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A TIPS Ladder Example
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ataloss
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PostPosted: Wed May 04, 2005 12:41 pm    Post subject: Reply with quote

tips are good, dividends are good some portfolio switching may be in order from time to time but since we can't predict the future it is hard to specify stratagies in advance. norwegion widow and all that. probably withdrawals should be sensiblly reduced during market downturns ( http://www.gummy-stuff.org/sensible_withdrawals.htm ) and certaily less overvalued asset classes should be utilized when possible. 4% is a nice rule of thumb (and high return annuities should be considered if available)



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peteyperson
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PostPosted: Thu May 05, 2005 4:55 am    Post subject: Reply with quote

ES wrote:
Greetings unclemick Smile
Quote:
I seem to have missed something - ? isn't the whole point of a ladder to sell bonds(of whatever kind) as they come due. Who cares about market vs NAV in the stretch?

Either you have missed something, or I have. Lets not discount either possibility. Wink But the idea of this plan is to dip into the TIPS ladder when the market is down. So the market is the prime factor in this scenario. How'd you miss that one mick? LaughingWink Also I still don't see how in an extended bear market your tips ladder would survive. Which was my point in the first place.


Hi Es,

This may have been subsequently answered (haven't read whole thread - playing catchup) but...

A bond component is held for low volatility, not high returns. Stocks are held with other goals in mind!

A TIPS ladder where one has 10 TIPS bonds, one maturing each year ensure limited price volatility on redeemed principal. This is perfect when markets are tanking and one needs to ensure one can retrieve bond capital deployed without taking on capital declines derived from rising interest rates. Bottom line: You can get your bond money out by way of the ladder and not need to sell of a bond fund with a changing NAV.

In the first instance, a bond AA allows one to spend those bonds down rather than equities when equities tank 50% a la 2001-2. The objective is to survive the period, not to hold the bond AA per se. During a 1970s scenario with a 4% inflation-adjusted w/r rate and a 1% dividend yield on stocks, one could have lived off a 30% AA to bonds. The 1980s come around and you only have your stocks remaining. Not good! But here's the thing. Your 70/30 allocation in the 70s would have fallen to circa 40/30 and then to 40/0 when you spent off your bonds. So now you own undervalued stocks.

The 1980s come around and stocks start to move on up. You need to sell down stocks and there is no getting around that. Your dividend/coupon income has fallen now as you don't own bonds anymore, but crucially you have held onto your stocks, your highest returning asset class. This gives them the best change to recover and as the 80s showed, this would have dramatically increased your portfolio survival rate and returns.

The second part is the TIPS drawdown aspect. While one may choose to not reinvest the TIPS if equities decline, one can always set the TIPS bond ladder up again when stocks has rebounded and your rebalance. There is nothing to stop you doing so. The coupon is a small part of the drawdown return - 70%+ is capital returned to you, so reinvestment at new lower rates is less of a concern.

Thus, those are two different components. The first is really more why investors hold bonds in the first place. Hint: It isn't for their cool returns!

Petey


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peteyperson
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PostPosted: Thu May 05, 2005 8:17 am    Post subject: Reply with quote

JWR1945 wrote:
The answer is far from an easy no because it is not my decision.

Our numbers strongly support a zero percent stock allocation at recent stock market valuations. (We are close to the territory where it can make sense to start adding a minimal allocation of stocks.)

John Russell


It is worth noting here that as I understand it, those numbers reflect current valuation levels on S&P 500/US Total Market and possibly EAFE Index. This excludes small cap value valuation levels, emerging market, oil & gas and other equity asset classes available.

I think it is far too broad a statement to rule out all equities at today's price levels. Different asset and sub-asset classes are available at different prices. UK micro cap, for instance, is still available at close to 1.25x book with a 2% dividend. Crude oil as I understand it, and commodities in general, are priced at their inflation adjusted 80s values and so should still have some way to run if one accepts the notion that commodities ultimately rise with inflation (with some noise created by supply/demand factors). It is a little like someone concluding that commercial real estate is off the table. US may well be, but UK and European RE is offered below or at NAV in many cases and countries like Singapore & Hong Kong are coming off multi-year depression which has levelled the field on their listed commercial real estate.

There are usually opportunities if one wishes to look deeper. Broad sweepin' statements will miss such opportunities which could be quite costly in the long-run.

P.S. Not knocking you, John, just thought it was worth pointing out.

Respectfully,
Petey


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peteyperson
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PostPosted: Thu May 05, 2005 8:32 am    Post subject: Reply with quote

unclemick wrote:
Sigh!

One more time - If you go to the Libra Investment Management website, click on Investment policy and look at the mythical widow example portfolio - you will find a very good MPT 7type portfolio. Couldn't have done a better job on my best day.

Now you take my mythical sweetie - the steely eyed Norwegian widow who gets dividend checks from "fine domestic corporations"(a little Charlie Munger") who doesn't give spit about volitility as long as the dividends keep coming and generally keep up with inflation.

Like Ford and Chevy - never the twain shall meet.

So I will ask again - how can you deal/or not with volitility in the distribution phase. This thread is one way.

So if you have saved years for ER, and your portfolio suffers a 40-70% drop do you have a plan? Note that a 'good' MPT portfolio in properly correlated asset classes should prevent this from happening.

BTY - the closest to Charlie Munger's one fine domestic corporation for a pension plan was a boss qualified for the company pension, a smattering of 401k and the big dog - Johnson and Johnson acquired over thirty years ago.

My big dog - Vanguard Lifestrategy mod with auto rebalancing and live with the volitility. No TIPs - non cola pension plus dividend stocks for the baseline. So when the stocks swoon - I watch the dividend stream.

If I 'knew' that a 40-70% drop was coming, instead of a sideways crawl - I would lower my stock allocation.

More than one way to skin a cat.


Uncle,

On the subject of Charlie Munger, I think he made an error when suggesting one stock was sufficient diversification. It is clearly easy to make such an assumption when you have so much money that even a 95% loss would not cause a major problem to personal finances. This is also true for Warren Buffett.

So I don't think the playing field is level. Munger's other point in his speech was that diversification with multiple fees thru a myriad of advisors, fund managers, etc. does not make sense when markets perform poorly and you're paying out 3% a year. Following a 50% decline and a stagnant market for the next decade, such a fee structure could just add further damage. This is the danger with high fee structures or multi-level structures like those that use a financial advisor.

I don't altogether disagree with Munger's second point, however one must bear in mind what the long-run returns are for the asset class. If global ScV costs an extra 2% instead of indexing large-cap blend yet delivers 4% alpha over long periods of time, one comes out ahead as long as one can weather the bad return sequence periods. This is done via a good dollop of bonds for individual investors and non-correlated asset classes like absolute return, venture capital, private real estate, O&G, commodities and so forth for institutional investors. Both Yale and Harvard which came under Munger's "gun" invest in a truly non-correlated manner in order to be able to hold thru return sequences. For the individual investor, the situation is a little more tricky with far fewer low to negative correlated asset classes to choose from. Interestly Yale's Swensen has written a follow-up book for the individual investor which is released in the fall in the US.

Regards,
Petey


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JWR1945
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PostPosted: Thu May 05, 2005 8:59 am    Post subject: Reply with quote

Peteyperson
Quote:
There are usually opportunities if one wishes to look deeper. Broad sweepin' statements will miss such opportunities which could be quite costly in the long-run.

P.S. Not knocking you, John, just thought it was worth pointing out.

Thank you. You have a good point.

In the context that I expect P/E10 for the S&P500 index to fall by a factor of 2 to 4 in the next decade (or so), it is a good idea to limit your exposure to the S&P500 index.

This does not always hold up In terms of individual stocks or segments with other distinctive characteristics. Sometimes, a rare opportunity will pop up. I place Merck in this category.

More often, there can be a different reason that is still valid. Along these lines, I think of dividend-based strategies. Buying now can make sense because there is a lot of uncertainty as to when the overall stock market will decline and because a person may need his dividend income NOW. To a retiree, a stock's price can be less important than its income stream.

Have fun.

John Russell


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peteyperson
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PostPosted: Thu May 05, 2005 11:15 pm    Post subject: Reply with quote

JWR1945 wrote:
Peteyperson
Quote:
There are usually opportunities if one wishes to look deeper. Broad sweepin' statements will miss such opportunities which could be quite costly in the long-run.

P.S. Not knocking you, John, just thought it was worth pointing out.

Thank you. You have a good point.

In the context that I expect P/E10 for the S&P500 index to fall by a factor of 2 to 4 in the next decade (or so), it is a good idea to limit your exposure to the S&P500 index.

This does not always hold up In terms of individual stocks or segments with other distinctive characteristics. Sometimes, a rare opportunity will pop up. I place Merck in this category.

More often, there can be a different reason that is still valid. Along these lines, I think of dividend-based strategies. Buying now can make sense because there is a lot of uncertainty as to when the overall stock market will decline and because a person may need his dividend income NOW. To a retiree, a stock's price can be less important than its income stream.

Have fun.

John Russell


Hi John,

I agree that the S&P 500 is overvalued. Last time I looked the TTM P/E was around 19-20. Historical is 14-16. Historical dividend is 4.4%. Last time I looked it was 1.8% today (although payout ratio may explain some of a difference there).

So for those who believe in reversion and has studied a bit of market history, the outcome is pretty clear. It is just a matter of when the market will get revalued. The large cap is very unattractive in the US at present based on fundamentals. It could of course do extremely well if investors simply push up price multiples like in the late 90s if boomers save with wild adandon etc... Anything is possible, but I do like to plan based on what I understand rather than based on wild assumption of investor behaviour! Laughing

Petey


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JWR1945
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PostPosted: Fri May 06, 2005 6:24 am    Post subject: Reply with quote

peteyperson wrote:
...
I agree that the S&P 500 is overvalued. Last time I looked the TTM P/E was around 19-20. Historical is 14-16. Historical dividend is 4.4%. Last time I looked it was 1.8% today (although payout ratio may explain some of a difference there).

So for those who believe in reversion and has studied a bit of market history, the outcome is pretty clear. It is just a matter of when the market will get revalued....

I checked. Today's payout ratio is 30.8%.

The payout ratio has decreased gradually over the last 50 years. Historically, a healthy payout ratio for individual stocks has been around 50% to 60%. [It can be higher for regulated industries such as banks and utilities that are seldom allowed to fail.]

The payout ratio explains part of the story, but not all. (Some people question whether the payout ratio has changed at all when compared to properly calculated earnings. I will not go into that issue except to mention this: the money that is reinvested instead of returned to shareholders in the form of dividends does not seem to get the kind of return that it should. Some people believe that this is a misstatement of earnings. Others talk about inefficient management. I defer the issue. I do not think that we have a long enough record to support the notion of a substantial decrease in management efficiency. I can point to some data over a short period of time that would argue just the opposite.]

Still, from the Gordon Equation (return = dividend yield + dividend growth) or John Bogle's version of it (investment return = dividend yield + earnings growth), there has been a big drop in the part with the dividend yield. As for growth projections, they are notoriously unreliable.

Still, Ben Graham would keep 25% of our portfolios in stocks regardless of circumstances. This could be a big winner if our recent bubble is followed by a super bubble.

Have fun.

John Russell


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peteyperson
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PostPosted: Sat May 07, 2005 6:24 am    Post subject: Reply with quote

JWR1945 wrote:
peteyperson wrote:
...
I agree that the S&P 500 is overvalued. Last time I looked the TTM P/E was around 19-20. Historical is 14-16. Historical dividend is 4.4%. Last time I looked it was 1.8% today (although payout ratio may explain some of a difference there).

So for those who believe in reversion and has studied a bit of market history, the outcome is pretty clear. It is just a matter of when the market will get revalued....

I checked. Today's payout ratio is 30.8%.

The payout ratio has decreased gradually over the last 50 years. Historically, a healthy payout ratio for individual stocks has been around 50% to 60%. [It can be higher for regulated industries such as banks and utilities that are seldom allowed to fail.]

The payout ratio explains part of the story, but not all. (Some people question whether the payout ratio has changed at all when compared to properly calculated earnings. I will not go into that issue except to mention this: the money that is reinvested instead of returned to shareholders in the form of dividends does not seem to get the kind of return that it should. Some people believe that this is a misstatement of earnings. Others talk about inefficient management. I defer the issue. I do not think that we have a long enough record to support the notion of a substantial decrease in management efficiency. I can point to some data over a short period of time that would argue just the opposite.]

Still, from the Gordon Equation (return = dividend yield + dividend growth) or John Bogle's version of it (investment return = dividend yield + earnings growth), there has been a big drop in the part with the dividend yield. As for growth projections, they are notoriously unreliable.

Still, Ben Graham would keep 25% of our portfolios in stocks regardless of circumstances. This could be a big winner if our recent bubble is followed by a super bubble.

Have fun.

John Russell



In terms of 25% in "stocks" at all times, that depends on how much you want to hedge your potential opportunity cost if stocks more up from an overvalued position. This is not unheard of, of course, but typically it ends badly and the 5-10 year returns covering such a period would not great. This is what people neglected to realise in the late 90s boom that now exhibits this data too.

I would not agree that one needs 25% in stocks regardless. One needs to place money where one stands a chance of the best long-term returns, over a timeframe that works for the individual investor. i.e. 100% cash may make sense if one has a timeframe of a few months and not at all for long-term investors in various liquid investments. So I don't think a blanket statement works all too well. Perhaps best for the general investor but certainly not for people who know a bit more about how markets work and market history.

BTW, where did you recheck the payout ratio data?

Petey


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JWR1945
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PostPosted: Sat May 07, 2005 12:02 pm    Post subject: Reply with quote

peteyperson
Quote:
BTW, where did you recheck the payout ratio data?

I used marketwatch.com (formerly cbs.marketwatch.com) to calculate the payout ratio.

Professor Shiller's web site has a complete set of data for the S&P500 index. I use it most of the time.
http://www.econ.yale.edu/~shiller/

The payout ratio was above 60% in the 1940s. It came down to 50% to 55% for a very long time starting in 1950. It started dropping further around 1975. It really went down around 1995.

As far as 25% regardless, it might have been Benjamin Graham's way of protecting himself as a businessman as opposed to what he thought was best for investors. I think about customers who fled away from investment managers who stayed out of (computer) technology stocks during the late 1990s. [IIRC, people started referring to Warren Buffett as an idiot for a few years.] Benjamin Graham must have had similar examples in mind.

Or reflect on Rob Bennett's decision to stay away from stocks given his unique, personal situation. Regardless of all facts, many deride his decision simply because the stock market happened to go up. The fact that previous bubbles have ended badly escapes them.

Have fun.

John Russell


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unclemick
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PostPosted: Sat May 07, 2005 12:46 pm    Post subject: Reply with quote

Hmmm

Being a left handed INTJ - if the internet had exsisted like today in 1973-1982(the famous "Stocks are Dead!' article) - one can conjecture what would dominate forum discussions - bond durations, the proper way to hold gold. how to leverage real estate, possibly the best 'collectbles' to own' etc., etc.


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ataloss
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PostPosted: Sun May 08, 2005 12:52 am    Post subject: Reply with quote

Quote:

In the context that I expect P/E10 for the S&P500 index to fall by a factor of 2 to 4 in the next decade (or so), it is a good idea to limit your exposure to the S&P500 index.


hmm, wasn't that the point that nfs was making



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PostPosted: Sun May 08, 2005 2:29 pm    Post subject: Reply with quote

ES wrote:
If you or anyone else here says "No, that's not true", or "History doesn't bear that out", or "If X is so, then Y must also be so" when Y is obviously false" there is not one person here that will accuse you of doing anything but arguing your point.

ES, I'm going to hold you to this.

The rest of this post deals with jwr's accumulated posts in this thread since I buggered off to look at a sailboat. Other comments may be addressed in a subsequent message.
JWR1945 wrote:
These rates are high because they include 2.50% (plus inflation) from principal.

For purposes of this discussion, I will assume that we can get an interest rate of 1.5% with 10-year TIPS. This corresponds to a 40-year withdrawal rate of 3.34% (plus inflation).

Next, we set a target allocation for the TIPS ladder. For purposes of illustration, I will set this allocation equal to 20%.

Under normal circumstances, the TIPS portion of the portfolio would contribute 20%*(the normal withdrawal rate for the TIPS) = 0.20*(3.34%) = 0.668% of the 4.0% that we are seeking.

It has already been pointed out by others that this presumes no change in the yield curve, favourable tax treatment, and no lies re CPI-U. Now note that, of the 0.668% contribution from TIPS, 0.500% on average is from consumption of principal. I'll refer back to this later. Don't forget it.
Quote:
We conclude that withdrawing 4% (plus inflation) is doable just so long as we can avoid being hurt by an unfavorable speculative return.

About the Speculative Return

It is highly likely that the stock market's multiples will contract over the next decade. They are likely to contract by a factor between 2 and 4.

IOW, compounded annual p/e declines in the range 6.7-8.7% are likely over the next ten years. Adding in <2% dividend yields and <2% growth rates, any investment in this asset class is a sure loser. Yet further on in the thread, Ben Graham's dictum that at least 25% of a portfolio should be in stocks at all times is repeatedly invoked. This is called having your cake and eating it too.
Quote:
This is the beauty of the TIPS Ladder.

When prices fall, you use the principal of the TIPS that mature in that year in your withdrawal. Since your TIPS allocation is 20% and since your ladder is 10 years long, you receive 2% (plus inflation) of your desired 4% (plus inflation) withdrawal amount. That is, one-half of your withdrawal amount will come from cashing in TIPS as they mature at par. The rest comes from stock dividends.

Refer back to what I asked you to remember above. The TIPS withdrawal schedule in the absence of a stock market decline includes a 0.5% per year consumption of portfolio principal. So, when stock prices fall, consuming the entire maturing principal of TIPS as an adjunct to dividends doesn't get you an extra 2% to spend. There is double counting here and you really net only 1.5% from eating the maturing bonds.

That means the dividend yield from the equity part of the portfolio has to be 0.5% higher than JWR indicated. Instead of 2.2-2.7% to start, it has to be 2.7-3.2% to start. It's still "doable", but it's looking less likely.

What's worse is that the problem compounds itself. The original amortization schedule presumed that the TIPS ladder would last 40 years, depleting slowly over that time. Now a tenth of the principal devoted to TIPS is consumed in the first year, cutting interest income from the ladder in subsequent years, which makes a rising return (or at the least, dividend stream) from the portfolio's equities absolutely crucial. Dividend payments must rise much faster than inflation to make up for eating the TIPS principal.
Quote:
Computers don't allow me to get away with hand waving and doing things that are fuzzy.

No, that's not true. History does not bear that out. Computers are a source of as much obfuscation as enlightenment.
Quote:
One is that it can be tax efficient since the nominal principal is left untaxed.

True but misleading. The nominal principal is untaxed but a significant portion of the amount you realize at sale or maturity is the inflation accrued during your ownership. That accrual is taxed. For a ten year bond, which is what ten year ladders are built from, and even with only mild inflation, expect 1/3 of the principal at maturity to be fully taxable income.
Quote:
Another is that the ladder always returns par plus inflation at maturity.

That's true only pre-tax. After tax in the US, there is no such guarantee.
Quote:
Based on Historical Surviving Withdrawal Rates alone, we should allocate nothing to stocks at today's valuations.

No, that's not true. History does not bear that out.
Quote:
your best tactic is to dump stocks early

History does not bear that out. There is a mountain of evidence that timing markets successfully is a very low probability bet.
Quote:
From our investigations, rebalancing adds nothing except in times of high valuations. And even then, it adds very little. The big payoff is from sitting on the sidelines, waiting for conditions to improve.

History does not bear that out. High valuations existed throughout much of the 1982-2000 bull market. Sitting on the sidelines was a grievous error.
Quote:
I recommend that you time your sales with the hope of getting at least the average price per share during the year. IMHO, you should be able to do just a little bit better. It is reasonable to shoot for a price in the upper third between a stock's (or index fund's) 52-week low and the 52-week high.

History does not bear that out. Note that no methodology for such timing is given.
Quote:
But even a TIPS-only account does much better for retirees than most people imagine. You would have 80% of your money available (plus adjustments that match inflation) after a decade of withdrawing 4%.

No, that's not true. If TIPS had real yields of 2.2%, it might be true, but yields at all maturities are now below that.

A few hours later ...
Quote:
Let us say that you withdraw 4.0% of your original balance (plus inflation) every year. You would still have 74% of your initial balance (plus inflation) at the end of a decade.

The arithmetic is quietly corrected. 74 < 80.
Quote:
Even with today's horrible interest rates on ten-year TIPS, you can start out withdrawing 4% from an all-TIPS portfolio. Assuming that stock market prices collapse within the next decade, which is likely, you would be in a great position to convert to a dividend-based strategy that would extend your portfolio's survival far into the future. You would never have to sell any shares

The assumption of a stock market collapse to bargain levels in the next decade is by no means a sure thing. Describing it even as likely is a stretch. Even if it happens, converting then to a high dividend strategy cannot assure portfolio survival.

One of the problems is the historical evidence that any high equity strategy has really high volatility, so what happens after this conversion remains problematic.

The more serious problem is the situation at conversion. Suppose you own a 100% TIPS portfolio. You are waiting for stock prices to fall, so that conversion is more attractive. When stock prices fall, their long run expected returns rise. But all investments compete in the marketplace. If expected returns on one asset class rise, expected returns on other asset classes rise too. The process is noisy and hardly perfect from day to day, but it happens.

Now suppose JWR's slump finally comes. Stocks look like bargains, with expected real returns of 10%, say. What are you planning to buy these stocks with? Your portfolio is all TIPS, so you have to pay for the stocks by selling TIPS. You are not the only person in this boat. Lots of people will be selling TIPS. The expected return on TIPS is going to be really fat, because TIPS have to compete for attention with an asset class with an expected return of 10%. TIPS yields must rise.

TIPS are bonds. When yields rise, their prices fall. So, just as stocks get to bargain territory - dividend yields of 6%, expected returns of 10% - you have to sell TIPS at 4% real yields which you bought at 1.5% real yields in order to make this conversion. You could take a 25%+ capital hit on those TIPS.

To sum up, you've waited ten years, spent 26% of the real value of the portfolio, and a quarter of the remainder has disappeared because TIPS yields had to rise to compete with ever better looking stocks. What you are left with could be 50-60% of original real principal. A 4% (of original balance) SWR now becomes a 7-8% SWR on this smaller capital base and the historical evidence is that, no matter how big a bargain the stock market is, 7-8% SWRs are quite likely to fail.



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PostPosted: Mon May 09, 2005 4:51 am    Post subject: Reply with quote

Hmmmm Nobert

So the glass is half empty. You have presented the pitfalls of ladders - big hand grenade here, I mean ladders in general. Difficulties in execution and waiting for dare I say RTM puts you at risk because you have reduced principle while waiting for valuations to get better. True grit - aka the emotional element is not to be underestimated - since long waits might be involved.

As an aside the famous Terhorst's(in the ER world) come to mind) starting out 100% fixed in the eighties and waking up to stocks in the stretch. Although I believe they where in the 4-5% SWR(in practice) range - in that period and I can remember almost 'doing a 72t at 7% in 92, 93 with my rollover, I am grateful I passed because the Vanguard calc's on their old website(before the bubble) showed my preference for higher stock valuations would have not survived thirty years - based on prebubble history.

The point! 7-8% SWR on a "smaller pile" of capital can seem normal. I think I still have a Vanguard Retirement book(circa 1996) that has tables for retiree's(Not ER's!) that has by implication higher take out rates. Looking back I'm assuming mortality is baked in.

MTP - in all it's forms becomes the default position/ arguement. Soldier on with your asset classes, rebalance into better value(relative to your other selected classes) and thus try to preserve/grow principle on an ongoing basis.

My view is somewhat from the bleachers - De Gaul and the Norwegian widow:

A less than pure 60/40 balanced index reserve(75%) with some income boosters(10% REIT Index, individual dividend stocks). 12 th year of ER, age 62 - believer in the old pie chart - and will gradually reduce stock allocation as I age chronologically( see Vanguard Target Retirement Series).

Since we have a variety of posters in the accumulation/distribution posting to this forum - the Ford/Chevy, half full/ half empty back and forth should help many clarify 'their ER approach'.

POGO should not be forgotten - 'behavioral finance' being popular now.




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PostPosted: Mon May 09, 2005 5:03 am    Post subject: Reply with quote

Greetings Norbert Smile
Quote:
ES, I'm going to hold you to this.

I have no problem at all with your post. I can't verify all the math but the presentation was great. You spoke to the points of the argument and kept it at that level. You stated your opinion in a mature way. That's all anyone can ask and we greatly appreciate your effort and contribution. Thank you. Very Happy



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PostPosted: Mon May 09, 2005 11:35 am    Post subject: Reply with quote

Good and constructive post Norbert! Cheers!



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PostPosted: Mon May 09, 2005 1:43 pm    Post subject: Reply with quote

Quote:
... a quarter of the remainder has disappeared because TIPS yields had to rise to compete with ever better looking stocks.


That's an interesting point.


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PostPosted: Mon May 09, 2005 1:59 pm    Post subject: Reply with quote

unclemick wrote:
My view is somewhat from the bleachers - De Gaul and the Norwegian widow:

That view should not be dismissed lightly but you (a) have to be aware of what markets do and (b) be aware of who you are. I'll give you two examples from personal experience.

A late friend started investing in his 40s, mostly blue chip equities with a few bonds thrown in, with the conscious desire to live simply within the income generated by the portfolio. Markets were mostly happy and his expenses were always less than the income produced by the portfolio. When the money piled up, he'd buy something else that looked like it was reasonably solid and that paid a dividend. He was not sophisticated in the sense that portfolio managers are sophisticated. He never looked offshore, never considered international diversification, never measured how exposed he was to particular sectors, played it all by ear. The year before he died, he told me that he figured he had made about as much this way as he would have by putting the money in the bank, but it had been a hell of a lot more fun. The important thing was that he never lived beyond his means, never stretched beyond the income produced, never really had to care about market volatility because dividend volatility is much lower. My guess is that his final withdrawals were 1-2% of total portfolio value. His heirs got a bundle.

OTOH, common today in Canada, we have businesses organized as trusts, which must distribute their entire free cash flow to the beneficial owners. (In the US, only REITs are commonly organized this way; up here, we've got everything from oil wells to cold storage to herring canneries to yellow pages.) The distributions from these trusts are a combination of income and return of capital (read: depreciation, depletion, and amortization of capital assets). People own tons of these things because the yields are incredibly fat compared to other income generating investments, and they spend the entire distribution, income plus DD&A.

My friend in the first example was one of your Norwegian widows. He spent part of the income he received plus he knew that what he owned was reinvesting what wasn't paid out. By contrast, the investors in the second example are spending not just part of the income. They are not even spending just all of the income. They are spending it all and then spending some more by encroaching on capital.

These people, who should be spending no more than 4% a year - less if you believe that JWR's methodology has any validity, which I don't - are being paid 6 or 8 or 10% a year and spending it all. It's not income, any more than borrowing against your home equity is income, but it is all being spent. These people have been convinced that, because the money is sitting there for the taking, it can all be spent. People who cannot distinguish between income and capital are liable to overspend and they are doing it in spades. One day...



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ataloss
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PostPosted: Mon May 09, 2005 2:36 pm    Post subject: Reply with quote

nfs, I like the part about having your tips and eating them too

jwr generates there numbers as if there was some validity and says what "should/could work"

totally unclear that one would be better off selling tips or bonds exclusively
if stocks are down- petey has been attracted to this idea for years, never even backtested

avoiding sales of an asset class when it is down makes some sense and I would do it just doubt jwr's approach- like the idea of having uncorrelated asset classes- hopefully they won't all be down

I am afraid that you have engaged in what h2004 refers to as "ataloss type posting" (but better)


from petey:
Quote:
A bond component is held for low volatility, not high returns. Stocks are held with other goals in mind!


I am learing something new having thought that the goal of holding any asset class was to improve withdrawal rates. in the future aI will have to seek a two wourd rationale for each asset class- maybe calculate withdrawal rates by asset class ala h2004


, " It isn't what you don't know that hurts you. It's what you know for sure . . . that just ain't so." (will rogers- maybe)

unclemick is aware (from other posts) about the dangers of reaching for yield but many aren't and get caught from time to time

Computers don't allow me to get away with hand waving and doing things that are fuzzy.

looks like fuzzy thinking is alive and well however



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unclemick
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Location: LA till Katrina, now MO

PostPosted: Mon May 09, 2005 2:46 pm    Post subject: Reply with quote

Yep

The big holes I perceive in my portfolio - proper international(10% buried in Lifestrategy), real estate(10% REIT Index) and to a lessor extent ????commodities via PCRIX or some such. Given my less than stellar attempts in the 70's and 80's - I have a fear of chasing horses that have left the barn.

Luckily - I never fell into the trust - you can spend all the income mode.


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unclemick
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Location: LA till Katrina, now MO

PostPosted: Mon May 09, 2005 3:59 pm    Post subject: Reply with quote

Poking around Nobert's Libra Investment Management website - I came across what I consider to be THE SINGLE MOST CRITICAL ELEMENT of a successful ER - they call it The Investment Policy Statement. Mine is called simply - The Plan - it's about 11 going on twelve years old and overdue for it's ten year checkup/revision/improvement.

Probably deserves it's own thread - but I'm afraid too many dismiss it as trivially obvious, no need to write it down, I know what I'm doing, the markets may change, spreadsheets are more fun. I often tongue in cheek as a POGO reference.

Since I'm visually oriented - mine's a single sheet of engineering graph paper with spend lines vs years including a croak point (84.3 in 1993) with all income expected from all sources: real estate, pension, SS, dividends, RMD at 70 1/2. With appropriate notes as to what drives each line.

Emotional market panics and 'brilliant brain pharts' would have required adjusting 'The Plan' which in the end wasn't required.

All in, properly crafted - it reflects your investment approach/philosopy and MOST IMPORTANTLY keeps you out of trouble or becoming your own enemy - ala my buddy POGO.

Again - I suspect many/most don't do this first step - I consider it vital.


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