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Volitility's role in distribution and accumulation

 
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unclemick
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Joined: 12 Jun 2004
Posts: 231
Location: LA till Katrina, now MO

PostPosted: Sat Feb 19, 2005 5:29 am    Post subject: Volitility's role in distribution and accumulation Reply with quote

JWR

I believe at one time you mentioned examining the role of volitility in portofolios.

If rebalancing causes a penalty thru history depending on valuation, what happens to the ER at various span times?

The classic 'old school?' ala Vanguard as exemplified by the Target Retirement Series says hold your 'high volitility stocks in youth' and gradually damp(add bonds) as you age - the Income Series ending with 20% stock AND 25% Inflation protected.

Heh, heh - my first question is: if I stay at or near the div/interest stream should volitility be discounted. I.e. I assume Vanguard is making assumptions relative to the 'typical retiree'.

So an early retiree with a 30-40 or longer span might be incurring the rebalancing penality of the accumulator -what are the tradeoff's???

Antidotally - the Vanguard examples of their 'advisor cases' don't seem to match what their Retirement Series does i.e. generally advising a higher stock position - ???a show em we're earning our money subconcious bias???


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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Sat Feb 19, 2005 9:57 am    Post subject: Reply with quote

unclemick wrote:
If rebalancing causes a penalty thru history depending on valuation, what happens to the ER at various time spans?

Rebalancing causes a penalty when you can discern that one of your investments is clearly inferior.

Valuations help us know when this happens. This is in terms of probabilities and for time periods of the intermediate-term or longer.

Volatility helps during accumulation when dollar cost averaging. It works the opposite during retirement. It hurts during distribution if one follows the same procedure.

In both cases, the average cost per share decreases. A lower price is good when buying. It is bad when selling.

It is important to differentiate between volatility and returns. It has now been shown that higher volatility does not guarantee a higher return. In fact, the opposite may be true. The opposite has been true for stocks in general.

The argument that volatility guarantees a higher return is a poorly worded distinction among asset classes. It became popular when it took a lot of effort to convince people to invest in stocks as opposed to savings accounts and/or bonds. Internal to the asset class of stocks, it has been shown to be false.

Quote:
Heh, heh - my first question is: if I stay at or near the div/interest stream should volatility be discounted. I.e. I assume Vanguard is making assumptions relative to the 'typical retiree'.

Volatility is still important when redeploying your funds. The need might arise in an emergency. A desire might come from spotting an opportunity.

Withdrawing amounts as stated, you would not be reducing your holdings. It is likely that your account would increase close enough to tracking inflation to satisfy your needs.

Quote:
Anecdotally - the Vanguard examples of their 'advisor cases' don't seem to match what their Retirement Series does i.e. generally advising a higher stock position - ??? a show em we're earning our money subconscious bias???

No. I think that it is strictly a bias in favor of stocks.

[One might interpret this discrepancy as a bearish signal for stocks.]

Quote:
So an early retiree with a 30-40 or longer span might be incurring the rebalancing penalty of the accumulator -what are the tradeoff's???


I have not thought through this sufficiently. If you have more questions along these lines, please ask them. It will help me clarify my own thinking.

Have fun.

John R.


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Mike
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PostPosted: Sat Feb 19, 2005 11:16 am    Post subject: Reply with quote

Quote:
Heh, heh - my first question is: if I stay at or near the div/interest stream should volitility be discounted.

If you could have lived strictly off of the dividends from your equities, there was no historical advantage to holding any bonds permanently. Switching out of equities during high P/E years would have historically added to the final balance after 30 years, with no withdrawals. I don't know how spending dividends would have affected the results.


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unclemick
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Joined: 12 Jun 2004
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Location: LA till Katrina, now MO

PostPosted: Sat Feb 19, 2005 5:15 pm    Post subject: Reply with quote

Lets take my two planned income streams(skipping pension and SS for now).

One is basically 60/40 balanced index IRA - 9 years away from RMD. Which I'm thinking of switching to 40/60 or lower. At current valuations (sans any number crunching) - ? not forgoing too much upside potential by damping SD volitility and taking out money now thru RMD years to minimize taxes. I have no way to quantify this - this is a bet. (file single).

Two. Dividend stocks relying on div/div growth. ?Volitility is my friend(think Merck) - provided div/divgrowth is acceptible. Some limited selling/switching to buy 'better' div prospects or dump ones that didn't work out after 7-10 years. Skip MPT zig versus zag correlation, rebalancing, yada, yada - try for the right balance of current div/div growth - one stock at a time.

Case one trying to damp SD. Case two ignoring SD or possibly in some cases trying to take advantage of it.


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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Sun Feb 20, 2005 12:26 pm    Post subject: Reply with quote

I have taken a stab at answering your allocation question. I have started a new thread about the Best Allocations versus Time.

The short answer is: don't worry about volatility as such. Start with Benjamin Graham's 50% stock allocation and then, for today, protect your capital because stock valuations are sky high.

BTW, rebalancing would normally be a bad choice when the fixed income investment is as bad as commercial paper has been. Your mutual fund, however, invests in bonds, including inflation indexed securities. Rebalancing is a good idea when your investment classes are equally good or, as they are now, equally bad. When one is good and the other is bad (the usual case with stocks and commercial paper), don't let a bad investment class hinder your good investments.

Have fun.

John R.


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