Notes starting from November 21, 2008

Updated: December 12, 2008.

What the Federal Reserve Fears

The Federal Reserve developed the bailout actions being made by the Treasury several years ago. The Federal Reserve fears deflation most of all. It has no tools for handling decreasing prices for reasons other than enhanced productivity.

Do not fear decreases in TIPS payments due to deflation. They are temporary.

RobCast Page 5

Rob Bennett continues to produce outstanding audio programs (RobCasts). Be sure to listen to #34: My Conversations with Michael Kitces and #35: Greenspan's Mistake.

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Exciting New Calculator

Rob Bennett and I are working on a new calculator. We have faced a series of development problems, but it looks as if things will work out fine. If so, it will be a spectacular success.

It will automate much of the Scenario Surfer. It will allow sensitivity tests based on today’s stock market.

It will not replace the Scenario Surfer. You still need to practice for retirement. You still need to brace yourself for the emotional challenges of the marketplace.

When P/E10=14

I brought up the Year 30 SWR Risk Evaluator. I looked at P/E10=14. The Year 30 Safe Withdrawal Rates for traditional fixed allocation portfolios were:

20% stocks: 4.45% (plus inflation).
50% stocks: 5.03% (plus inflation).
80% stocks: 5.41% (plus inflation).
100% stocks: 5.21% (plus inflation).

In a normal market, these rates have a 95% chance of success.

The Year 30 Reasonably Safe Withdrawal Rates for traditional fixed allocation portfolios were:

20% stocks: 4.70% (plus inflation).
50% stocks: 5.43% (plus inflation).
80% stocks: 6.01% (plus inflation).
100% stocks: 6.11% (plus inflation).

In a normal market, these rates have an 80% chance of success.

Today, we are still in a Secular Bear market. Adjust the safety percentages down slightly. Still, a withdrawal rate of 5.5% (plus inflation) should do fine (with about a 90% chance of success) with a fixed 80% stock allocation (S&P500 index) with 20% TIPS at 2% real interest.

Better yet, train yourself on the Scenario Surfer and use Valuation Informed Indexing to improve your results.

Even better, if you are willing to do the research, use the dividend blend to lift your income above 6% of the original balance (plus inflation).

When the Market is Normal

Dollar Cost Averaging when P/E10=14

Previously, I have examined dollar cost averaging at high (P/E10=26) and low (P/E10=8) valuations. This time I looked at today’s market with P/E10=14 in a Bear Market.

Dollar Cost Averaging when P/E10=14

System Engineering References

Rob Bennett mentions my system engineering references in his latest RobCast #36 -- Is Wall Street to Blame? Here are three articles.

System Engineering
Planning or Dreaming?
Elements of Success
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How Long Should You Wait?

I used the Scenario Surfer to get an idea of how long we should wait to buy stocks heavily.

How Long Should You Wait?

Wait 5 Years?

I used the Scenario Surfer to determine whether to wait up to 5 years or to buy stocks immediately. I examined a very simple approach.

Wait 5 Years?

Rational Investing and Sharpe Ratios

Rob Bennett refuses to discuss Sharpe Ratios and Rational investing, mainly because he does not feel capable. Yet the answer is simple: Rational investing increases the Sharpe Ratio. It increases your overall return and it reduces your risk. Nothing could be simpler.

Except. The missing bit of information is the time frame. Rational investing improves the Sharpe Ratio in the long term (one decade or longer), not necessarily in the short term.

Traditional research applies the wrong time frame to the Sharpe Ratio, typically one month or one year. This is a serious mistake.

Remember The Next Recession?

It is here.

It took a year of updates and revisions before we knew that we were in a recession. Yet, we knew that it would happen sometime. Read what I wrote in 2006.

The Next Recession

A High Stock Allocation for Today

What do we do today?

I looked at Valuation Informed Indexing with a high stock allocation when P/E10 starts at 14 in a Bear Market. The Scenario Surfer tells us that this is a good idea.

A High Stock Allocation for Today

Why Only 5%?

In “A High Stock Allocation for Today” I came up with a 5% (plus inflation) withdrawal rate for today [S&P500 and 2% TIPS]. Why not 5.4% as the Year 30 SWR Retirement Risk Evaluator indicates?

The reason is that I looked at P/E10=14 in a Bear Market, not in a normal market. We have to accept the possibility that stock valuations will fall to new, all time lows. We also make allowances for the possibility that we have already reached the Bear Market bottom.

In “A High Stock Allocation for Today” the Year 30 balance was above the initial balance in 5 out of 10 times. Yet it was almost zero once. The Scenario Surfer looks at possible future stock returns, not simply those that have already happened. It gives us insights that allow us to protect ourselves from the unexpected.

RobCast #37 through 40 -- The Future of Investing (Parts One through Four)

Rob Bennett has just completed his new, four part series. He looks forward to the Future of Investing. This is well worth your time.

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In A Normal Market

Today’s Bear Market allows us to withdraw 5% (plus inflation). But what about a Normal Market?

In a Normal Market, P/E10=14 as it is today, but valuations are more likely to rise than in a long lasting (secular) Bear Market.

In A Normal Market

RobCast #41 (76 minutes) -- Bogle and Valuations

Rob Bennett does an outstanding job in this overview. It is really worth listening to in spite of its length. Rob responds to many alternative viewpoints.

John Bogle presents inconsistent advice. Much of it is great. His advocacy of Passive Investing is not.

Rob Bennett's RobCast Page Six

Notes Index Starting from November 23, 2007