Income & Dividend Investing

Re: Thanks, John

JWR1945a — Mon, 30 Jun 2008 17:36:59 GMT

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Bill, this is the kind of issue that I had in mind.

From the end of “Why People Ignore Valuations:”

What Has Changed

Over a very wide range of conditions, historically, the optimal fixed stock allocation (subject to constraint B) was 80%. Only when we demanded the highest levels of safety or when TIPS were especially attractive have lower stock allocations made sense.

What is the best stock allocation? In the past, there was a single answer: 80% stocks. Most often, it was the right answer. Valuations had little effect.

Today, there are differences. Today’s valuations are outside of the traditional range. They are well above the traditional danger level, P/E10=20. Today’s TIPS are yielding 2.4%, much better than commercial paper has been historically.

What is the best stock allocation? Today, we have many answers. They depend upon the amount of safety that we demand. They depend upon the TIPS interest rate. They depend on the Terminal Value percentage. Most of all, they depend upon P/E10 (valuations).

Why Do People Ignore Valuations? In the past, it did not matter. It did not affect stock allocations. Today, it does.

Have fun.

John Walter Russell

May 30, 2006

http://www.early-retirement-planning-insights.com/why-people-ignore-valuations.html

Re: Thanks, John

bilperk — Mon, 30 Jun 2008 17:08:33 GMT

"(I suspect that you should be asking a different question.)"

Thanks for the information, John.

Now what is the different question you suspect I should be asking.

best,

Bill

Re: Yuck, no way

cliff — Mon, 30 Jun 2008 16:05:34 GMT

bilperk:
I'll ask again john, What was the PE10 in 1990?

In June of '90, it appears to have been 17.9.

in December of '90, it appears to have been 15.9.

According to the data posted by Lew. Thanks, Lew.

Regards.

Cliff

Oops, didn't see your answer, John.

Re: Yuck, no way

JWR1945a — Mon, 30 Jun 2008 16:04:11 GMT

We are posting at the same time, Bill.

P/E10 was 17 in 1990. More precisely, it was 17.05 in January 1990.

Have fun.

John Walter Russell

Re: Re:Question for John.........

JWR1945a — Mon, 30 Jun 2008 16:00:44 GMT

ElLobo provided an excellent summary.

In the early days, I referred to varying allocations with P/E10 as "switching." It produces a much better outcome, when looking for the highest levels of safety, than maintaining a fixed allocation. Roughly, it allows you to withdraw 5% per year (with adjustments to match inflation) when rebalancing would allow you to withdraw less than 4%.

It turned out that switching works with all S&P500 slices. It turns out that not-rebalancing is the best choice with all S&P500 slices. The reason is that better returning slices should be allowed to grow--if you can discern that they are more likely to grow--and you can.

I consider dividend and income approaches to be better overall. They allow for continuing withdrawal rates as opposed to 30-year withdrawal rates. But many people prefer a capital appreciation approach. With varying allocations, a capital appreciation approach can do quite well. Fixed allocations do not do nearly so well.

Have fun.

John Walter Russell

Re: Yuck, no way

bilperk — Mon, 30 Jun 2008 15:52:28 GMT

I'll ask again john, What was the PE10 in 1990?

Re: Re:Question for John.........

JWR1945a — Mon, 30 Jun 2008 15:49:05 GMT

John,

That is only somewhat helpful....Before 2000 covers a lot of ground. Can you give me a year when the S&P 500 stayed in the PE10 of 14 or less for an entire year? For example, what was the PE10 in 1990?

best,

Bill

(I suspect that you should be asking a different question.)

The source for P/E10 data is Professor Robert Shiller’s web site.

http://www.econ.yale.edu/~shiller/

P/E10 below 17 was in 1991.

P/E10 below 14 was in 1988.

January 1990 P/E10 was 17.05.

I do not know for entire years.

Have fun.

John Walter Russell

Re: Yuck, no way

JWR1945a — Mon, 30 Jun 2008 15:39:33 GMT

Correct me if I'm wrong, JWR, but P/E10 is a 10 year average P/E, or related to a 10 year average, possibly weighing later years more heavily.

P/E10 is the current price (index level) divided by the average of the previous ten years of earnings. Only the latest price. But with smoothed earnings. (All terms are adjusted to match inflation.)

This differs from the average of ten years of P/E values.

Have fun.

John Walter Russell

Re: Yuck, no way

JWR1945a — Mon, 30 Jun 2008 15:33:25 GMT

I can't see myself sitting 80% in cash or bonds. No way, Jose. In the quest for the upside, I CAN see myself roaming more broadly into more adventurous areas like international, emerging markets or frontier markets (a little), precious metals and commodities. Inverse or bearmarket funds? Uh-uh. I've already been bitten a few times and I'd rather look for the upside.

I take from this that you are NOT withdrawing funds during retirement, but that you are accumulating funds. The two differ somewhat. Your need for safety differs as well.

Have fun.

John Walter Russell

Re: Links to PE10

ladamson — Mon, 30 Jun 2008 14:29:03 GMT

Susan,

Here are the links. The first link has tabs at the bottom of the worksheet that contain charts and data tables.

The second link also contains links to Prof. Shiller's website.

http://www.econ.yale.edu/~shiller/data/ie_data.htm

http://www.early-retirement-planning-insights.com/why-PE10.html

Regards,

Lew

Re: Re:Question for John.........

bilperk — Mon, 30 Jun 2008 11:39:34 GMT

"JWR or Bill, can you give us a link or a whitepaper pdf that will explain P/E10 in plain English? It would help me understand. Thank you"

Sorry, I'm in the same boat as you on PE10. John, of course, can help you.

Re: Re:Question for John.........

bilperk — Mon, 30 Jun 2008 11:35:20 GMT

JWR1945a:

What is the last date that PE10 would have supported a 70% allocation to equities for at least 1 full year?
It has been a long, long time. Before year 2000 with an S&P500 index portfolio.
NOTE: I generally talk about portfolio shifts in increments of one year.
A portfolio allocation of 70% to 80% would correspond to P/E10 around 14 or so. With the highest (one third of all) dividend payers, P/E10 would be around 17 or so, if I recall correctly. [I looked at Dividend Stocks in my Current Research section.]
Have fun.
John Walter Russell

John,

best,

Bill

Re: Yuck, no way

ElLobo — Mon, 30 Jun 2008 04:41:34 GMT

Correct me if I'm wrong, JWR, but P/E10 is a 10 year average P/E, or related to a 10 year average, possibly weighing later years more heavily.

All of JWRs NON-yield focused work is trying to 'value' the market. In the sense of predicting future returns, where the majority of the return is share price changes. At high P/E, for a volatile asset, there is a greater probability of a decrease in P. At lower P/E, the probability is greater for a share price increase. IOW, he is trying to give guidance for anyone who wants to buy low, sell high.

Holding a lot of cash, on the sideline, is the recommendation whenever P/Es are high. That is, Bogle's speculative return isn't in the cards. Speculative return is an expansion (increase) in the P/E.

If your withdrawal strategy relies on the sale of fund assets (depleting a portfolio, eating seed corn, spending capital), rather then harvesting yield, you are VERY concerned with falling portfolio value (share price depreciation). JWRs work simply suggests that it's more probable for share prices to fall, at high P/Es, which is devastating to a retirement portfolio. Keeping a lot of cash, on the sideline, avoids, or at least minimizes, share sales during down market conditions.

JWRs work with P/E10 is statistical and probabilistic in nature. That's what happens whenever share price behavior is the major issue with a strategy. And that is the major shortfall of such stratagies, one that doesn't affect yield based strategies.

For example, falling share prices are bad for withdrawal strategies that rely on the sale of assets/realizing capital. Falling share prices have absolutely no affect, notwithstanding a few opinions expressed on this forum, on yield based withdrawal strategies. The thing that is bad, for yield based strategies, is falling dividend (and interest, BTW) distributions.

If you look at some of JWRs results, whenever he quotes safe withdrawal rates, based on P/E10, the numbers are always quite low, compared to yield focused strategies. The reason is the uncertainty in the 'growth' component of total return, which, at times, is negative growth, or falling share prices!

To think of this in more simple terms, a yield based withdrawal strategy has one major rule, that is, withdraw, and spend, no more then the yield of your portfolio, and YOU control that yield, by your choice of assets. The corresponding 'rule' for a growth focused strategy would be to spend no more then the total return of your portfolio. The problem is that, in any one year, or series of year, the total return of your portfolio might be negative, that is, it's value, at the end of the year, is less then at the beginning of the year.

Yuck, no way

rascfw — Mon, 30 Jun 2008 04:09:03 GMT

JWR, I am not belittling your P/E10 or 100P/E10 or Rob Bennett's valuation index formula, truly I'm not. I'm sorry, but I'm with Cliff and Lew on this one.

I guess I have egg on my face. LOL! Then again, I have been able to find nothing that clearly explains P/E10 or Bennett's valuation indexing... Nothing that clarifies how these methods are calculated or whether it is even possible for a layman like myself to calculate this stuff on my own. I'm sorry, but I cannot place any faith in generalizations. I've tried reading and following the links on your website, but it got too convoluted and I gave up.

The following conservative yet effective strategy is the only thing that leads me to believe that your P/E10 has merit: In January 2008, I used MSN 401k quick check to help me decide which funds my husband should own in his new 401k... I settled on 80% SAIPX, 10% PEPSX and 10% PIIIX. That mixture of funds and % gave me our preferred allocation of roughly 1/3 domestic equity, 1/3 international equity and 1/3 bond. I experimented with varying % levels of each fund until I found that 80/10/10 was the most optimal combo. I was impressed that holding the bulk of Rick's assets in a very conservative allocation fund of funds combined with international and emerging markets gave him the most growth potential with very little downside... Of course, now that the market has squashed their index funds, I've decided to DCA into one of them over the next 6 months or so and then keep it for another 6-12 months. (The political morass we're facing gives me the heebie-jeebies.)

JWR or Bill, can you give us a link or a whitepaper pdf that will explain P/E10 in plain English? It would help me understand. Thank you!

Regards,
Susan

Re: Re:Question for John.........

ladamson — Mon, 30 Jun 2008 02:11:24 GMT

John,

If, by chance, you had bought $10,000 each of the current top 10 of Mergent's Dividend Achievers Select on 06/27/2000, the results would be as shown in the table below.

The results aren't great, but they probably beat a money market fund. It would also be interesting to know what the yield on cost would be today.

I think the PE10 is a valid concept, but I don't know if I will last until it drops below 14.

Mergent's Dividend Achievers Select - Top 10 Stocks 6/29/08
Value of $10,000 invested in each stock on 06/27/2000

IBM	11,082
CVX	30,109
WMT	10,621
JNJ	14,531
T	10,561
XOM	25,719
PG	25,158
KO	10,676
GE	6,092
PEP	16,312
	160,861
CAGR	6.12%

S&P 500	8,789
CAGR	-1.60%

Data is from MSN Money.

Regards,

Lew