Notes starting from November 23, 2007

Updated: December 15, 2007.

ElLobo Extends his Theory

ElLobo has extended his mathematical formalism at the Morningstar Income & Dividend Investing discussion board. He presented an early version in one of our Letters to the Editor. This is well worth following.

One note: ElLobo uses the capital Y for the total income from yield, not the percentage yield.

Morningstar
ElLobo’s Theory at Morningstar
April 7, 2007 Letters to the Editor

Share Buybacks

Share buybacks are a bad idea.

Share Buybacks

The Efficient Market Concept is A Big Bunch of Hooey

David Dreman proved this in his writings, which was great for the technically inclined. Rob Bennett explains it now for the ordinary citizen.

The Efficient Market Concept is A Big Bunch of Hooey
Who's Afraid of the Efficient Market Hypothesis?

Elements of Skill

Here are several elements of skill that you can adopt as your own.

Elements of Skill

Sometimes the Gordon Model

does not apply. From Dividend Growth Rule of Thumb:

“Notice that the Gordon Equation does NOT apply. That is, the required initial yield plus the dividend growth rates differ at Year 10.”

Dividend Growth Rule of Thumb

Threshold Distortion

Threshold Distortion describes a common analysis error.

Threshold Distortion

New Letter

I just responded to a Letter to the Editor this morning (December 3, 2007). I might add that everyone should start with a baseline. From the Guidelines section:

Always Insist on a Baseline

I bond Maximums

The I bond maximum that you can purchase will soon be reduced from $30000 per social security number and account type to $5000. The account types are electronic and paper.

1966 S&P500 Sequence

Except for a few early years, the 1966 sequence of S&P500 total returns (dividends reinvested) was negative for 17 years after adjusting for inflation.

Variable Withdrawal Rate?

I made a run on the Scenario Surfer. I varied the amount withdrawn according to the previous year’s results. If the balance changed by 3% of the original amount, I withdrew either 4% (following a decrease) or 6% (following an increase). I varied stock allocations in accordance with valuations. The net effect was to have lots of lean years and a few fat ones: 15 withdrawals at 4%, 7 withdrawals at 5% and 8 withdrawals at 6% for an average withdrawal of 4.767% (plus inflation).

My final balance was 35.980% of my original balance (plus inflation).

This was a lot of activity for little gain. It is easy to withdraw 4.5% (plus inflation) when varying allocations in accordance with valuations. With more effort, 5.0% is within reach.

I used the P/E10=26 bear market and 2% TIPS.

I made another run on the Scenario Surfer. I varied the amount withdrawn according to the previous year’s results. If the balance changed by 6% of the original amount, I withdrew either 4% (following a decrease) or 6% (following an increase). I varied stock allocations in accordance with valuations. The net effect was to have several lean years and only one fat one: 7 withdrawals at 4%, 22 withdrawals at 5% and 1 withdrawal at 6% for an average withdrawal of 4.6% (plus inflation).

My final balance was 33.567% of my original balance (plus inflation).

Again, I used the P/E10=26 bear market and 2% TIPS.

Delayed Withdrawals

I made two more runs on the Scenario Surfer. I varied the amount withdrawn. I withdrew 4% of the original balance in Years 0 through 4 and 5% after that. I varied stock allocations in accordance with valuations.

My final balance was 91.3% of my original balance (plus inflation) in my first run. It was 95.5% in my second run. All except one of the 20%, 50% and 80% rebalancing portfolios went bankrupt. The 50% rebalancing portfolio in my first run ended with a 2.9% final balance.

It is easy to withdraw 4.5% (plus inflation) when varying allocations in accordance with valuations. This is a simple alternative that comes close to 5.0% (plus inflation).

I used the P/E10=26 bear market and 2% TIPS.

Easing into 5%

This time, I examined the conventional withdrawal strategy, one that includes selling shares.

I used the Scenario Surfer to determine whether I could lift the 30-Year withdrawal rate to 5% of the original balance (plus inflation) after a five year delay at 4%. I found that I could, but only if I adjusted withdrawals in accordance with valuations.

Easing into 5%

Seeking 5%

I examined the conventional strategy with variable withdrawals. I tried to lift the 30-Year withdrawal rate to 5% of the original balance (plus inflation) except for brief periods at 4%.

It is better to ease into a 5% withdrawal rate with the first five years at 4%.

Seeking 5%

Waiting for the Big Drop

I tried to reach a 5% withdrawal rate with a conventional withdrawal strategy, one that includes selling shares. This time I limited my stock allocation to 50% unless I encountered a big drop: 10% of the original balance (plus inflation).

Once again, I failed.

Waiting for the Big Drop

Reaching for 5%

We routinely exceed a 5% (plus inflation) withdrawal rate with the Dividend Blend and related strategies. What about conventional strategies, those that include selling shares?

With conventional strategies and in today’s market, 5% is beyond our reach.

Reaching for 5%

Conventional Portfolios at 4%

Traditional studies suggested that a 4% withdrawal rate (plus inflation) would be safe. Our research shows otherwise. This is what is likely to happen at today’s valuations.

Conventional Portfolios at 4%

Notes Index Starting from November 23, 2007

Notes Index Starting from November 23, 2007

Notes Index

Notes Index

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