hocus's puzzle

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

JWR wrote:
OTOH, I do remember hearing a person say that he wanted to stay in stocks until just before all of the baby boomers begin making withdrawals. That was almost ten years ago. There certainly could be selling panics along the way.


Identifying and taking advantage of selling panics seems to be one area where TA style market indicators may be useful. The panics are largely psychologically driven events, so watching a collection of tells on the market's 'mood' might help one have a decent chance of successfully identifying selling panics, and good buy points.

I'm talking about making relatively rare, progressive shifts in asset allocation that are primarily keyed to valuation. For instance, my allocation to S&P 500 is pretty low right now, but I'm hoping to increase that if/when the valuation improves. I have in mind that I'll increase it a bit when valuation is under PE-10 of 19. If I keep an eye on 'technical' indicators like the VIX, volume, percentage bears/bulls, percentage losers, etc ... . Then they might help me pull the trigger on 1) rebalancing and 2) an allocation shift when the market has the very negative tone surrounding a panic.

Is this delusional? Sticking to strick valuation as a parameter might be more advised, but it is interesting to see the panic indicators flashing at the lows.

Ben
"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
hocus
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Post by hocus »

The truly rational are not making make or break bets. they are highly conditioned to NOT spending the principal.

This brings to mind another concern I have re the investing approach touted (and too infrequently rebutted) at Motley Fool's Retire Early board. The intercst approach presumes that you can determine in advance that you will not live beyond a certain age. If you use the 30-year number, and live to age 31, the safety "guaranty" explodes.

For a plan to survive for longer time-periods, even assuming away the other flaws of the approach, you would need to take a lower annual withdrawal. But who knows in advance whether he is going to live 30 or 40 or 50 years? In board discussions, the 30-year number is generally used as the reference point to the study. But how many early retirees can be certain that they will not live more than 30 years? I "retired" at age 43. Is it not possible that I will live past age 73? Intercst retired at age 39.

I find more safety in an approach where you rely only on earnings of your portfolio to cover spending for the year, leaving principle untouched. That's what I do. Each year, when I make adjustments to my plan, I check to see that, in inflation-adjusted terms, I possess either an equal or greater level of financial independence than the year before. If I had $700,000 working for me at the beginning of Year A, and inflation for the year is 2 percent, I want to have at least $714,000 working for me at the end of Year A. So long as I have that much, I know I am not falling behind. If I am falling behind, I need to make adjustments.

This approach gets complicated when you have a large percentage of your assets in volatile asset classes (like stocks). A downturn in the reported prices of stocks does not mean that the real value of the stocks has gone down. So you need some way to reflect in your records the real value of the investment rather than the reported value. I have devoted some preliminary thinking to this problem, but I have not spent a great deal of time on it as of yet. Since I do not currently own stocks, it has not been a priority.

But I agree with the general principle that Wanderer is advocating. It is not such a great idea to be basing your annual withdrawal on a calcualtion that requires that some portion of principle be "eaten up" each year. If you do that, you must be very sure that you will not live longer than you expected starting out. A safer approach is to cover annual expenses with earnings, and allow the principle to remain in place indefinitely.

It's hard to follow the preferred approach with a 74 percent S&P stock allocation, however. The problem is that, when times are bad for S&P stock holdings, your entire portfolio hits a downdraft. As we have found repeatedly in our discussions here, there is great value in diversification. Diversify, and a temporary downturn in one section of your portfolio can be matched with an upturn in another, allowing you to take an acceptable annual withdrawal without invading principle.

Again, my guess is that intercst did not start his research with the idea of finding out what sort of investment approach is best suited to early retirees. My guess is that he started out liking the idea of a big S&P stock allocation, and then constructed the parameters of the study to show support for that preference.

It's a backwards way of examining the question that aspiring early retirees need answered, and it has led the REHP down all sorts of darkened back alleys trying to figure out why an approach that seems to work when you only look at the spreadsheet does not work when you try it out it in the real world.
raddr
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Post by raddr »

BenSolar wrote:


I'm talking about making relatively rare, progressive shifts in asset allocation that are primarily keyed to valuation. For instance, my allocation to S&P 500 is pretty low right now, but I'm hoping to increase that if/when the valuation improves. I have in mind that I'll increase it a bit when valuation is under PE-10 of 19. If I keep an eye on 'technical' indicators like the VIX, volume, percentage bears/bulls, percentage losers, etc ... . Then they might help me pull the trigger on 1) rebalancing and 2) an allocation shift when the market has the very negative tone surrounding a panic.

Is this delusional?

Ben


Absolutely not! Just last week I lowered my already low 4% S&P500 allocation down to zero even though I had to take a capital gain (long term) to do it. I just can't justify leaving any money in an asset that I feel is overvalued by at least 20-30% - maybe as much as 50%. I think that there is a feeling out there among investors (including many pros) that just because the S&P500 is down X% it must be close to a bottom and therefore is a bargain.

The good news is that there are plenty of other asset classes out there which look to be significantly better values.
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Post by raddr »

For a plan to survive for longer time-periods, even assuming away the other flaws of the approach, you would need to take a lower annual withdrawal. But who knows in advance whether he is going to live 30 or 40 or 50 years? In board discussions, the 30-year number is generally used as the reference point to the study. But how many early retirees can be certain that they will not live more than 30 years? I "retired" at age 43. Is it not possible that I will live past age 73? Intercst retired at age 39.


hocus,

Intercst doesn't consider married folks in his worldview. IIRC he is disdainful of marriage and family.

As I posted earlier (http://nofeeboards.com/boards/viewtopic.php?t=238) the numbers that most of us should be using are far different. For example, I am 48 and my wife is 47. We have about an 86% chance of at least one of us living 30 or more years, fully a 50% chance that one will make it 40 more years, and a close to a 10% chance that one will live at least 50 years. For us to plan on anything less than a 50 year retirement is silly unless we want to risk dining on Alpo in our twilight years. :P
WiseNLucky
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Post by WiseNLucky »

raddr wrote:
I think that there is a feeling out there among investors (including many pros) that just because the S&P500 is down X% it must be close to a bottom and therefore is a bargain.


I am grateful that I do not hold this delusion :shock:
The good news is that there are plenty of other asset classes out there which look to be significantly better values.


Would you mind sharing your opinion on what you feel is currently a good value, and the methodology you use to determine it?

And your data source?

I have in my mind a foggy concept of a spreadsheet with historical high/low/average information about valuation of asset classes, the current valuation using those same criteria, allowing me to use judgement for asset allocation. I am in the camp that does not consider this practice market timing. I am more in the BIC camp (using a TSM clone and not VFINX) right now, but would like to backtest some concepts.

It would require a reliable source of valuation information and a lot of study time. I'm not sure I have either.
For us to plan on anything less than a 50 year retirement is silly unless we want to risk dining on Alpo in our twilight years.


I got my wife to read one of Bernstein's recent articles where he mentioned that today's younger generation may soon get to see their elders subsisting on cat food. My wife asked, if it came to that, if we could live on dog food instead. She says she can't stand the smell of cat food.

I find the smell of the dried food we purchase for our dog to be almost pleasant :oops:

WiseNLucky
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
wanderer
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Post by wanderer »

I got my wife to read one of Bernstein's recent articles where he mentioned that today's younger generation may soon get to see their elders subsisting on cat food. My wife asked, if it came to that, if we could live on dog food instead. She says she can't stand the smell of cat food.

I find the smell of the dried food we purchase for our dog to be almost pleasant

some of that dog food is appetizing and bears a striking similarity to my hungry man sirloin burger dinner.

but ALPO? my god, man!:wink:

btw, i have a little spreadsheet of potential vanguard funds with their highs and lows. I update it daily thru download. when the % decline gets big enuf, then i go to smartmoney and look at fund snapshots. i'll start fishing off another pier (ETFs) if vanguard continues to pay john brennan outrageous sums that appear to lack justification.

wanderer
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
raddr
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Post by raddr »

Would you mind sharing your opinion on what you feel is currently a good value, and the methodology you use to determine it?

And your data source?

I have in my mind a foggy concept of a spreadsheet with historical high/low/average information about valuation of asset classes, the current valuation using those same criteria, allowing me to use judgement for asset allocation. I am in the camp that does not consider this practice market timing. I am more in the BIC camp (using a TSM clone and not VFINX) right now, but would like to backtest some concepts.

It would require a reliable source of valuation information and a lot of study time. I'm not sure I have either.


Hi WnL,

Check out these links for data:

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/

http://www.barra.com/research/summary_returns.asp

http://www.tamasset.com/allocation.html

http://aida.econ.yale.edu/~shiller/data.htm

http://www.nareit.com/home.cfm

http://www.msci.com/tools/index.html

Those should keep you busy for awhile. :wink: Seriously, though, wading through all of that historical data is the best way to get a handle on current valuations in historical context.

As for what constitutes good value now I like ScV, REITS, int'l, and precious metals stocks. What I don't like are domestic large caps and long term bonds (other than TIPS).
WiseNLucky
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Post by WiseNLucky »

Those should keep you busy for awhile.


Many thanks, raddr!

WiseNLucky
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
wanderer
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Post by wanderer »

people get raddr FREE here. at another spot they a) made him pay and b) were abusive toward him. you can't make this up...

thanks as usual raddr...

wanderer
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
raddr
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Post by raddr »

wanderer wrote: people get raddr FREE here. at another spot they a) made him pay and b) were abusive toward him. you can't make this up...

thanks as usual raddr...

wanderer


Wanderer, you're too kind. :oops: Just keep recruiting stellar board members like you have recently as well as in the past at MSN. We've got a good thing going here and it keeps getting better all the time. I would've left TMF even sooner if this board had been born before I left.
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ElSupremo
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Post by ElSupremo »

Greetings raddr :)
I would've left TMF even sooner if this board had been born before I left.


I'm sorry! :cry:

:wink:
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