"Money" Breaks Ranks

Research on Safe Withdrawal Rates

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hocus2004
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"Money" Breaks Ranks

Post by hocus2004 »

Our ideas are going mainstream!

http://money.cnn.com/2004/08/12/markets ... uild_0409/

Juicy Quote #1: "No Internet-bubble hype for you. Your expectations are grounded in history. They're at the core of responsible financial planning, and you've found confirmation of them in financial magazines on many occasions. But what if all you knew was just flat-out wrong? "

Juicy Quote #2: "Some of the smartest minds in finance are taking a hard look at today's cherished beliefs about stock market risks and returns, and the answers they're coming up with are, frankly, disquieting. "

Juicy Quote #3: "Much of what passes for unassailable historical truth turns out to rest upon shaky assumptions. Stocks haven't returned what you thought they did. Investors never saw anything close to the market rate of return. And the market's future looks a lot bumpier and perhaps a lot less lucrative than you likely expect. "

Juicy Quote #4: "only three markets besides the U.S. have never seen a 20-year stretch in which the return on stocks fell behind inflation. In six of the 16 stock markets that the London researchers looked at worldwide, investors would have had to wait a full 50 years to be assured of a positive real return. The seeming safety of American stocks owes a lot to their better-than-average returns. "

Juicy Quote #5: "If you expect the 5 percent real (after inflation) rate of return that world markets have delivered and assume the same sort of volatility the U.S. market has shown in the past, Dimson calculates that you face a 14 percent chance of losing money after inflation over 20 years; if your portfolio isn't diversified, you face a 15 percent chance of a shortfall over 40 years. "

Juicy Quote #6: "Finally, realize that the Big Three of diversification is not the traditional triad of stocks, bonds and cash. A new and more helpful way to think about the Big Three is human capital (your job and career), physical capital (your house and other possessions) and financial capital (those stocks, bonds and cash).
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Post by unclemick »

Duh - sounds like the same old bull crap - I heard in the 60's, 70's, and early 80's - usually after a market downturn. It was bull then, and it's bull now - know matter how pretty they restate it. Publish or perish! - one more time.

De Gaul and the Norwegian widow ride - or Angus Maddison if you read Bernstein - he lives in Scotland and is apperantly not subject to 'groupthink' - he uses data.

2.5% - Vanguard Balanced Index
4+% - Vanguard Wellesley
3.4% - Vanguard Retirement Income

4.2% - my version of the Norwegian widow as of friday.

In a 'fair' world people who publish that stuff would be put in public stocks and pelted with rotten fruit - lead by Bogle.
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Post by Mike »

I heard in the 60's...
The 60s were a good time to be accumulating stocks at the beginning of a person's career, but a bad time to retire. Youngters just starting out might be in good shape accumulating now, but a someone retiring could be in a bit of trouble becuase of today's low dividend yield. Low dividend yields are historically associated with poor results for someone who has to withdraw part of their portfolio to live on. Dividends have never been lower. It all depends upon your life circumstances.
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Post by JWR1945 »

From the referenced article.
Further dragging down returns is our tendency to buy high and sell low, pouring more money into the market when it's up and selling when things look dire.

A sobering new study by Ilia Dichev at the University of Michigan found that investors in the New York and American stock exchanges saw their returns lag the markets by 1.3 percentage points annually from 1926 to 2002. Investors in the Nasdaq did even worse: Their returns lagged the Nasdaq overall by 5.3 percentage points annually from 1973 to 2002.
..
A 2002 study conducted by MONEY's Jason Zweig and three finance experts found something similar. The study looked at money moving in and out of 6,900 U.S. stock funds from 1998 through 2001 and found that while the average fund returned an annualized 5.7 percent, the average fund investor earned a measly 1 percent a year by buying and selling at the wrong time.
I keep seeing this point more and more often. I have seen lots of references to such studies but not the studies themselves. They are proprietary.

Major institutions fall into this trap as well. This example is a little bit different because it is based on chasing performance. Institutional managers saw impressive academic credentials (from a University of California Professor at Berkeley) and an impressive early track record. They bought heavily.

From Pioneering Portfolio Management by David F. Swensen, the Chief Investment Officer of Yale, pages 194-196.
RIEM got off to a fast start. Promising to beat the S&P500 by an impressive margin of 400 basis points per year, with a relatively low volatility of 6 percent, RIEM set a high hurdle. The firm reached its goal in the first three years, returning 17.3 percent annually relative to 13.3 percent for the S&P500, beating the benchmark by precisely 4.0 percent per annum.
..
Assets under management skyrocketed. From three clients and less than $200 million on December 31, 1985, the firm's core equity product grew to more than $8,000 million by the end of 1989.
..
No client truly understood the investment process, for the secretive Rosenberg disclosed few details regarding his model's inner workings.
..
After an indifferent 1989, Rosenberg's performance deteriorated sharply...

A back-of-the-envelope calculation indicates that during its twelve-year history, Rosenberg's core equity product lost $480 million relative to market.
..
By year-end 1997, assets in the core equity product dropped to $1,600...Had RIEM's 1989 client assets simply matched the S&P500, the firm would have managed approximately $27,500 million.
Have fun.

John R.
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Post by hocus2004 »

"In a 'fair' world people who publish that stuff would be put in public stocks and pelted with rotten fruit "

We sure are taking in this one from very different perspectives, UncleMick.

I view publication of this article as a breakthrough development. We have seen a good number of experts reject out of hand the "Stocks for the Long Run" paradigm. Smithers has done so. Arnott has done so. Mauldin has done so. Peter Bernstein has done so.

The comments that have been put forward by those people are great for those who spend a lot of time studying this stuff. But how many middle-class investors are aware of what Smithers and Arnott and Mauldin and Bernstein have said? My guess is that there are not too many who at this point are on notice that their investment stratagies were built on sand.

Money magazine is different. Lots of middle-class investors read Money or will hear about the article from people who read Money. Money has been one of the lead promoters of the "Stocks for the Long Run" paradigm in the past, so I don't want to go overboard in my praise of the magazine. But I think it is fair to say that the decision to give a go on this particular piece took a lot of guts. There are going to be more than a few nasty letters sent to the editors as a result of their letting this particular cat out of this particular bag.

I think it is wonderful that the article actually refers to the "Stocks for the Long Run" book, which was certainly not soley responsible for the development of the flawed paradigm but which did a lot to popularize it (to some extent a good thing and to some extent a bad thing, in my view).

I also love the subtitle--"What If Everything You Know About Stocks Is Wrong?" That gets right to the core problem. Learning is achieved through a building-block process. When you in error re a fundamental assumption, all beliefs that follow logically from the flawed premise are also in error. The reason why we have had such a hard time gaining traction with the Data-Based SWR concept is that most community members have bought into the flawed paradigm, and rethinking it now means throwing overboard much of what they have over the past 20 years come to "know" is true. That old saying--that it is not the things you don't know that hurt you the most but the things you know for certain that just ain't so--very much applies.

I have talked in the past about a Wave that is already big and always growing. When Money starts backtracking on its "Stocks for the Long Run" claims, I can't help but wonder if we are getting close to the point where the Wave is getting so big that it simply must break. I think it's a mistake to try to predict what is going to happen in the next year or two. But I can't help but remember from time to time that it was in the summer of 1996 when Shiller went public with his warning that those heavy in stocks would regret it within 10 years. The 10-year time-frame employed by that most cautious of prognosticators comes to an end in less than two years.
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Post by JWR1945 »

In a 'fair' world people who publish that stuff would be put in public stocks and pelted with rotten fruit - lead by Bogle.
John Bogle is the wrong person to quote looking forward. He has put out strong warnings. He anticipates lower stock market returns going forward because of today's valuations. He devotes all of Appendix 1 in Common Sense on Mutual Funds to caution his readers.

From pages 441 and 442.
Rightly or wrongly, many institutional investors seem to be even more strongly concerned about the course of future stock returns than I am. Jeremy Grantham...looks for nominal stock returns of about 3 percent during the coming decade, well below the range of 5 to 8 percent that my analysis, based on good fundamentals and some diminution of the price-earnings ratio suggests. Gary Brinson looks for future returns on US stocks in the 7 percent range in nominal terms.
John Bogle even presented an analysis from the original version of Graham and Dodd's Security Analysis as a warning. [Later editions made shorter and shorter references, finally deleting it entirely. John Bogle draws strong parallels to the thinking just before the 1929 crash and that of the late 1990s.]

Have fun.

John R.
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Post by JWR1945 »

Here are some numbers for the recent era (1921 and later).

With 100% stocks and all dividends reinvested, the real, annualized total return was negative at least once in the years from 10 to 20 for:
1929, 1937, 1962-1973.
[The fancy wording is needed for 1929. It went from (4.89%) in year 6 to +1.50% in year 7 but it was (0.57%) in year 13.]

With 80% stocks and 20% commercial paper and with all dividends and interest reinvested, the real, annualized total return was negative at least once in the years from 10 to 20 for:
1937, 1964-1973.

With 50% stocks and 50% commercial paper and with all dividends and interest reinvested, the real, annualized total return was negative at least once in the years from 10 to 20 for:
1936-1940, 1965-1966, 1968-1970, 1972.

With 20% stocks and 80% commercial paper and with all dividends and interest reinvested, the real, annualized total return was negative at least once in the years from 10 to 20 for:
1932-1944.

With 0% stocks and 100% commercial paper and with all interest reinvested, the real, annualized total return was negative at least once in the years from 10 to 20 for:
1928-1947.

With 50% stocks and 50% 5-year treasuries (replaced each year without cost and without capital gains or losses) and with all dividends and interest reinvested, the real, annualized total return was negative at least once in the years from 10 to 20 for:
1936-1940, 1964-1973.

With 0% stocks and 100% 5-year treasuries (replaced each year without cost and without capital gains or losses) and with all interest reinvested, the real, annualized total return was negative at least once in the years from 10 to 20 for:
1923-1948.

P/E10 was above 20.00 in January of the following years:
1929-1930, 1937, 1962, 1964-1969, 1993-2003 [data ends in 2003].

Of interest, P/E10 fell to 7.33 in January 1982 (and to 6.63 in July 1982), which explains some of the difficulties faced by some retirement portfolios in 1970-1974. There was a huge reduction in P/E10 multiples.

Have fun.

John R.
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Post by hocus2004 »

"Later editions made shorter and shorter references, finally deleting it entirely."

This is a fascinating information bit. Can you give more detail on the point being made in the deleted language said?
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Post by unclemick »

I meant Bogle should be throwing the fruit - along with Walter L. Morgan (1929) and Ben Graham (1972) who expressed appriopriate skepticism based on valuations at points in history.

Even Bogle cracked for a brief period on Wellington fund in the 70's before they got back on the value track.

Whether it's the way - Bogle does it - div + economy growth + P/E change. - showing what could happen.

Or JWR's calculations - caution is warranted.

Yield is the horse I rode in on - balanced index - maybe not the same as the 1929, 1931 versions - the principle is there - stocks for the long run - BUT I will admit the horse is looking a tad skinny lately.

Even with index funds - still retro after all those years.
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Post by unclemick »

In fact - the contrarian curmudgeon in me says now might be the time to accerate movement toward 100% stocks - with the caveat that they be dividend, Lowell Miller, Mergent types. JWR's recent data runs in this area are fascinating - but one had better be ready for some thrills and chills from "Mr Market" - AND be watching the right rabbit.
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Post by hocus2004 »

Word is getting out, people. Here is an article telling us that the creator of fractal geometry is now arguing that the "Stocks for the Long Run" emperor is wearing no clothes.

http://www.dailyrecord.com/business/business2-bor24.htm

Juicy Quote #1: "Another fundamental belief of academics that he attacks is the efficient market hypothesis - the absurd notion that (a) all information about stocks is out there and (b) everybody interprets the information the same way, therefore (c) stock prices are always reasonable. Curiously, this absurd view was invented by a former student of Mandelbrot: Eugene Fama."

Juicy Quote #2: "Stocks follow a "random walk"? There's no relationship between what happens to a stock Monday and what happens Tuesday? Actually, Mandelbrot argues, drops and rallies tend to congregate together. There really is momentum."
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Post by unclemick »

Duh - the word has been out for a while. Circa the 1700's - Issac Newton per the myth got hit in the head with head with an apple and lost his shirt in the South Seas Bubble - not exactly true - but the point is - math and people don't always compute exactly. The apple/Newton's laws worked and the gov gave him a day job so he could buy a new shirt.

2.57% - Vanguard Balanced Index

I understand Yale is screwing around with real estate and ?hedge funds? - viewing two of their graduates - Bush and Kerry - I can understand why versions of Popular Delusions and The Madness of Crowds surface every generation.

4.2 % - Vanguard Wellesley

Math cats and engineers should be especially careful when applying numbers to the market - people do non math things - for long periods of time.

De Gaul, the Norwegian widow and of course Bogle's - CMH hypothesis.

Press on regardless.

If somebody actually needs 4% for the next thirty years - forget index, MPT, Bernstein, Coffeehouse and all that other crap - reread Ben Graham and go buy balanced value - and for heavens sake - shut off the computer - unless of course you wish to monitor the dividends being autodeposited to your checking/savings account. And don't get hung up on inflation adjusted dollars - you take what Mr Market gives you.

Of course I'm glad all this bull is being rediscovered - gives me something to read in the waiting rooms at the eye doc and dentist.
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Post by JWR1945 »


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Post by JWR1945 »

unclemick
I meant Bogle should be throwing the fruit - along with Walter L. Morgan (1929) and Ben Graham (1972)...
This misunderstanding has turned out to be beneficial.

Have fun.

John R.
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Post by JWR1945 »

From the Daily Record article written by Warren Boroson.
Think of all the investors who lost their shirts, and their early, comfortable retirements, when the Internet bubble burst because they were not sufficiently aware, as Mandelbrot is, of how treacherous the stock market is.

Too many people, Mandelbrot argues, think that the "bell curve" is found everywhere in nature, that most things congregate in the middle, and that the relatively few exceptions peter out on the left and the right. (Hence the shape of a bell.)
..
But the bell curve, Mandelbrot argues, doesn't apply to the stock market, the cotton market or to markets in general.

"The seemingly improbable happens all the time in financial markets," he writes.
This sounds like vintage hocus. This is the main reason that we this board.

Have fun.

John R.
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Post by JWR1945 »

unclemick
If somebody actually needs 4% for the next thirty years...And don't get hung up on inflation adjusted dollars - you take what Mr Market gives you.
If you only need 4% and it only has to last 30 years, you can do much better with (essentially) no risk whatsoever.
A Bright Future dated Sat, Jun 12, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2598

Have fun.

John R.
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Post by hocus2004 »

"as soon as the price was advanced to a much higher price in relation to earnings, this advantage disappeared, and with it disappeared the entire theoretical basis for investment purchases of common stocks...the new-era exponents were starting with a sound premise and twisting it into a woefully unsound conclusion."

They took that part out of the book, did they?

I wonder why.
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Post by hocus2004 »

"Duh - the word has been out for a while."

I understand. I can't recall the title, but there was a song that had the line "Everything old is new again." That's the phenomenon that we have experienced in our development of the Data-Based SWR Tool. Much of what people used to think about stocks prior to the recent bull market made sense. That's our big "discovery."

Still, it's important. For two reasons.

One, even if what we are saying is just common sense, the problem with common sense is that it's not too common anymore. Endless voicing of the "Stocks for the Long Run" paradigm has left lots of investors repeating 12 nonsensical stock dogmas (it's a random walk both in the short term and in the long term, the market is efficient, even long-term timing is impossible, the risk in stocks goes away if you plan to hold them for the long term, price doesn't matter, and so on) before breakfast. Today, stating the obvious is controversial. Today, common sense observations are shocking.

Two, we have added to the weight of the old common-sense observations by quantifying them. For many of the stratagies we are talking about to work, investors need to have confidence that they will pan out in the long term. We are providing a good reason for having condidence in these ideas--a showing that in the past they worked. Common sense standing along is persuasive and historical data standing alone is persuasive. Historical data backing up common sense (with some supportive expert opinion thrown in) is doubly (or triply) persuasive.

There's a sense in which there is nothing new under the sun. But while old patterns repeat, the details differ with each repetition. This is a data-oriented age, so this time it was purportedly data-based analyses that did people in. The natural thing to expect to follow in the wake of the carnage likely to come is data-based refutations of the flawed data-based analyses that caused all the trouble.

The bottom line is that, no matter how common sensey the observations put forward at this board may appear to be, there are obviously lots of lots of well-informed investors who haven't been able to make sense of them. It's that reality that tells me that what we are doing here will be of lasting significance. We are telling people things that they don't know and that they very much need to know, insights that in recent years "experts" have been taking out of books so that even those middle-class investors who did a lot of independent research would have a hard time tapping into them.
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Post by unclemick »

Bogle is fond of Lord Keynes - along the lines of: Understanding history is important - and understanding WHY history was what it was is even more important. The exact quote is floating around somewhere on Bogle's website.

May 1958 (after the 57 recession) Graham laments The New Speculation in Common Stocks, appdx.3, 4ed., The Intelligent Investor.

After thirty years of investing, rehearing some familar stuff (with some different nouns and adjectives - perhaps phased slightly different) - makes me down right grumpy - especially since I paid more for some lessons than I wished to - in the school of hard knocks.

One aside - since the markets supposedly adjusts for all elements - has anyone seen anything relating to the effects of inflation adjusted securities on regular fixed and stocks - I've seen no evidence of valuation adjustments to 'compete' with say TIPs - ???
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Post by JWR1945 »

unclemick
In fact - the contrarian curmudgeon in me says now might be the time to accelerate movement toward 100% stocks - with the caveat that they be dividend, Lowell Miller, Mergent types. JWR's recent data runs in this area are fascinating - but one had better be ready for some thrills and chills from "Mr Market" - AND be watching the right rabbit.
unclemick has been able to generate an income stream from his hobby stocks by means of dividend growth. His income stream is now returning 6.6% (in real dollars, after adjusting for inflation) based on his original investment and it will last into the foreseeable future.

This is much, much better than the 3.9% that was claimed [incorrectly] as being safe, but only for 30-years, by the conventional methodology. Today, unclemick gets little respect because of the bubble. Based upon what was reasonable to plan for, unclemick had a vastly superior strategy. Based upon what actually happened, it was only an excellent strategy.

For unclemick:
Expect to be ridiculed for straying away from the crowd even if the facts are in your favor.
Reference:The Facts about Hocus's Investment Decisions dated Sat, Jun 12, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2599
And this post especially:
http://nofeeboards.com/boards/viewtopic ... 000#p21000

The worst case is that super-bubble will follow the bubble so that you underperform those who stuck with typical, lower dividend stocks. It makes no difference that your approach is sound.
Reference: A Recent Email Exchange dated Fri, Jun 11, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2594

Have fun.

John R.
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