Notes starting from August 9, 2008

Updated: September 10, 2008.

TIPS and Taxes

The inflation matching price adjustments of TIPS are taxed immediately. This is why I prefer for TIPS to be in a tax sheltered account.

There is very little difference in taxes between TIPS at 2% with 3% inflation and a bond ladder at 5% without a built in inflation adjustment.

A TIPS ladder is no worse than any other bond ladder. You need to reinvest part of your income from a traditional bond ladder if you want to avoid falling behind inflation.

S&P500 Dividend Payout Ratio

Here is a graph with a long term version of the S&P500 payout ratio.

S&P500 Dividend Payout Ratio

Switching with TIPS Example

I took this from my Yahoo Briefcase. It shows how well you can do with a mechanically defined algorithm that varies allocation in accordance with P/E10. You can train yourself to do better by practicing on the Scenario Surfer.

The Historical Surviving Withdrawal Rate depends on the initial valuation even with this form of Valuation Informed Indexing.

Switching with TIPS Example
Yahoo Briefcase

S&P500 Dividend Theory

Retirees can gain confidence by examining the history of S&P500 dividends. Dividend strategies are safe and sound. The downside risk is a temporary income drop less than 10% (nominal).

S&P500 Dividend Theory

S&P500 Dividend Design Baseline

Here are some baseline numbers for use in designing dividend strategies.

S&P500 Dividend Design Baseline

An Easy 5%

Here is how to put together a portfolio with a 5% Safe Withdrawal Rate. It lasts indefinitely. It keeps up with inflation.

An Easy 5%

Something Simple

Here is a simple way to reach a continuing withdrawal rate of 6% (plus inflation).

Something Simple

Practicing for Retirement

Why not practice before retirement? Here are my suggestions.

Practicing for Retirement

Black Swan Event

The Year 2000 bubble was a black swan event. One is spotted only rarely. The bubble extended higher than past bubbles in the United States. The ten year price appreciation from 1990 greatly exceeded the norm.

Stock returns have settled back to their normal range. The S&P500 index has moved sideways. P/E10 has fallen because of inflation and earnings growth.

Too many people are anchored in a bubble mentality. They think of the 1990s as normal. They were not. Only now are people beginning to see clearly. Returns since 2000, although dismal, are actually a little bit better than historical norms.

More RobCasts

Rob Bennett has posted his tenth RobCast. I recommend them highly. Rob advocates rational investing. He invented Valuation Informed Indexing.

Prices matter. Always. Too many people deceive themselves into thinking otherwise.

Rob Bennett’s A Rich Life Blog
Rob Bennett’s RobCasts

RobCasts #1 and 2

RobCast #1: Buy-and-Hold Cannot Work -- Here's Why
RobCast #2: Passive Investing vs. Rational Investing

This is a great introduction to stock market investing. Yet, it is as advanced as anything that you can find. Rob exposes the errors of today.

The insanity of the hour is that you should maintain a constant stock allocation regardless of stock market risk. Rob makes it clear. You should vary stock allocations. You need to maintain a constant level of risk. This is Rational Investing. It takes prices into account.

Passive Investing does the opposite. It ignores prices altogether. In reality, it is highly emotional. It is thinly coated with a theory that cannot possibly be true.

RobCasts #3 and 4

RobCast #3: Few Dare to Tell the Truth About Stock Investing
RobCast #4: I'd Be the Growlingest Bear on the Internet If Only I Were A Bear

Rob Bennett and I are willing to tell you the truth about stock investing. Too many “experts” will not. Look carefully, however, and you will see a hint every now and then. The issue is whether readers are willing to listen. Too many “experts” assume that their readers only want to hear soothing words.

This freezes research. It holds people back. Because of this, many people are heading toward busted retirements. Yet, when you look at the research at this board, you will discover that there are many fine alternatives. They are safe. They even provide higher income.

Rob Bennett is right. Emotions dominate investments.

Just remember that today’s poor investment outlook will be followed by a spectacular opportunity in the not too distant future.

Rob Bennett is not really a bear. He is a realist.

RobCast #5

RobCast #5: The Great Safe-Withdrawal-Rate Debate

Rob Bennett correctly characterizes the Great Safe-Withdrawal-Rate Debate. It is the strangest that I have ever encountered.

Rob Bennett’s RobCasts

RobCasts #6 and 7

RobCast #6: Rob Bennett, the Reluctant Investing "Expert"
RobCast #7: I Know More About Investing Than John Bogle (and You Can Too!)

Rob Bennett believes that “valuations affect long-term returns.” Knowing this makes Rob Bennett an expert.

The idea is obvious. It should not be controversial. Yet, it is. This was the idea that led to the Great Withdrawal Rate debate. This is the idea that our leading “experts” are unwilling to acknowledge.

Think through the logic of passive investing. It doesn’t make sense. Prices matter. Prices must matter. Eventually. Not always right away. Prices matter in the long-run. Maintaining a fixed stock allocation regardless of circumstance makes no sense at all.

RobCast #8

RobCast #8: The Coming Revolution in Investing Advice

Rational investing will replace the passive investing model of today. It has to. Passive investing does not make sense. It never will.

Rational investing will reduce risk dramatically. Stock market investing will make sense. Rob Bennett would like the change to take place without the pain that today’s investors are likely to suffer.

Gummy is Back

Gummy (retired Professor Peter Ponzo) is back. His site was off the air for a couple of days. Visit his gummy-stuff dot org for the best in financial mathematics.

Gummy's (Peter Ponzo's) Web Site

RobCast #9

RobCast #9: The True Bogleheads

John Bogle has a wide following. Rob Bennett is among his admirers. But many of John Bogle’s followers are bringing him harm. They isolate him. John Bogle needs to advance beyond the passive investing model.

Rob Bennett is John Bogle’s true friend. He has many words of praise. But Rob tells it straight. Rob is the True Boglehead.

Rob Bennett’s RobCast Page 2

RobCast #10

RobCast #10: The Case Against Valuation-Informed Indexing

This is well worth your time. This is far more than knocking down straw man arguments. Rob Bennett has put together a fabulous overview of rational stock market investing.

Rob Bennett’s RobCast Page 2

Price Drops When P/E10=20

P/E10 has fallen below 22. Soon it will be 20. The Scenario Surfer tells us what to expect.

Price Drops When P/E10=20

It’s a Great Day

It’s a Great Day for Valuation Informed Indexing and Delayed Purchases. P/E10 has touched 21 briefly. Expect P/E10=15 within 5 years, possibly within a single year. It is well worth the wait. We will be able to buy stocks at a fair price.

It is likely, but not guaranteed, that P/E10 will fall below 10 within the decade. If P/E10 falls that low, a 100% stock allocation can make sense.

Bennett-Kitces Emails

Rob Bennett is publishing a series of emails with Michael Kitces, who wrote an excellent Safe Withdrawal Rate study. Michael Kitces has made this study available for a free download. Visit Rob Bennett's "A Rich Life" blog starting September 9, 2008.

Rob Bennett's A Rich Life Blog

Notes Index Starting from November 23, 2007