Notes starting September 16, 2006
Updated: October 20, 2006.
My Retirement Trainers Work!
I posted this on the Morningstar Income & Dividend Investing discussion board (Conversation 1219) this morning (September 16, 2006).
Morningstar Web Site
I have generated a simplified version of the Retirement Trainer. This version uses previously calculated sequences. I have included two sets of eight. One set of sequences starts at today's valuations (P/E=27.3) and a secular (long lasting) Bear Market. The other set of sequences starts with bargain prices (P/E10=8.0) and a Bull Market.
Look for Simplified Ret Tr A in my Retirement Trainers folder.
SWR Calculators Starting September 5, 2006
Yahoo Briefcase
I have written a description of the runs and what they tell us.
More P/E10 Predictions
I have left my practice session with run a3 on the Simplified Retirement Trainer A in my Yahoo Briefcase. Run a3 starts at today’s valuations (P/E10=27.3) in a secular (long lasting) bear market. I started with $1000000 and withdrew $45000 (plus inflation) each year for 30 years. [NOTE: my Retirement Trainers use real dollars. All dollar amounts are adjusted for inflation.]
Under normal circumstances, the probability of reaching Year 30 with a fixed stock allocation between 20% and 80% is 50%-50% at best. The probability rises above 80% when you vary stock allocations. You can have a guarantee of reaching reach Year 30 by investing entirely in TIPS (at 2.2% interest).
I ended up with a balance of $1630285.
According to Super SVTVR Calculator L, only a full range switching program (that varies stock allocations from 0% to 100%) and a 100%-stock portfolio come close to ending up with 100% of the initial balance. The Almost Certain Failure Rates are 4.70% and 4.55%, respectively. Neither comes close to ending up with 160% of the initial balance.
I checked a 100%-stock portfolio on the Simplified Retirement Trainer A. It would have ended with a balance of $28648 in Year 23, not enough to reach Year 24.
My conclusion? Retirement Trainers work. They help you become a better investor.
Demonstration a1 to a8
I have run through all eight Bear Market sequences. They begin with P/E10=27.3. The TIPS interest rate is 2.2%. In all cases, I started with $1000000. I withdrew $45000 (plus inflation) each year. These are my final balances (in real dollars):
a1 $1080662
a2 $1431280
a3 $1630285
a4 $1048227
a5 $1581600
a6 $ 243463
a7 $ 729262
a8 $1670173
The lowest value of P/E10 in sequence a6 was 15.2. The lowest value of P/E10 in sequence a7 was 12.7. All other sequences fell to P/E10 levels below 10.0.
You can view my practice session results. Download my Demonstration a1 to a8 file from the Retirement Trainers folder in my Yahoo Briefcase.
Yahoo Briefcase
My approach has evolved this way:
1) I withdraw the full amount from stocks or from TIPS. I seldom withdraw intermediate amounts.
2) I move money into stocks when P/E10 falls below 20.
3) I move money heavily into stocks when P/E10 falls below 10.
4) I move toward a stock allocation around 20% to 50% when P/E10 is around 15 to 20.
5) I move toward a stock allocation around 50% to 80% when P/E10 is below 15.
6) I move toward a stock allocation close to 100% when P/E10 is below 10.
NOTE: Deposits are negative withdrawals.
Keeping an eye on price (via P/E10) pays off. It is better than any fixed stock allocation.
Retirement Planning Insights
Here are insights for retirement planning, both before and after retirement.
Retirement Planning Insights
Retirement Trainers and Accumulation
My Retirement Trainers help you improve your skill during accumulation.
Retirement Trainers and Accumulation
Learning the RIGHT Lessons
I have made a series of practice runs with Dollar Cost Averaging starting from a balance of $0. Glancing at the Year 30 balances doesn’t tell us the entire story. In fact, that is the wrong place to look for the most important lessons.
Learning the RIGHT Lessons
The Wrong Lessons
The experts have let us down. Too many are teaching us the wrong lessons.
The Wrong Lessons
Denial Is Expensive
Ignoring our cutting edge research can be expensive.
Denial Is Expensive
My Yahoo Briefcase
Visit my Yahoo Briefcase to download a variety of calculators. Downloads are free and available to everybody. My Yahoo username is jwr19452000.
I have found it necessary to click on refresh repeatedly when downloading from my Yahoo Briefcase. This can be a nuisance. But I am always able to complete a download.
Right click to "Save Link As" or to "Save Target As" or equivalent.
Yahoo Briefcase
Dollar Cost Averaging at Year 15
Dollar Cost Averaging reduces the effects of fluctuating prices during accumulation. It does not eliminate them entirely. Valuations matter.
Dollar Cost Averaging at Year 15
The Next Recession
When do you expect the next recession? Within 5 years? Within 10 years?
In either case, it is time to hold cash.
The Next Recession
Interesting Web Site
I ran across this web site. It was started by a college student. I am interested in seeing how it develops. It's off to a good start.
Smart-Investing-Guide Web Site
Market Timing--What Works and What Doesn't
Rob Bennett has posted this article at his web site. It is outstanding.
Market Timing--What Works and What Doesn't
I Saw My Doctor Today
Right off the bat, he told me that he does not understand what I send him.
I Saw My Doctor Today
Capitalization Weighted Stock-Bond Allocations
The Efficient Market Hypothesis leads to a variable stock and bond allocation. [NOTE: I am NOT an advocate of the Efficient Market Hypothesis.]
Capitalization Weighted Stock-Bond Allocations
Explosive Earnings Growth
I have made another attempt to improve upon P/E10. The result: a warning about earnings growth in times of high valuations.
Explosive Earnings Growth
More about Earnings Growth
I am continuing to look into adjustments for earnings growth.
I considered magnifying the effect of the percentage earnings yield 100E10/P (or 100/[P/E10]). If I were to multiply by Ex/E10, I wouldn't accomplish anything besides replacing E10 by Ex. That is, (Ex/E10)*(100E10/P) = 100Ex/P.
Instead, I have begun by looking at Year 5 scaling: E3/E5. That is, I looked at (E3/E5)*(100E10/P).
Using identical data for stock returns, I compared Year 5, 10, 15 and 20 real, annualized, total returns versus (E3/E5)*(100E10/P) and (100E10/P). Looking at R-squared, the magnified (E3/E5)*(100E10/P) values were 0.2773, 0.4112, 0.5462 and 0.5611, respectively. The regular 100E10/P equations have R-squared levels of 0.3717, 0.383, 0.5387 and 0.5591, respectively.
These results leave open the possibility that we might be able to improve our predictions by adding an earnings growth term. We do not have a suitable adjustment yet.
I also looked at 30-Year Historical Surviving Withdrawal Rates for portfolios with 50% stocks and 80% stocks along with TIPS at a 2% interest rate.
The values of R-squared with the adjustment were 0.6479 and 0.6509 for HSWR50T2 and HSWR80T2, respectively. Without a special adjustment, the values of R-squared were 0.7326 and 0.7172, respectively.
I conclude from these results that we should not expect to improve Safe Withdrawal Rate equations by introducing an earnings growth term.
Why Is Today's Investing Advice So Poor?
Here is another great article from Rob Bennett's PassionSaving.com web site.
Why Is Today's Investing Advice So Poor?
Another Note about Earnings Growth
This time, I looked at changes in earnings.
I looked at the difference between the latest five years of earnings and the earliest five years of earnings within a decade. I also looked at the difference between the latest three years of earnings and the earliest three years of earnings within a decade. In both cases, I normalized to the average earnings throughout the decade. Mathematically, I looked at the effect of these two ratios: [E5(t)-E5(t-5)]/E10(t) and [E3(t)-E3(t-7)]/E10(t).
As before, I examined Year 5, 10, 15 and 20 real, annualized, total returns and 30-Year Historical Surviving Withdrawal Rates (with 50% stocks and 80% stocks and 2% TIPS). I looked for whatever relationship that I could find, not simply at R-squared.
Every value of R-squared was below 0.03.
Every curve had a negative slope.
For the most part, the data are spread out. There are more data points with slightly positive values. This is consistent with a generally upward trend in earnings.
I was unable to identify a usable adjustment to earnings growth and Safe Withdrawal Rate equations based on these data.
Earlier Notes
Visit Notes Starting July 10, 2006 for links to all earlier notes:
Notes through August 21, 2005
Notes through November 29, 2005
Notes through January 13, 2006
Notes Starting from January 14, 2006
Notes through April 18, 2006
Notes through June 12, 2006
Notes starting June 13, 2006
Notes Starting July 10, 2006
Notes Starting July 10, 2006 covered the following topics:
It is about time..., Time and the Gordon Model, It is about time...continued, It is about time...more, The Copie Index, It is about time...number six, Compact Variable Terminal Value Rate Calculators, Orders of Magnitude, Using Stock Return Predictions, Eye Opening Calculations with Compact CVTVR L, New Standards for Financial Reporting, A Tip about my Yahoo Briefcase, Rational Pessimism and Tobin’s q, Super Variable Terminal Value Rate SVTVR Calculators, What does “3% + inflation” mean?, Tobin q Survey, Turning Points, A Helpful Theorem, Year 15 Calculator A, Designing a 45-Year Retirement, Retirement Trainer.
Notes Starting July 10, 2006
Notes starting August 25, 2006 covered the following topics:
Retirement Trainer, P/E10 Predictions, Bulls, Bears and P/E10 Predictions, P/E10 Predictions Revisited, Great Article, Playing with the Toy, More Fun with the Toy, Why Dividends Are Better, Improving the Retirement Trainer, Great Fun with the Improved Retirement Trainer, Accumulation and the Retirement Trainer, Dividends versus Capital Appreciation, E10 or D10?, Type 2A Bull Bear Retirement Trainer, Simplified Retirement Trainer A, More PE10 Predictions.
Notes starting August 25, 2006