Does VII work?

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Re: Does VII work?

Postby hocus » 02/18/08 at 12:59:20

And how do you know this? It would be helpful if you would present an example from the historical data so it can be compared.

I don't know what you're talking about. If you want to engage in a transaction, you do. If you don't, you don't. What does the historical data have to do with it?

The historical data reveals to you the long-term value proposition of stocks at various valuation levels. It doesn't force you to engage in transactions that you don't care to engage in. That's a matter of personal choice.

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Re: Does VII work?

Postby Schroeder » 02/18/08 at 13:34:02

hocus wrote:And how do you know this? It would be helpful if you would present an example from the historical data so it can be compared.

I don't know what you're talking about. If you want to engage in a transaction, you do. If you don't, you don't. What does the historical data have to do with it?

The historical data reveals to you the long-term value proposition of stocks at various valuation levels. It doesn't force you to engage in transactions that you don't care to engage in. That's a matter of personal choice.

Rob

So if a VII investor was holding 60% stocks in 1996, the strategy doesn't compel him to reduce this stock allocation when he sees P/E10 has risen above 20? That same VII was probably sitting on large taxable capital gains. Maybe he decided that he doesn't want to incur the big tax hit. So he just sticks to 60% stocks. Is that what you're saying?

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Re: Does VII work?

Postby hocus » 02/18/08 at 14:09:32

So he just sticks to 60% stocks. Is that what you're saying?

If that's what he wants to do, of course. It's entirely up to him.

I have made zero transactions since 1996 and I am ahead of someone invested in the S&P index over that time. That person cannot possibly have had fewer than zero transactions.

Say that the P/E10 value goes to 16 and I move to a 50 percent stock allocation. I might not have to sell those stocks until I died. If the P/E10 value continued downward, I obviously would not need to sell (the value proposition would be improving). If the P/E10 value went up only to 19 at some point, I could justify not selling on grounds that the change in the value proposition is not that great. If the number went much above 20, it would make sense to sell perhaps half of the stocks. But there is no requirement to do so. If the number went to 30, the numbers would be screaming to sell. But you know what? It might be a long time before we ever get to 30 again. We were at 30 in 1929 and in the late 1990s, no other time.

There is never a requirement that someone sell. I think that people have this idea in their head because when they hear the word "timing," they think of short-term timing, where you have to pick tops and bottoms. None of that silliness comes into play with VII. There is no one way to do it because there is no one strategy that makes sense for all circumstances (anymore than there is any one asset allocation that makes sense for all circumstances). There are some valuation levels at which the case for making a shift are strong. But it is always up to the investor to decide what to do.

The point is to educate people as to the long-term value proposition of buying stocks at different valuation levels. Education can never be a minus. It is always a plus. The question as to which strategy to use to implement this is left to the investor (how could it be otherwise?). Different people are going to make cases for different approaches. Some of those approaches may call for lots of transactions. Those who don't like the idea of making lots of transactions will obviously elect to follow other approaches. "Problem" solved.

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Re: Does VII work?

Postby Schroeder » 02/18/08 at 15:13:28

hocus wrote:So he just sticks to 60% stocks. Is that what you're saying?

If that's what he wants to do, of course. It's entirely up to him.

I know it's entirely up to him. But then he's no longer adhering to the VII strategy. He doesn't lower his stock allocation because he knows he's going to incur a big capital gains tax hit when he sells. And you seem to be OK with his decision to stay with 60% stocks (in 1996) despite the fact that P/E10 levels are above 20 and climbing.

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Re: Does VII work?

Postby hocus » 02/18/08 at 15:28:45

He doesn't lower his stock allocation because he knows he's going to incur a big capital gains tax hit when he sells. And you seem to be OK with his decision to stay with 60% stocks (in 1996) despite the fact that P/E10 levels are above 20 and climbing.

It's his money.

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Re: Does VII work?

Postby Schroeder » 02/18/08 at 16:37:47

hocus wrote:He doesn't lower his stock allocation because he knows he's going to incur a big capital gains tax hit when he sells. And you seem to be OK with his decision to stay with 60% stocks (in 1996) despite the fact that P/E10 levels are above 20 and climbing.

It's his money.

Rob

Of course, it is his money. But instead of lowering his stock allocation in response to a rise in valuations (in 1996), he didn't want to pay the price of incuring a big capital gains tax hit when he sells. He was probably well intentioned to follow the VII plan in the beginning. But once he realized the realities involved, he couldn't follow through.

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Re: Does VII work?

Postby nfs » 02/18/08 at 18:02:32

Schroeder, just for you, I've thrown taxes into the mix.  I modeled it under the assumption that interest on bills gets taxed at 30% as it's paid and that the total return on stocks is taxed as capital gains only on disposition at 20%.

Complain about whether the tax rates are appropriate.  I don't care.  This is all back of the envelope.  Complain that part of the total return on stocks is dividends, which are also taxed currently.  I don't care.  This is all back of the envelope.

These are the same general idea as before, reducing stock exposure as PE10 rises and vice versa.  Introducing taxes certainly makes it a much nearer thing than in the first set of simulations.

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Looking at the 30 year graph, there really isn't much to choose between the two approaches for periods ending later than the early 1970s.  There is certainly variation one way or the other and a glance says there is probably a minor overall advantage to timing but it's very very close.

I don't know what to make of the 10 year graph.  There appear to be 15-25 year cycles where one approach works better than the other and then things flip the other way.
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Re: Does VII work?

Postby Schroeder » 02/18/08 at 19:29:16

nfs wrote:Schroeder, just for you, I've thrown taxes into the mix.

Thanks, nfs! This is very interesting.

Recall that black is B&H and violet is VII. The comparison for the recent 20-year experience between with or without tax treatment is more dramatic. Here's without taxes . . .

Image

And here's with taxes applied . . .

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Re: Does VII work?

Postby hocus » 02/19/08 at 10:57:56

I think it would be fair to say that this is the only currently active thread on this forum which has some honest and informed posting on the subject of investing, yet Rob can't be bothered.

The discussion should be held at a board at which people who are not Goons feel comfortable participating.

Once intimidation is employed to discourage people of intelligence and intrgrity from participating, the forum becomes a corrupt enterprise. It is possible for constructive comments to be posted at a corrupt enterrpise. But there is no way for the person seeking to learn about the subject matter to distinguish the comments that are constructive from the ones that are exercises in deception.

When you give up your personal integity, you give up something of considerable value. My sincere take.

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Re: Does VII work?

Postby hocus » 02/19/08 at 11:00:45

I think it would be fair to say that this is the only currently active thread on this forum which has some honest and informed posting on the subject of investing

This tells us something important about the owner of the forum.

The owner of the forum is John Greaney.

John Greaney has published at his site a "study" that purports to tell aspiring early retirees what the historical data says about safe withdrawal rates.

I first urged that Greaney be removed from the Retire Early boards on November 23, 2002.

What have you done in this regard, NFS?

Rob
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Re: Does VII work?

Postby hocus » 02/19/08 at 12:04:10

John Greaney published a study on Safe Withdrawal Rates which has provided much useful information to early retirees.

That much is a fair statement. I gave the Greaney study five stars in my customer review at Soapbox.com.

Rob Bennett has trolled internet discussion boards for years wasting peoples time.... Rob Bennett is ridiculed as a lieing and sliming internet troll.

No emotion there, Yip.

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