of the worst investment decisions that you can make. It works only if there is no way to discern relative value. Professor Shiller’s P/E10, the dividend yield equivalent P/D5 and P/D10, and Tobin’s q all let you assess relative value.

Shun Rebalancing

Today’s Safe Withdrawal Rates

Today, P/E10=24. Here are the 30-year Safe Withdrawal Rates using a variety of strategies.

Today’s Safe Withdrawal Rates

Dividend Strategies versus Valuation Informed Indexing

I list the 30-Year Safe Withdrawal Rate for dividend strategies as 6.0%. I list the 30-Year Safe Withdrawal Rate of Valuation Informed Indexing as just under 5.5%.

The differences are smaller than indicated.

Dividend Strategies versus Valuation Informed Indexing

Now It Is Four Powerful Advantages

Remember this?

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.

I can now add a fourth: Dividend Strategies can lift your Safe Withdrawal Rate to 6.0% of your original balance (plus adjustments that match inflation).

Three Powerful Advantages of Dividend Strategies

Notes starting from November 23, 2007