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Financial Independence/Retire Early -- Learn How!
JWR1945
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Post by JWR1945 »

BenSolar
First, to be clear, I said that stock market earnings growth is usually 1.5% above inflation. I find the number quoted is usually 1.5 or 2%.

The best way to see this is to plot some of Professor Shiller's data (using the *.xls format). Professor Shiller's data includes real earning and real dividends as well as nominal numbers. See his website at www.econ.yale.edu/~shiller/

Looking a real earnings and using half of a century to a century for your baseline, you can measure the long-term earnings growth and the long-term dividends growth. Real earnings growth is reasonably well behaved and projecting their percentage increase per decade makes sense.

Real dividends growth behaves poorly, but you can project their growth per fifty years. Nominal dividends behave somewhat better. It makes sense to project the very long-term dividend growth going forward because payout ratios are exceedingly low and because the latest changes in the tax law favor more dividends (for US taxpayers). We can expect dividend growth in the near future. This kind of projection provides us with a number that is more reasonable than some alternative guesses.

Have fun.

John R.
eridanus
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Post by eridanus »

peteyperson wrote:
I think my biggest problem will be buying property late when an apartment in suburbs of London costs around $200k now and
by the time I can afford to buy in 3-4 years time, more like $300k.


Another tangent: The Economist had a recent survey about the housing bubble. While I don't believe in a widespread property market crash, I believe there will be some adjustments in certain regions. London is one of them. By the time you're ready to buy, you may be purchasing a place on the cheap.
[KenM]
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Post by [KenM] »

Petey
how can one invest with safety in mind in a balance portolio including stocks?

If you're trying for FIRE in 20 years I suggest you can't aim for "safety" and "balance" during the accumulation phase. You have to take higher risks to achieve higher returns over that relatively short investment timeframe. Bonds or similar assets are unlikely to be of much use. You need a balanced "aggressive" portfolio as others have indicated Scv, REITS, precious metals, real estate, etc.

I suggest it is also premature thinking about SWR's in 20 years time - who know's???? But, to me, 2% is very conservative - if that gives a comfortable income from your portfolio that's great - however if 2% means starting off living at the poverty line then I would take a greater risk and start at, say, an SWR of 3% even at todays valuations. If you want FIRE in 20 years you've just got to build the highest portfolio you can and then see what an appropriate SWR might be at the time - it might even be 6% :D

I always maintain the view that long term averages are dangerous things - they hardly ever happen - especially over 20 to 30 year investment timeframes - therefore debates on long term averages of returns etc, although perhaps intellectually stimulating, maybe don't mean much when you're considering practical investment issues such as investing for FIRE in 20 years. Anyway guessing what is likely to happen in 20 years is more fun and is just as likely to be correct :)
KenM
Never try to teach a pig to sing. It wastes your time and annoys the pig.
peteyperson
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Post by peteyperson »

Ben,

You give me lots to read and consider. I really should thank you.. but I won't! :)

I feel somewhat behind everyone else here who seem on similar tracks, levels of knowledge and understanding. I think I may have to read Bogle's latest cover to cover and then buy one of Bernstein's books to get up to speed a bit more. I think right now that I read things and I don't get it immediately and it makes one feel dumb. An ususual feeling. I think once you have the data and a clear basis for understanding you can analyse new commentary faster and be right up to speed almost immediately. At the moment I feel like there's a drag factor of understanding for me, I don't always understand what is being said or my ignorance is leading me to question sound commentary that I'm reading.

:)

Thoughts..

Using PE10 does seem to me a bit of a fudge at first glance. Why smooth the results over the preceeding decade rather than take the current figure or the average over the last year? I suppose you are looking for long term trends rather than last three months girations.

Am I understanding you correctly, that you are using a two-pronged approach to move in and out of asset classes that seem best in a given time period as you continue to invest and you hope that in combination with an improved market once valuations get back to sensible, reasonable growth will resume. In the meantime the markets will be jittery and tread water, possibly for a number of years. Is that about right?

I suppose then, currently, I sit between taking the most prudent approach of expecting little to no growth in investments in the market over the next 5-10 years and just assuming a 4% w/d rate is realistic and calculating a w/d at a time when the markets are out of balance is a bad idea in the first place. The poor market valuation and likely returns perhaps are clouding my overall view on FIRE funding re w/d rates long term. There is such a world of difference between 25x spending and 50x spending. That is what concerns me the most. My budget doesn't really shrink any further, entertainment expenses are limited anyway. Once you get to that point, it really comes down to how much you actually need rather than cutting expenditure further.

I shall read your links and try and make sense of them!

Thanks for taking the time to post.

Petey





BenSolar wrote:
peteyperson wrote: Firstly, where do you get the analysis of the market return is usually 1.5% above inflation?


First, to be clear, I said that stock market earnings growth is usually 1.5% above inflation. I find the number quoted is usually 1.5 or 2%. Here Bernstein writes:
The long-term real growth of earnings and dividends had not budged from the historic 2% rate, and stock yields barely poked above 1%. A future of 3% real expected returns beckoned.


Asness estimated the relationship as follows:
Nominal Earnings Growth = 2.2 + .94 * inflation

John Cambell says about 2%:
Over long periods of time, these formulas have given results that are consistent with average realized returns. For instance, from 1871-2001, the average dividend/price ratio was just under 5 percent, while the average real growth rate was just over 2 percent, adding to about 7 percent, which is the long-term compound average realized stock return in real terms, that is, correcting for inflation.


So, hmm, I'm sure I've seen 1.5% referred to, but can't find a reference. Perhaps my memory is faulty. :? Let's use 2%, then we have 3.6% real return from S&P500.
you debunk your own analysis on w/d rates why?


Well, as I mentioned 'if you are willing to deplete capital', that is spend down your capital over your expected withdrawal period. I also mentioned 30 years, while you seem to be planning for longer/indeterminant withdrawal without depleting capital? As JWR mentioned 4% survived 30 years from these valuation levels in the past. A worse outcome is entirely possible, I think, as shown by raddr's mean reverting Monte Carlo analysis
What do you use for your own FIRE calculations (I don't know if you're FIREd or not) in calculating the total investments required to FIRE? That sets my target.

I'm shooting for a 4% WR for my planning purposes. I'm a long way from FIRE. I think I could build a portfolio that would support 4% in today's environment, and I hope valuations will improve.
I see the term PE10 here. I understand P/E, but what is PE10?

PE10 is a valuation measure that uses inflation adjusted price divided by inflation adjusted 10 year average earnings. Using the 10 year average earnings smooths out the bumps and dips in earnings, giving us a smoother picture of 'earnings power'. Shiller and Cambell established that PE10 is a pretty good predictor of future long term stock market returns. You can find recent values for PE10 here and you can determine current value using this formula: current PE10 = current price * last PE10 / last price .
I didn't actually get whether you agreed with me that people should auto-correct what they have in an inflated stock market using historical P/E values so they don't retire with 80% in stock at avg P/E of 30 and then a month later the market massively corrects to 15 and they have to go back to work (read too many articles about people like this). Were you side-stepping the issue somewhat by suggesting investing in a variety of investment vehicles so I only have limited exposure to the market upon FIRE? In which case, isn't is usually the case the all other investments deliver inferior results to the market and yet we're examining swr based on what the markets do? Or did I miss something there?

I do agree with you on the first point. I also suggested the option (desireable to me) of carefully investigating other investment options and diversifying into those with low correlation to the TSM and with decent returns. The assumption that the TSM is always the investment option with the highest return is not always correct, IMO. For instance in early 2000 in the US, the S&P 500 rose such that it's dividend yield was only 1.1%. Add 2% real growth for an expected real return of 3.1 %. At that time there were US inflation protected Treasury bonds with a guaranteed real return higher than that. REITs, small cap value, large cap value, all had higher expected returns then. Presently the options aren't as clear cut and returns from the alternatives look lower. But the Vanguard REIT index fund with current yield of about 6% still looks good to me compared to S&P 500. I don't know if you have any comparable option.
I'm just thinking that I dollar cost average 15 + years of market investment, then I go to retire and the P/E is on 25. I've plowed my money into something overvalued and like okay, where do I go from there? Use the market as a growth vehicle, but heavily diversify away from it near FIRE in order to avoid the downsides? In which case, what happens to the expected return when dealing with other investments with lower returns? I wonder, how does Warren Buffett deal with investments he buys on the open market that later trade on a high multiple as most do now? He buy and holds. So does he just ignore that side of it?


If you can identify asset classes that are more attractive, then you can move money there. If not, then I guess you are stuck with dealing with lower predicted returns. If you've been able to buy in at lower levels, then at least you've had the pop in return given by the growth in valuation. Buffet doesn't sell core holdings much, but he certainly wasn't buying when valuations were sky high. If the market continues north from here, I plan to sell the last of my S&P 500 by the time it hits PE10 of 30. I'll put proceeds in fixed rate bank contract available in my 401k for lack of better options. I like the guaranteed 1.7% better than the prospects of S&P 500 at PE10 30. I'll increase exposure to S&P 500 when valuations improve. Some frown at this, but it makes sense to me.
Last edited by peteyperson on Thu Jun 26, 2003 4:11 pm, edited 2 times in total.
peteyperson
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Post by peteyperson »

This is turning into a facinating thread.

JWR,

Would you kindly clarify what the difference is between "real dividends" and "nominal numbers" and the context.

Thanks,
Petey


JWR1945 wrote: BenSolar
First, to be clear, I said that stock market earnings growth is usually 1.5% above inflation. I find the number quoted is usually 1.5 or 2%.

The best way to see this is to plot some of Professor Shiller's data (using the *.xls format). Professor Shiller's data includes real earning and real dividends as well as nominal numbers. See his website at www.econ.yale.edu/~shiller/

Looking a real earnings and using half of a century to a century for your baseline, you can measure the long-term earnings growth and the long-term dividends growth. Real earnings growth is reasonably well behaved and projecting their percentage increase per decade makes sense.

Real dividends growth behaves poorly, but you can project their growth per fifty years. Nominal dividends behave somewhat better. It makes sense to project the very long-term dividend growth going forward because payout ratios are exceedingly low and because the latest changes in the tax law favor more dividends (for US taxpayers). We can expect dividend growth in the near future. This kind of projection provides us with a number that is more reasonable than some alternative guesses.

Have fun.

John R.
peteyperson
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Post by peteyperson »

Ken,

Thank you for your comments.

I do agree that swr is premature, however it is used to get a good idea on the total portolio one needs to FIRE. If you use a reasonable rate of return over the next 20 years, given the discussions it is fair to say that a consensus would be poor over the next 10 and better follow gradual correction.

So working the figures back, I can play with how much I need to put aside if my FIRE savings were flat yearly and if I incrementally increased them as my business grows gradually more successful in the marketplace, how that gradual increase interacts with the various expected rates of return at that time. Thus, in order to see where I might be in 20 years time and play with various options, I need to have these kind of discussions up front. That way, you can make spending decisions ever more wisely because you understand the long term consequences of them and you can consider how you are doing against your future plans (are you behind or ahead of schedule). Enjoy living day to day to be sure, but don't sabotage a decent tomorrow because you're ignorant of the future. Finding a balance to that is the key I think. Tomorrow may never come, but if it does, we all need to be financially prepared.

From various discussions on the boards, I am beginning to see several things a bit more clearly:

Firstly as you say, bonds and other low return instruments really aren't a good idea for growth. I had played with the idea of a heavily accelerated paydown of a mortgage over the next 7-10 years and ignore the market altogether. Not so much because of over valuation, but because of the low expected return during that period vs. guaranteed expected return on mortgage clearance - 5% rate here which I expect to rise back to 6% over the next 5 years. So a defensive, low risk investment of paying a mortgage off may be a solid choice even if only in part. It would be an interest rate hedge in case they go up and a guaranteed return besides that.

Secondly, I had the idea to play with small amounts of money on learning to invest in individual stocks over that time. Give myself several years to become comfortable with that using limited funds and see what results I can generate. The goal being education rather than gain. Funnel any additional funds into mortage repayment or alternative investments that are not actively managed. Thereby not sabotaging a 20 year plan forcing you to work well into your 60s because you "dabbled in the market" in your thirties. But see how well you can do, learn to buy companies you understand without the pressure of getting results and treat it, if necessary, as an intellectual exercise that may pay off financial results if you feel that will deliver better results than buying mutual funds solely for stock market exposure.

Trying to see other ways than to stay out of a market and buying back in at a higher price thru the usual psychological buyers mistakes that are common. Taking a diffferent route to investment and wealth building coupled with the investment in my modest business venture combines some risky with some risk-free choices, while dabling in the market for experience.

I'd of course welcome your thoughts.

Petey


KenM wrote: Petey
how can one invest with safety in mind in a balance portolio including stocks?

If you're trying for FIRE in 20 years I suggest you can't aim for "safety" and "balance" during the accumulation phase. You have to take higher risks to achieve higher returns over that relatively short investment timeframe. Bonds or similar assets are unlikely to be of much use. You need a balanced "aggressive" portfolio as others have indicated Scv, REITS, precious metals, real estate, etc.

I suggest it is also premature thinking about SWR's in 20 years time - who know's???? But, to me, 2% is very conservative - if that gives a comfortable income from your portfolio that's great - however if 2% means starting off living at the poverty line then I would take a greater risk and start at, say, an SWR of 3% even at todays valuations. If you want FIRE in 20 years you've just got to build the highest portfolio you can and then see what an appropriate SWR might be at the time - it might even be 6% :D

I always maintain the view that long term averages are dangerous things - they hardly ever happen - especially over 20 to 30 year investment timeframes - therefore debates on long term averages of returns etc, although perhaps intellectually stimulating, maybe don't mean much when you're considering practical investment issues such as investing for FIRE in 20 years. Anyway guessing what is likely to happen in 20 years is more fun and is just as likely to be correct :)
Last edited by peteyperson on Thu Jun 26, 2003 4:55 pm, edited 4 times in total.
peteyperson
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Post by peteyperson »

Hi there,

London is a specific area that is in decline in some parts. At the moment it is mainly central London and the top-end properties. Flats / Apartments are on the end of the scale, still in high demand and aren't really going anywhere. Prices are still expected to have rised 15%+ this year, with a slowdown to 10%ish next year. The Bank of England keep forecasting that and we'll see if it plays out. The difficulty is that I have a 3-5 year timeline before I can qualify for a mortgage as a self-employed, get my income up enough to get the 3.5x multiple together and clear existing debts. There may well be a slowdown but as the cheapest 1 bed apartments are $200,000, even modest 10-15% rises compounded over 3+ years will push that up a $100k. At this point I'm suffering under the power of compound interest both from debts and property being so high as it stands. You have to smile and grimace at that, both at the same time which is an odd sight!

I am hoping that I can get debt-free fast enough to get on the property market in three years time. There is also the issue of joining the Euro which I believe we have just said no on that for another three years. The interest rates are 1.5% lower there, so it is expected that the property market will surge again at that time or at a time when the clear indication is that we'll say yes to joining the Euro. So that's another ticking bomb with property and I don't think I'll be able to get in before that.

My focus has been on reducing costs and the limited benefits of that are in place. My new focus is on raising income substantially in all areas in order to make solid progress on my 3-5 year goals of clearing debt and being a first time buyer.

What I am planning to do is hire a property search specialist at the time. Their role is to track down good properties that meet your brief and to locate you in up and coming areas. Here in the England the real estate people work on behalf of the seller and there is no representation for the buyer. This service will cost me around $6k but I think it may well be worth it to find the good opportunities out there at that time.

Thank you for your note.

Petey


eridanus wrote:
peteyperson wrote:
I think my biggest problem will be buying property late when an apartment in suburbs of London costs around $200k now and
by the time I can afford to buy in 3-4 years time, more like $300k.


Another tangent: The Economist had a recent survey about the housing bubble. While I don't believe in a widespread property market crash, I believe there will be some adjustments in certain regions. London is one of them. By the time you're ready to buy, you may be purchasing a place on the cheap.
peteyperson
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Post by peteyperson »

JWR,

It occurs to me that I've come a long way in my learning process to a point where I'm reading articles and papers by professors of Economics from Yale and Harvard.

:)

Interesting times! Not fun in a way that a woman would find attractive in a man who likes to have fun. But interesting times from the heady perspective of using your brain and learning new things that stretch you throughout life.

Petey


JWR1945 wrote: BenSolar
First, to be clear, I said that stock market earnings growth is usually 1.5% above inflation. I find the number quoted is usually 1.5 or 2%.

The best way to see this is to plot some of Professor Shiller's data (using the *.xls format). Professor Shiller's data includes real earning and real dividends as well as nominal numbers. See his website at www.econ.yale.edu/~shiller/

Looking a real earnings and using half of a century to a century for your baseline, you can measure the long-term earnings growth and the long-term dividends growth. Real earnings growth is reasonably well behaved and projecting their percentage increase per decade makes sense.

Real dividends growth behaves poorly, but you can project their growth per fifty years. Nominal dividends behave somewhat better. It makes sense to project the very long-term dividend growth going forward because payout ratios are exceedingly low and because the latest changes in the tax law favor more dividends (for US taxpayers). We can expect dividend growth in the near future. This kind of projection provides us with a number that is more reasonable than some alternative guesses.

Have fun.

John R.
peteyperson
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Post by peteyperson »

JWR,

Re: Your bond commentary

Would you agree that for the most part bonds will get poor results for the reasons I stated, interest rate increases likely etc? If S & P is also likely to get poor results in the 5-10 yr term, you're solely looking at alternative investments at that point, right? Both of those asset classes or sub-classes look poor. That a fair summary?

Ta,
Petey


JWR1945 wrote: peteyperson brings up a much better point than he may realize.
I had thought that bonds were a bad investment as many run from stocks to bonds when they dropped in value pushing bond funds up. The expectation was that the market would rise with an improving economy, that interest rates would go up naturally too as they are at historic lows currently and that bond returns have an inverse relationship to interest rates. Meaning people are selling stocks at the low and buy bonds shortly before the return is likely to tank, then when confidence is returned in the stock market they'll get rid of bonds in order to buy back the market (at the increase valuation), thereby selling low and buying high..

I am not quite sure how bonds entered into these discussions. Let me point out that this shift between stocks and bonds occurs much less than market commentators would have you believe. The bond market is much larger than the stock market. Along the same line of thought, the stock market is much larger than the gold market. I think that the dollar ratio of bonds to stocks is at least ten.

Most people know only one market really well. They do not shift from one to another very often. (I got this thought from listening to radio talk show host Roger Arnold of www.myhomelender.com .) By the sheer magnitude of the bond market, it would quickly swamp the other markets. People do change their allocations, but only slowly. And as peteyperson points out, they tend to do so at the worst possible times.

The most convincing information that I have seen is that stocks and bonds should be treated separately. Your total return (in nominal dollars) for bonds after a decade is almost identical to starting yields regardless of what happens in the economy. Your total return from stocks after a decade can be just about anything, regardless of initial dividend yields.

I have noticed that it is seldom a good time simply to shift between stocks and bonds. Usually, there is a gap when you would not be invested in anything, according to how gains are reported for the two markets. That gap can easily wipe out any trading advantage.

There is another point worth mentioning. There really is such a thing as a re-balancing bonus. That is, you re-balance your portfolio when it deviates greatly from your planned allocations. This forces a sell high, buy low discipline. You are best off by having more than a simple stock/bond selection, especially these days. Since neither stocks nor bonds look especially attractive at this time, you might do better by emphasizing such asset classes as REITS and small capitalization value stocks at this time. The discipline of re-balancing would work its wonders by making the timing decisions for you. (Use a re-balancing threshold of 5% to 10% such as raddr has found to be of greatest benefit.) The re-balancing bonus can add up to 1% to your total return. In the real world, that is a biggie.

Have fun.

John R.
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BenSolar
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Post by BenSolar »

peteyperson wrote: Ben,

You give me lots to read and consider. I really should thank you.. but I won't! :)


LOL :lol: Don't worry if you don't get everything at first. I've read the Shiller and Cambell valuation paper about 4 times now. :?
Using PE10 does seem to me a bit of a fudge at first glance. Why smooth the results over the preceeding decade rather than take the current figure or the average over the last year? I suppose you are looking for long term trends rather than last three months girations.

Exactly right about the long term trend thing. You know, the business cycle is a fact of life, earnings will accelerate and they will droop. In some cylical businesses it is commonplace for a business to have negative earnings in the trough of the business cycle - that certainly doesn't mean the company has negative value. Using 10 year earnings lets you include a full business cycle (more or less) in your earnings figure. The 10 year earnings figure just gradually climbs along with the long term earnings growth.
Am I understanding you correctly, that you are using a two-pronged approach to move in and out of asset classes that seem best in a given time period as you continue to invest and you hope that in combination with an improved market once valuations get back to sensible, reasonable growth will resume. In the meantime the markets will be jittery and tread water, possibly for a number of years. Is that about right?


Yep. Though I hope to get some growth out of my small cap and REIT investments in the mean time.
I suppose then, currently, I sit between taking the most prudent approach of expecting little to no growth in investments in the market over the next 5-10 years and just assuming a 4% w/d rate is realistic and calculating a w/d at a time when the markets are out of balance is a bad idea in the first place.


Personally, I'd use a figure in the ballpark of 3 or 4% for planning and just invest your money as best you can each year. The opportunities will change. Right now your 'opportunity' is to pay down debt. :D Later your opportunity might be to pay off your mortgage. Who knows what the opportunity will be in 5 years? Maybe investment options commonly available in the UK will improve as well. 8)

Well, don't stress over it. I'd think that 20 years down the line you will be able to assemble a portfolio that will comfortably provide a 4% withdrawal, or at least a 3% withdrawal as a baseline, with more after good years in the markets.

Cheers
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
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Post by [KenM] »

Petey
some random thoughts....
given the discussions it is fair to say that a consensus would be poor over the next 10 and better follow gradual correction.
...I'm always suspicious of a consensus. My own first law of probability says that a consensus is usually wrong :)
Tomorrow may never come, but if it does, we all need to be financially prepared.
My second law of probability is that tomorrow always comes (unless I'm dead and then I wouldn't care anyway) and when it does, my third law says that conditions will be so unforeseen that the financial preparations made 20 or 30 years in the past will be largely irrelevant.

As someone about to stop work with a comfortable retirement income but who never actually planned anything, my suggestions (sorry if there're too obvious) would be (based on looking back over 30 years):-
1. Place emphasis on building up over the years diversified sources of potential retirement income. It seems to me that many planning for FIRE only think about building up a large stock/bond portfolio.
2. Maximise tax advantages. Investing in low tax/no tax scenarios may give higher net returns than taxed higher risk/higher pretax return investments. Not sure what the situation is now wrt mortgages in the UK - if mortgage interest is still tax free why pay off a mortgage early? Aren't there now more opportunities for no-tax personal investments in the UK ?
3. Forget individual stocks - use index funds - and always invest a sum in an index fund every year to allow it to compound over 20 years or more, even if it means delaying paying off the mortgage.
4. Try to avoid obsessively calculating overall net worth at frequent intervals - it only leads to short-termism and temptations to keep changing strategies.
KenM
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Post by peteyperson »

Hi,

I have decided to start a new thread on the investing options I have here and let everyone view it and see if they have any thoughts.

Petey


2. Maximise tax advantages. Investing in low tax/no tax scenarios may give higher net returns than taxed higher risk/higher pretax return investments. Not sure what the situation is now wrt mortgages in the UK - if mortgage interest is still tax free why pay off a mortgage early? Aren't there now more opportunities for no-tax personal investments in the UK ?




Petey
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Post by WiseNLucky »

Petey:
Interesting times! Not fun in a way that a woman would find attractive in a man who likes to have fun. But interesting times from the heady perspective of using your brain and learning new things that stretch you throughout life.


Maybe you're meeting the wrong women? Money and power are still a huge turn-on in the US (At least that's what I read. Having neither, I can't perform an actual experiment) :D
WiseNLucky

I just wish everyone could step back and get less car and less house then they want, and realize they don't NEED more. -- NeuroFool
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Post by WiseNLucky »

have decided to start a new thread on the investing options I have here and let everyone view it and see if they have any thoughts


Pretty interesting exchange between PP and BS so far. I look forward to the new thread.
WiseNLucky

I just wish everyone could step back and get less car and less house then they want, and realize they don't NEED more. -- NeuroFool
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Post by JWR1945 »

peteyperson
Would you kindly clarify what the difference is between "real dividends" and "nominal numbers" and the context.

In economic discussions, "real" means that inflation has been taken into account and "nominal" means that there is no adjustment for inflation.

If an investment provides you with a 3% dividend, but inflation is 2%, the "real dividend" is 1% and the "nominal number" (in this case dividends) is 3%.

Have fun.

John R.
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Post by JWR1945 »

peteyperson
Re: Your bond commentary

Would you agree that for the most part bonds will get poor results for the reasons I stated, interest rate increases likely etc? If S & P is also likely to get poor results in the 5-10 yr term, you're solely looking at alternative investments at that point, right? Both of those asset classes or sub-classes look poor. That a fair summary?

Yes on both points.

There are special cases involving junk bonds. A good, low cost junk bond fund can make sense at times. When dividend yields are very low and the prospect of stock price increases are very low, junk bonds can act as a high dividend stock equivalent. They share some of the risks of stocks (that companies may go bankrupt), they have limited upside potential by virtue of being bonds and they have a much greater payout ratio (or yield). The key is that you believe that stock prices have little upside potential.

The S&P 500 index gets excluded, but not all of the stocks in the index. Some of the small capitalization or medium capitalization stocks (especially value stocks) can still be attractive. Some of Vanguards index funds (with their very low expenses) can look very attractive even when the market as a whole does not.

Have fun.

John R.
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Post by JWR1945 »

KenM has a good point when he says:
4. Try to avoid obsessively calculating overall net worth at frequent intervals - it only leads to short-termism and temptations to keep changing strategies.

Let me modify this just a little bit. If peteyperson were to get a large poster and plot his net worth versus time on a graph, perhaps using one quarter of a meter per year on the x-axis, it wouldn't matter how often he calculates his net worth (so long as it was at least once per year or, preferably, once per quarter). The big picture would still be the same.

Making a poster like this can boost morale. peteyperson could start with negative numbers (overwhelming debt) from a few months ago and show progress as he moves towards the black. He could project when he will be debt free and so forth. As long as he sees steady improvement, he will be pleased with his progress.

Have fun.

John R.
JWR1945
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Post by JWR1945 »

peteyperson
Would you kindly clarify what the difference is between "real dividends" and "nominal numbers" and the context.
This refers to my comments about earnings and dividends:
Looking a real earnings and using half of a century to a century for your baseline, you can measure the long-term earnings growth and the long-term dividends growth. Real earnings growth is reasonably well behaved and projecting their percentage increase per decade makes sense.

Professor Shiller provides us with stock market data for the S&P 500 index (along with his own estimates for what it would have been before the index was formed). The columns include the Price P, Dividends D and Earnings E in nominal dollars. That is, without adjusting for inflation. He then provides an inflation index (the Consumer Price Index CPI...most likely CPI-U, the index for Urban consumers). He has a Date Fraction, which is new, which converts the from the old xxxx.01 for January, xxxx.02 for February and so forth to fractions of a year for plotting purposes. (There is more to this fraction than I have figured out since I see eights but not quarters and not thirds.) Then he lists real price, real dividends and real earnings. His final column has P/E10. This is the current real price divided by the average of the real earnings from the previous ten years.)

I was surprised to find that Professor Shiller's real price, real dividends and real earnings do not scale directly according to his CPI. Rather, his time reference (when the nominal price equals the real price, the nominal dividend equals the real dividend and the nominal earnings equal the real earnings) appears to be June and July of 2000 for everything except the CPI values. The time reference for his CPI values (when CPI equals 100) appears to be July and August 1983.

Professor Shiller's website is: www.econ.yale.edu/~shiller/ You can download his data in Excel (*.xls) format and then use Paste Special to convert it to word documents (tables for thinning out the number of entries and for making other manipulations). By using the Chart function in Microsoft Word, you can make various graphs.

Have fun.

John R.
therealchips
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Post by therealchips »

Let me modify this just a little bit. If peteyperson were to get a large poster and plot his net worth versus time on a graph, perhaps using one quarter of a meter per year on the x-axis, it wouldn't matter how often he calculates his net worth (so long as it was at least once per year or, preferably, once per quarter). The big picture would still be the same.


I agree with JohnR's suggestion. I have records of my total retirement savings, with weekly closes from January 1, 1988 through last Friday, in an Excel spreadsheet. I had to transcribe some of that data from hand-written records when I started using Excel around 1992. Excel charts these weekly closes for me, both in current dollars and in inflation-corrected dollars, applying the inflation corrections evenly through each year. I have to guess the inflation rate for the current year, but it is stored in a single cell of the spreadsheet so that I can correct it easily when the final inflation figure for that year becomes available.

A spreadsheet may be handier than a poster, although there is no danger of losing your poster in a computer crash. (At the moment, there is an eight month gap in my records, because of a crashed computer I may one day get working again. Consider backing up your records better than I have.) Looking at both the nominal dollars (pounds or yen or whatever) and the inflation-corrected dollars keeps the chart from being misleading about the purchasing power of the retirement stash. I also chart ten, twenty, and forty week running averages of the weekly closes, just for the fun of it and because Excel makes that so easy. (My weekly close moved above (not about, editor's note) its forty-week running average about six weeks ago for the first time in many months. Some gurus claim that is a bullish sign. :roll:)

A striking feature of this record is that the transition from accumulation phase to distribution when I retired in 1993 is not detectable in the graphs. Market volatility swamps the change from putting money in regularly to taking it out regularly. Of course, that is a consequence of retiring into a bull market, something you should arrange if at all possible. :lol:

Of couse, I had to write the spreadsheet I'm talking about and make it produce the graphs I mentioned from the data I input weekly. Updating the records takes only a few minutes a week.

Having the context of all these years helps me stay calm about market volatility. I find that evaluating the stash weekly and keeping track of the big picture with this spreadsheet helps me avoid trading rather than pushing me into it. YMMV
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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