Over Valued?

Research on Safe Withdrawal Rates

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Mike
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Over Valued?

Post by Mike »

JWR1945
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Post by JWR1945 »

The article starts this way:

Why I Think the S&P 500 Is Fairly Valued at 625
You can't time the market, but you can value it.

by Curt Morrison, MD, FACC
Many smart people, including most academicians, believe that the stock market is always fairly valued. Because the price is always appropriate, so the theory goes, there is no better or worse time to invest. In my opinion, that is bunk. The market's price wandered above and below its intrinsic value frequently during the last 123 years, and it is overpriced today. In fact, the S&P 500 looks dramatically overvalued based on two of the best methods for measuring market valuation.
Sometimes, I think that Dr. Curt Morrison reads these boards (the NoFeeBoards).

Let me add a note of caution to his remarks: the stock market [and markets in general] typically overreacts. Prices are unlikely to stop at fair value. They are more likely to continue downward into bargain territory.

Our best predictor for estimating Safe Withdrawal Rates is P/E10. We use percentage earnings yield these days, but the relative rankings remain in place.

Our second best predictor is Tobin's Q. We end up with a few very bad predictions when we use Tobin's Q. But overall, it does a good job. It does almost as well as P/E10.

Our original comparisons were based primarily on how well an indicator predicted the order of Historical Surviving Withdrawal Rates (or Historical Database Rates). We have advanced to the point that we can do better than that, relating the percentage earnings yield 100E10/P to the Historical Surviving Withdrawal Rates. The percentage earnings yield 100E10/P makes a good substitute for dividend yield plus dividend growth.

Have fun.

John R.
hocus2004
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Post by hocus2004 »

Here's a link courtesy of my old friend AdvocatusDiaboli (I believe he has forgiven me for posting under another persona that I suspected that he was really hocus posting under a different name).

http://www.hussmanfunds.com/wmc/wmc041227.htm

Juicy John Hussman Quote #1: "There is no assurance the market is at the peak of this advance, or that valuations will normalize quickly - certainly nothing that would prove useful as a short-term forecast. But risk management is generous - it is very tolerant of positions established somewhat early. Speculation, on the other hand, is extraordinarily unforgiving of positions taken off somewhat late. "

Juicy John Hussman Quote #2: "Once again, investors seem to have lost their sense of simple algebra. It helps to remember that corporate earnings, despite extreme cyclical variability, are actually very well-behaved over the long-term. Whether one looks at the past 10, 20, 50 or 100 years, S&P 500 earnings have remained well contained in a 6% growth channel connecting earnings peaks across market cycles. Yes, earnings growth can be very rapid from trough to peak, with growth rates often exceeding 20% and 30% annually. But peak-to-peak variation is quite small. The growth rate of S&P 500 earnings was 6% from peak-to-peak even in the roaring 90's, productivity boom, new economy and all. "

Juicy John Hussman Quote #3: "I certainly would not advise the following fact as an investment approach, but it turns out that an investor who did nothing more than sell the S&P 500 at a price/peak-earnings multiple of 19 and wait - often several years - to repurchase stocks at a multiple of 15, would have outperformed the S&P 500 with less risk over the past 20, 40, 60, 80 and 100 years. Indeed, over most of the past century, investors could have held Treasury bills, refusing to re-enter the market until the S&P 500 reached a multiple below 8, even if it took as long as 16 years to get there, and still they would have outperformed a buy-and-hold over the long-term."

Juicy John Hussman Quote #4: "There is absolutely no evidence in the historical record that long-term returns are penalized by adopting a defensive market stance at very high valuations.... The reason is simple. In terms of annualized returns, contractions in price/earnings multiples are extremely costly. At 6% peak-to-peak earnings growth, it takes four years of sideways price action to move the price/peak-earnings multiple from 19 to 15.
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Post by JWR1945 »

Juicy John Hussman Quote #2: "Once again, investors seem to have lost their sense of simple algebra. It helps to remember that corporate earnings, despite extreme cyclical variability, are actually very well-behaved over the long-term. Whether one looks at the past 10, 20, 50 or 100 years, S&P 500 earnings have remained well contained in a 6% growth channel connecting earnings peaks across market cycles."
..
Juicy John Hussman Quote #3: "I certainly would not advise the following fact as an investment approach, but it turns out that an investor who did nothing more than sell the S&P 500 at a price/peak-earnings multiple of 19 and wait - often several years - to repurchase stocks at a multiple of 15, would have outperformed the S&P 500 with less risk over the past 20, 40, 60, 80 and 100 years."
..
I wish that John Hussman had not tied everything this way, where the final date is always 2004.

A more general statement would not look as clean and clear cut, but it would be much better. Such a statement would refer to any period of 10 (?), 20 (?), 50 and 100 years or any period of 20 (?), 40, 60, 80 and 100 years.

Have fun.

John R.
JWR1945
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Post by JWR1945 »

I like this quote from the John Hussman article. It is a classic.
In short, one need not make catastrophic bearish assumptions to conclude that risk management poses little probable cost here. Optimistic assumptions are enough to produce pessimistic results.
Have fun.

John R.
Delawaredave
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Post by Delawaredave »

New to this board.

What an interesting (and scary) discussion. I'm no expert, but it is hard to defend current valuations - with huge downside potential and limited-at-best upside

What's the best next course ?

Are International equities/debt the answer ? Any good websites/discussions to learn more ?

I'm roughly 70% stocks/30% bonds - with 1/2 of the stocks already "international" funds. I'm thinking of going 50% stocks/bonds - with 3/4 of the stocks international and 1/3 of the debt international.

But that almost seems scarier than where I am.....

I'm new to SWR and potential early retirement - but I don't see how anyone right now could leave work - seems like quitting your job and counting on stocks in 1929.....

Appreciate any comments /thoughts. Have a great day !
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Post by unclemick »

Vanguard Wellesley - SEC yield 3.62%, Balanced Index - SEC yield 2.44%.

Accumulation or distribution phase - life is chewy right now. If I had 20 or more years to ER - I'd DCA on.

At 61 (ER since age 49), next year I'll morph more toward Ben Graham's 50/50 defensive investor postion with ?? 20% of the 50% in REIT's and 10% total international. Or may do nothing and solder on with Lifestrategy mod/REIT Index and research contrarian/dividend stocks.
Mike
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Post by Mike »

No one knows what will happen from here, since the S&P's low dividend yield is unprecedented.
hocus2004
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Post by hocus2004 »

"New to this board. "

Welcome to the community, DelawareDave.

"I don't see how anyone right now could leave work - seems like quitting your job and counting on stocks in 1929....."

JWR1945's research shows that the SWR for an 80 percent stock portfolio today is about 2.5 percent. So it's true that, if you are heavily invested in stocks, it is going to take a lot of assets to finance a comfortable retirement beginning at today's valuation levels.

Remember, though, that there is no law of the universe saying that you must always be heavily invested in stocks. Aspiring early retirees manage their money differently than most other people, right? That's how they are able to achieve financial freedom so much sooner. Well, aspiring early retirees need to be a little bit on the cutting edge with their investing strategies too. The smart early retiree does not want to lose the accumulated capital that he worked so hard to accumulate by saying "oh, those conventional SWR methodology studies are good enough for me." He wants to get the number right so that he obtains as much freedom with those dollars as he possibly can.

We are not a bunch of killjoys at this board. The reality is quite to the contrary. The Data-Based SWR Tool is an exciting tool that permits middle-class workers to win financial freedom years or even decades sooner than they otherwise could. Please read the section in the "About This Board" post where I talk about this, DelawareDave. Stocks are not going to remain at the valuation levels that they are at today indefinitely. The valuation level is going to come down. When it does, the SWR is going to go up. That means big opportunities are waiting not too far down the road. Opportunities for whom? For us!

The SWR tells you how much mileage you can reasonably expect to get from your accumulated capital. The highest SWR we have seen in recent years is the 9 percent SWR that applied in 1982. The lowest is the 1.6 percent SWR that applied in 2000. Think for a moment what a difference that is. With a 9 percent SWR, you need only $500,000 in capital to finance 30 years of annual spending at the $45,000 level. With a 1.6 percent SWR, it would take almost $3 million in accumulated capital to finance 30 years of annual spending at the $45,000 level. There are no guarantees with any of this. We look at statistical probabilities at this board. But I think it is fair to say that there are great benefits to be had in learning what the historical data reveals re how stocks have performed in the past.

People look at today's SWRs and they get depressed. They say "how can I ever retire early when valuations are at these levels?" But who wrote the law saying that you must be heavily invested in stocks even at times of extremely high valuations? Lighten up on stocks a bit and you can probably move your SWR up a few notches. Moreover, that will permit you to move your stock allocation up again when the SWR for stocks improves. I doubt that anyone is going to be able to time things so that he gets a 9 percent SWR for his entire portfolio. It would be piggish to try to do that, and pigs get slaughtered. But there is no reason not to take some money off the stock table at times of extreme valuations and to move some back when more attractive SWRs become available.

If you get out of the "I must keep all of my money in stocks at all times regardless of whether the historical data indicates that that makes sense or not" mindset that is pushed by many of the conventional money advisors, now is not such a depressing time at all. Now is a time to be protecting your accumulated assets and preparing to reap the benefits that will become available in the not-too-distant future in the event that stocks perform in the future somewhat in the way in which they have always performed in the past.

Here is a link to a thread started by JWR1945 in which he argued that we enjoy "A Bright Future" because of what we have learned about the realities of SWRs for the various investment classes.

http://nofeeboards.com/boards/viewtopic.php?t=2598
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Post by Delawaredave »

Thanks for above info.

I need to get outside of the "stocks for the long haul" and "buy and hold" mentality. There's obviously other asset classes more appropriate at different times (like now....).

I originally naively thought 7% total annual return (with inflation) would be conservative and "near certain" on $1million. Figured inflation at 3%, then I thought I could draw today's equivalent of $40,000 per year "forever" and original principal would be retained and grow with inflation to pass to kids.

The great tools/posts on this board shows me that above is not as conservative and certain as I thought....

Thanks again.
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Post by unclemick »

Ah yes - the devil lies in the details. To paraphrase Lord Keynes - nothing wrong with "stocks for the long run" or "buy and hold" PROVIDED you understand to whom and why they apply - ie the reasons behind history.

High/low P/E, TIPs, contrarian/dividend strategies - this forum provides a lot of info from which to craft individual strategies. More than one way to skin a cat.
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Post by Delawaredave »

Then there's contrarian article to S&P 625...

http://news.morningstar.com/doc/article ... 22,00.html

Interesting how two educated views can differ so widely.

I guess I do believe that:
- PE's should be higher than normal now because interest rates are so low, and
- PE's should be higher than historically normal because "less capital is needed per dollar of earnings"

Question is do above "hold enough water" to justify current valuations....
Mike
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Post by Mike »

PE's should be higher than normal now because interest rates are so low
Interest rates can change.
less capital is needed per dollar of earnings
This is a double edged sword. Less capital intensive industries means more labor intensive industries. Labor costs are rising, and human productivity doesn't improve at the same rate as machine productivity. This could mean slower growth.
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Post by hocus2004 »

"Interesting how two educated views can differ so widely. "

You are bringing up a very important point here, DelawareDave. I often find that I learn the most about a topic not by taking in the stuff that initially makes sense to me but instead from focusing on the things that do not make sense until I am able to come up with some sort of reasonble solution to whatever the riddle is. You are pointing out a riddle here. I think that it makes sense to spend some effort trying to unravel it.

In most areas of study, you do not see such widely divergent viewpoints on such core questions. The question we are examining here is a core one--What is the value of a stock purchase? People have been purchasing stocks for a long time, so there really should by now be a clear consensus on at least some aspects of the question of how value is assessed. There shouldn't be so much darn CONTROVERSY about the questions examined at this board. Why is everything such a mish-mash?

The biggest reason is that the study of stocks is generally undisciplined. To come to sound conclusions about things, you need to focus your efforts a bit. If you don't do that, you will find yourself going around and around in circles. Stock analysis tends to be an area where knowledge has not advanced much over time; it has gone around and around in circles.

Consider what went on when mankind was trying to send a spacecraft to the moon. There are engineers who had to work out certain calculations properly to make the thing work. What would have happened if, each time someone tried to measure the distance to the moon, someone interrupted with a comment that "the distance to Mars is very different, you know," or "measurements of things as big as the distance to the moon are never absolutely precise, you are going to be off by a little, so you might as well just give up," and so on? If things had been allowed to proceed in this way, we never would have placed a man on the moon.

This is very much the way that our discussions of SWRs have proceeded for the last 31 months (the Great SWR Debate was kicked off by a post that I put to the Motley Fool board on May 13, 2002). What we hear all the time is "there is no measure of valuation that is absolutely precise, so this is all a waste of time," or "you don't know the future, it's possible that we will not see a worst-case scenario and then your SWR number won't apply." There is a good bit of truth in these statements, and that is why it is hard to refute them in a final way; they keep popping up because they appear on the surface to be reasonable observations. What is wrong with them is not that they are untrue. What is wrong with them is that THEY ARE BESIDE THE POINT. The point of SWR analysis is to assess the probabilities of various possible future outcomes. The fact that this cannot be done with absolute precision does not mean that it is not worth doing. The fact that it may be that withdrawal rates higher than the SWR will work out does not mean that the SWR is not what the historical data says it is.

To make sense of a topic, you need to narrow your focus to one question at a time. It is perfectly appropriate after you have answered the first question to move on to a second and then a third. But you cannot make any progress at all unless you do things in steps. SWR ANALYSIS DOES NOT TELL YOU HOW TO INVEST. It is not intended to do that. It is a descriptive tool, not a prescriptive tool. It is theoretically possible that someone could read the material on this board, believe that it is all accurate, and then decide reasonably to invest 100 percent of his portfolio in stocks at today's valuations. This is an extremely unlikely scenario, but I can imagine a circumstance in which this could happen. It is not our job here to tell people to invest in stocks or not to invest in stocks. It's inevitable that people will use the material we develop to make those decisions for themselves. But our job is just to provide the materials that permit the investor to make a better informed decision.

The reason why experts come down on so many different sides of the valuation topic is that they are all asking different questions. Ask a different question, and you come up with a different answer. Would it be fun to sit through a double-header between the Yankees and the Red Sox this June? Is there one answer to that question? There is not. For some, that sounds like heaven. For some, it sounds like hell. The true answer is--It depends on where you are coming from. There is no one correct answer to that sort of question.

Similarly, there is no one correct answer to the question "Should I be invested in stocks today or not?" The answer always depends. It depends on what your life goals are and it depends on what your financial circumstances are. So if we can't answer that question, what the heck ARE we trying to do at this board?

We are trying to answer the question--What is the safe withdrawal rate (SWR) for stocks? The SWR is the highest take-out number you can employ that is sure to work in the event that stocks perform in the future as they have in the past. Do you see how narrow that question is? We are looking at one tiny little spot on a broad spectrum of possibilities. It is because we have so narrowed our focus that we are able to come up with correct answers to the question. If we were to try to answer the question "Are stocks going to do well or poorly in the future?" we would be at a loss. Who even knows what these words mean? No one can provide meaningful answers to those sorts of questions. To come up with meaningful answers, you must start with meaningful questions. You must narrow the scope of inquiry enough so that you can say something with some degree of confidence.

We can say with confidence today that the REHP study got the number wrong. Why can we say that? Because we looked at the historical data and the historical data does not support the claim in the REHP study that a 4 percent take-out from a high-percentage stock portfolio is "100 percent safe." The fact that the REHP study has been discredited does not mean that everyone should get out of stocks. But it does mean something important. It means that everyone needs to be looking at alternatives to stocks because stocks are not in all circumstances the best bet. If the REHP study were accurate, stocks would ALWAYS be the best best. If the REHP study were accurate, it really would be so that all middle-class workers should be thinking "stocks for the long run." We have shown by studying the historical data that the Stocks for the Long Run investing paradigm is a dangerously flawed paradigm. That's a breakthrough development. We have done some very important work at this board, work that I believe will stand the world of investing on its head in days to come.

There's a sense in which we should not be at all disturbed that there is such a wide variety of viewpoints on investing questions. On many issues, there really is a large range of reasonable viewpoints, so we should enjoy the diversity of opinions rather than bemoan it. On the matter of the calculation of a number, however, we should be highly critical of efforts to muddy the waters and confuse people about what the numbers say. There is simply no question but that the SWR varies from valuation level to valuation level. We have proven this 10 times over. It is shameful that there are still people to this day recommending that newcomers to our boards take a look at the REHP study without letting them know that the study has been discredited. That is a dangerous business. That sort of thing should stop.

I developed the Data-Based SWR Tool in late 1995 and early 1996. I took my money (it wasn't much at the time)) out of stocks in 1996. Stock prices went up about 30 percent in 1997, and again in 1998, and again in 1999. It is entirely possible that this sort of things could happen again, starting from today's valuations. It is possible that you could take your money out of stocks because of what you read at this board and that 12 months from today stocks will be at values 50 percent higher than they are at today. You have to keep that thought in the back of your mind when you make decisions.

Even though that could happen, I believe that the work being done at this board has great value. The work we are doing is different from the work being done just about anywhere else in a way that speaks directly to the point you raised that prompted me to enter these words on the computer screen. We are engaged in a disciplined study of statistical probabilities at this board. There are times when we put forward stuff that is just personal opinion, but our focus is not that mish-mash feelings, oh, oh, oh, oh feelings sort of thing. At this board we deal with numbers. Numbers are not feelings. Numbers are hard. You can't have six different people telling you six different things about the result of a mathematical calculation (if you do, there is something wrong). We don't answer all of your investing questions here. But, because we work with hard numbers instead of soft personal feelings, we give you tools that you can put to work helping you to answer those questions for yourself.

I am not a numbers guy. I hate looking at numbers. So why the heck am I moderator of a board that deals with numbers? It's because, as much as I hate numbers, that's how much I love financial freedom. And if you are going to hand in a resignation from a high-paying job in your early 40s (that's what I did), you had damn well be sure you take a look at some numbers before you do. If you do not do this, you are a fool. So I took a look at some numbers. I didn't take those numbers on faith. I took a HARD look at those numbers. I wanted the numbers to be accurate before I took any irreversible steps. If I was able to do that with all my lack of skill with numbers, then other community members should be able to do it too. That is why I am so no-nonsence on the matter of intercst acknowledging the errors he made. If I handed in that resignation because I put my trust in something that I read on one of these boards, and my retirement went bust, and I later learned that the person who calculated the number had known for a long time that it was wrong and he just wasn't man enough to admit the mistake, I would have been plenty steamed. I expect numbers guys to at least make a minimal effort to get their numbers right, and that means acknowledging errors when they are brought to your attention.

The point here is that there are some things on which different people can have honest differences of opinion and there are some things on which different people cannot have honest differences of opinion. If the question is a sufficiently vague one--Are stocks going to do well in the future or not?--anyone can say anything he or she pleases; there is no right or wrong answer to such questions. When the question is more specific--What is the SWR at today's valuation levels?--there are indeed right and wrong answers. JWR1945 says that the SWR at today's valuation levels is about 2.5 percent for an 80 percent S&P portfolio. If someone using a different methodology that is also analytically valid says that they believe it is really 2.4 percent or 2.6 percent,. I am OK with that. SWR analysis is not a precise science, and those numbers are in the same general ballpark. If someone says that the SWR is 4 percent today, I can't help but be suspicious as to what sort of methodology they are using. The historical data should say the same thing to different people who look at it, and that number is so far afield from the numbers that everyone who has taken an informed look at the question has come up with, that it is hard for me to imagine that the methodology producing it is not gravely flawed. Sure enough, when you examine the methodology used in the REHP study, you find that it makes ZERO ADJUSTMENT for changes in valuation. It is a nonsense gibberish result generated by use of a nonsense gibberish methodology.

To pull this back to your actual question, the people who offer these different views are looking at different aspects of the question. There are people who are very gung ho on stocks today who make good points. Our own Mike is not real gung ho on stocks but he sometimes makes points that are reasonable and that could be interpreted as being positive re how stocks will do in the near future. Mike says that we are in uncharted waters today and thus we can not be at all sure that stocks will perform in the future as they have in the past. He is right about that. Mike says that it might be a long time before stocks return to moderate valuation levels. He is right about that. Mike says that it is possible that changes in the Social Security laws may cause stock prices to go even higher. He is right about that. Mike says that demographic realities may help stocks for some time to come. He is right about that.

I like Mike's contributions because he sometimes gives a pro-stock point of view (although his personal view is not generally pro--stock). We need more of that. I love stocks myself and I do not want this to be viewed as an anti-stock board. I would like to have voices here which are more pro-stock than Mikes. We need to hear pro-stock views if we are to learn because Ultimate Truth is generally not possessed by any one human being.

All that said, I don't tolerate certain types of nonsense at this board. I do not tolerate Word Games. I do not tolerate Intimidation. I do not tolerate Deception. That stuff is out because that stuff hurts the community, and my job is to help the community learn. I have a well-deserved reputation for coming down on that stuff and coming down on it hard. I am proud of that reputation.

The fact that DCMs (defenders of the conventional methodology) have had to resort to the use of so much ugliness and trickery to block discussions of SWRs over the past three years itself reveals how weak their position is on the merits. If they had reasonable arguments to offer, don't you think that they would come forward with them rather than put forward the crud they have become known for? The reality is that the conventional SWR methodology is the SWR methodology of the past and the data-based SWR methodology is the SWR methodology of the future. The reality is that the Stocks for the Long Run paradigm is in its twilight years. We appear to be near the end of the bull run and in all likelihood investors will be re-learning in days to come some lessons that could be learned with a lot less pain by taking a reasoned look at the historical stock-return data.

Our job is to help people learn what the data says. The data says that stocks are a wonderful asset class. So we want people to learn that. The data says that a good argument can be made for most investors holding a moderate position in stocks even at today's valuation levels. So we want people to learn that. The data says that SWRs go up and down with changes in valuation levels. So we want people to learn that. The data says that the SWR for a high-percentage stock portfolio is on the low side today and is likely to move a good bit higher in the not-too-distant future. So we want people to learn that.

There are many things on which there can be reasonable differences of opinion. There are a few things on which this is not possible. We need to try to distinguish clearly what sort of thing it is we are talking about at a given time. Stocks may do well in the future or they may not. No one has a crystal ball. No one knows. The SWR is a mathematical construct. The SWR is whatever the historical data says it is.

Please don't be intimidated by the length of this response. As BenSolar once put it, "it's just another case of hocus being hocus."
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kathyet
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Post by kathyet »

Hi JWR1945,
Why I Think the S&P 500 Is Fairly Valued at 625
You don't seem to be the only one found this at Kiplinger site you need to scroll down for some reason the top of the page is blank.
VALUE ADDED
Blue Chips Are Back for 2005

In spite of everything, 2004 has turned out to be a good year for stocks. With just a couple of trading days left, the S&P 500 is up more than 10%, including dividends. That's right in line with the historical average.
http://kiplinger.com/columns/value/

Kathyet
JWR1945
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Post by JWR1945 »

Delawaredave wrote:Then there's contrarian article to S&P 625...

http://news.morningstar.com/doc/article ... 22,00.html

Interesting how two educated views can differ so widely.

I guess I do believe that:
- PE's should be higher than normal now because interest rates are so low, and
- PE's should be higher than historically normal because "less capital is needed per dollar of earnings"

Question is do above "hold enough water" to justify current valuations....
I have not seen historically based justification for believing that Discounted Cash Flow has predictive value for stocks. Professor Robert Shiller (along with Dr. Campbell) has provided justification for P/E10.

I generally hold the numbers produced by accounting in high regard, particularly when averaged over several years. Discounted cash flow strikes me as being more appropriate for debt instruments than for stocks.

P/Es automatically take inflation into account because earnings respond to inflation while bond interest rates (excluding Treasury Inflation Indexed Securities such as TIPS and ibonds) change with the anticipated level of inflation. [We have an old series of posts on the FIRE board that looked into this. They were based upon an excellent article by Asness. The P/E versus interest rate (10-year) comparison worked one way in recent years. But it worked the opposite way before then!]

Because of demographics, it is reasonable to expect to have an excess of money looking for investments throughout the next decade or so. It is reasonable to shave off a percent or two of returns from just about everything, not just from stocks and bonds. In that sense, it is reasonable for valuations to remain high overall for the next decade or so.

There is a danger, of course, that enough people will become disenchanted with a particular investment class (such as stocks) and overreact on the downside. History suggests using caution.

One thing that I need to know is whether you are talking about the accumulation stage or the distribution stage. They are much different. For example, in the distribution stage you can count on being able to withdraw 3.33% plus inflation for 30 years as long as you can own inflation protected securities with an interest rate of zero percent or better.

If you are in the accumulation stage, you should be able to do better than that with stocks even at today's valuations provided that you have sufficient time. But I am talking in terms of 25 to 30 years. If you don't have time, you face a considerable amount of risk of incurring a loss, even after 15 years.

Have fun.

John R.
Delawaredave
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Post by Delawaredave »

John - thanks for above. I'm in the "accumulation" stage - in 10 years will have last kid through college - and probably "fully retire" then.

For now, guess I gotta "keep my day job". Was hoping to "partially retire" early (read: now) and get into a "hobby job" and/or "paid volunteer" position which would be a lot more satisfying, but pay a lot less.

But to do that, I think I'd need a 5-6% SWR at high certainty for 40 years.

Does any one have any experience/websites on SWR's for rental real estate ? Though I read somewhere that rents average 1%/month of property value.

That's 12% per year - sounds high. If one did the property management themselves and some repairs, is that a more reliabable way to get a 6-7% SWR than equities ?

Happy New Year to all !
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Post by JWR1945 »

Delawaredave wrote:John - thanks for above. I'm in the "accumulation" stage - in 10 years will have last kid through college - and probably "fully retire" then.

For now, guess I gotta "keep my day job". Was hoping to "partially retire" early (read: now) and get into a "hobby job" and/or "paid volunteer" position which would be a lot more satisfying, but pay a lot less.

But to do that, I think I'd need a 5-6% SWR at high certainty for 40 years.
Do not give up hope. You may not have to wait ten years.

Pay special attention to what hocus2004 has done. He has pioneered this kind of semi-retirement, where you retire to opportunity, personal development and satisfaction instead of simply retiring away from gainful employment.

I am assuming that your 5% to 6% SWR is in terms of real dollars. Many people miss that point. Typically, these withdrawal rates would correspond to 8% to 9% prior to making an adjustment for inflation. I mention this because, if you are thinking in terms of nominal dollars, you are already there.

For the moment, focus on capital preservation and motivated savings (what hocus2004 calls Passion Savings). Recognize that you do not have to finance your full retirement right away. Your income from a more satisfying but lower paying job can make up the difference. This is especially important if your alternative employment has a high potential upside, but not before 5 to 10 years.

Think in terms of perpetual income streams. Recently, I have been looking into dividend-based strategies.
High Dividend Strategies dated Sat Sep 25, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2976
The Truth about High Dividends dated Mon Aug 16, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2886

As for historical stock market behavior over 10 years, glance at:
Annualized Real Total Returns 100% stocks dated Tue Mar 16, 2004.
http://nofeeboards.com/boards/viewtopic.php?t=2226
[These tables have annualized real returns. Let r be the annualized real return expressed as a fraction. Let the number of years equal N. Then to calculate growth multipliers, use this equation: (the growth multiplier at N years) = (1 + r)^N.]

Some of the number are negative. [The worst years are associated with periods of high valuations such as the 1960s.]

FMO posted many great real estate articles in the earliest days of the FIRE board. Go back to the second and third pages on the FIRE board to see some really great articles about owning rental properties.

Have fun.

John R.
Mike
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Post by Mike »

That's 12% per year - sounds high. If one did the property management themselves and some repairs, is that a more reliabable way to get a 6-7% SWR than equities ?
Like any small business, rental real estate depends a lot upon the skill of the individual. Some people make quite a good living with it, and others are so bad at picking tenants and property that they actually lose money.
hocus2004
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Post by hocus2004 »

"FMO posted many great real estate articles in the earliest days of the FIRE board."

I second JWR1945's recommendation to check out FMO's posts on rental real estate. If you have questions you want to direct to FMO, he posts today at the raddr-pages.com site.

"Pay special attention to what hocus2004 has done. He has pioneered this kind of semi-retirement, where you retire to opportunity, personal development and satisfaction instead of simply retiring away from gainful employment. "

JWR1945 has read my book, "Passion Saving," which I will self-publish in the early months of 2005. The book argues for a new definition of retirement, one in which retirement is achieved in stages as one becomes over time increasingly able to spend the hours of the day doing what one wants to do rather than what one needs to do to put food on the table. I agree with JWR1945's suggestion that there is usually more than one way to skin a cat. I urge caution in the development of "retirement" plans because the downside of carelessness can be great. But I also believe that with some creativity most people can come up with a way to make some move in the direction of realization of their dreams in a way that is reasonably prudent.

If there are any interested in exploring the "Passion Saving" concept at this board, it is OK to do so as long as there is at least some connection established to investing questions. Passion Saving requires the development of income streams that finance the new work arrangements being pursured. SWR analysis is really just a way of assessing the strength and safety and staying power of various alternative income streams. I don't want this board to become a general FIRE/Retire Early board. But there clearly are places where the saving topics and the investing topics overlap, and the points of overlap are fair game here.

I will be out of town for a few days. I will not be able to respond to any questions directed to me until Monday.
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