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Chip-skiff
07-07-2016, 10:36 PM
The conventional wisdom, as retirement approaches, is to shift one's investments to bonds. There are lots of year-target mutual funds that make the shift, in return for a high expense ratio.

We've been investing for growth, mostly in large or mid-cap stocks with steady rates of appreciation, and regular dividends, which at this point is yielding on average about 12%. I shifted part of my wife's Roth account to a bond fund, Vanguard Long-Term Government Bond Index Fund Admiral Shares (MUTF:VLGSX) which YTD is up over 18%.

Another member (I forget who) posted about gains in two of his bond funds, T. Rowe Price Summit Municipal Income Fund (MUTF:PRINX) which is up YTD 5.32% and T. Rowe Price Tax-Free High Yield Fund (MUTF:PRFHX) a junk bond fund which is up YTD 6.29%. He was intending to sell.

A stock buyout will put a large lump sum into our (taxable) brokerage account in August, and I'm wondering about shifting the whole balance to a bond fund. The money guy who advises my wife on her TIAA-CREF retirement account claims that this is a bad time to buy bonds. I'm not so sure.

Any thoughts?

skuthorp
07-08-2016, 05:16 AM
I manage my own, always have. I bought bonds a lot when they were paying in the teens here. Not so much these days. Made a little on Grexit ups and downs actually, but out of that now.

peb
07-08-2016, 06:46 AM
Putting everything in a bond fund now is quite risky, IMO. How much lower can interest rates go? If you believe our rates follow other areas of the world and will actually go negative, then you will still make some money on a bond fund. But that is a bet, not a fixed-income investment.

If interest rates stay where they are, you will get very low returns. Corporate bonds might be best if this is the thesis.

If interest rates finally start going up, you will loose.

Norman Bernstein
07-08-2016, 06:47 AM
The conventional wisdom, as retirement approaches, is to shift one's investments to bonds. There are lots of year-target mutual funds that make the shift, in return for a high expense ratio.

We've been investing for growth, mostly in large or mid-cap stocks with steady rates of appreciation, and regular dividends, which at this point is yielding on average about 12%. I shifted part of my wife's Roth account to a bond fund, Vanguard Long-Term Government Bond Index Fund Admiral Shares (MUTF:VLGSX) which YTD is up over 18%.

Another member (I forget who) posted about gains in two of his bond funds, T. Rowe Price Summit Municipal Income Fund (MUTF:PRINX) which is up YTD 5.32% and T. Rowe Price Tax-Free High Yield Fund (MUTF:PRFHX) a junk bond fund which is up YTD 6.29%. He was intending to sell.

A stock buyout will put a large lump sum into our (taxable) brokerage account in August, and I'm wondering about shifting the whole balance to a bond fund. The money guy who advises my wife on her TIAA-CREF retirement account claims that this is a bad time to buy bonds. I'm not so sure.

Any thoughts?

Quite a few thoughts, actually, since I'm approaching 65, and pay a great deal of attention to this.

Contrary to most financial advice, I'm 85% in equities, only 15% in fixed income.... which would be considered to be overweighted by most advisors. I own some mutual funds, but not a lot, because I'm aware that the overall record of actively managed funds is NOT a good one; I've heard it stated that something like more than half of all mutual funds can't even reach the market index returns. If these fund managers can't beat an index fund, then why would I want to pay high expenses? Instead, most of the mutual funds I DO have are fixed income funds with low expense ratios (I do own two equity funds which have had good performance over the years; I wouldn't consider ANY mutual fund that didn't earn a Morningstar 4 or 5 star rating).

Instead, I've got my own formula, which I've talked about before. I invest mostly in large cap stocks with very strong brands, and long histories of continuous (and rising) dividend payouts. There are 20+ stocks in the portfolio, a mix of telecom, pharma, consumer, and industrial, plus a couple of REIT's that pay huge dividends and are trading for less than 11X EPS.

I'm pretty pleased with the results.... both the absolute numbers, but more importantly, what happens to my portfolio in a market downturn.

First, the returns. My brokerage (Schwab) provides an overall portfolio analysis that starts back at 1/1/09 (I've been investing for far longer than that, but 1/1/09 is where their software starts). Over that seven year period, my portfolios have returned 14.78% annually... and in comparison to the S&P500, I beat it in every time frame (5 year, 3 year, 1 year, year to date, quarter to date)... sometimes, by a very wide margin. I also compare to Schwab's 'moderately aggressive' benchmark, and I beat THAT one by even bigger margins.

However, more important to me, is how I do in market downturns. Last fall, when the market was down in the 6-9% range, I dropped only 3%. Large cap, strongly branded stocks are an outstanding buffer against the short term fluctuations in the market.

I didn't invent this strategy for myself... instead, I learned a thing or two from my Dad, who passed away in 2002. He invested from the early 50's onward... and the net result was remarkable, having put two kids through private colleges, funded his grandchildren's college educations (including an expensive masters degree, for one of them), and provided the grandchildren's down-payments on their homes. He left my mother a millionaire, who lives VERY comfortably on little more than the earnings of her portfolio. We didn't live expansively, as a kid... a modest house, no fancy cars or expensive vacations. My own home down-payment also came from his generosity (although all I currently have, is from my own earnings and investments... he gave far more to his grandchildren, than his own children).

The results of the past decade have given me a great deal of confidence in this whole investment thing... and I don't trust financial advisers, at all. A recent John Oliver piece pretty much demonstrates that, at best, investment advisers without fiducuiary responsibility cannot be trusted... and, at worst, they're frauds.

I sometimes get it wrong. For example, I own Royal Dutch Shell (RDSB), bought when I thought the oil companies would make a strong comeback. I'm down a fair sum on the stock price... but ahead, after factoring in the 6.6% dividend.

I've also had bigger screw-ups. 20 years ago, I thought stock in my former company had fallen to unreasonably low levels... so I bought $28K worth of it. I rode that investment to $280K in a matter of less than two years... and figured that I'd done as well as I could reasonably expect... so I sold it, and invested in two hot mutual funds. I then proceeded to lose nearly $100K in those funds. It taught me quite a lesson :)

Finally, it might be reasonable to ask: Why bother to manage a portfolio, when one's total returns over the long term are only slightly higher than the S&P500 itself? Why not just invest in an S&P500 index fund? The answer: because of the performance during a market downturn, which has been substantially better than the S&P500 itself. The reason: concentrating on those large cap, strongly branded companies is much better, defensively.

Too Little Time
07-08-2016, 09:52 AM
The conventional wisdom ...
Conventional wisdom is always wrong.

The S&P500 has had good performance in time frames of 20-30 years. You may live that long. You may want to leave some money to your heirs. Bonds have not done as well.

Your investments should be matched to your cash flow needs and the consequences when you do not meet those needs.

Vince Brennan
07-08-2016, 02:09 PM
Ahhh, we need TD back to tell us what we SHOULD think and how it won't do any good, any way.

Chip-skiff
07-09-2016, 12:51 PM
I've been investing our brokerage account in the same way as Norman, with a social filter: no tobacco, arms, mining, fast food, or petroleum stocks. We try to choose large or mid-cap companies that are making a real effort to reduce pollution and make their operations sustainable. Two cornerstone stocks are Church & Dwight (NYSE:CHD) the parent company of Arm & Hammer, which uses Wyoming trona to produce baking soda, the basis of all sorts of products; and UniLever, another non-cyclical consumer goods company that has been reforming their practices from the bottom up. We also have Vestas Wind Systems, the turbine company (OTCMKTS:VWDRY) which has been doing well lately. Also some utilities and a big chunk of Apple, which is a bit disappointing these days.

I plan on a 5-10 year basis, which can make bond funds seem attractive, compared to large-cap stocks with substantial and increasing dividends, e.g. Chevron. Not sure the dividends make up for the loss in NAV. VLGSX is a low-cost Vanguard government bond fund.

https://lh3.googleusercontent.com/-9bAXBNOEDoQ/V4E1aEux3GI/AAAAAAAAK5c/5CFgnzTIFzYakFI8Aj3LStclYuHJluutwCCo/s902/chev.jpg

We did have a bunch of high-cost mutual funds, which I've been selling to buy index funds that track the same investments for lower cost, such as the PowerShares QQQ Trust (NASDAQ:QQQ) and the Vanguard S&P 500 Index (NYSEARCA:VOO). The strategy is to split between growth stocks/funds and stable price/steady income, so the Roth accounts will finance the later part of retirement. My wife's account holds VOO, Vanguard Health Care Fund Admiral Shares (MUTF:VGHAX), Vanguard Information Technology ETF (NYSEARCA:VGT), VLGSX (above), and a Vanguard mid-cap fund. She also has an REIT.

I do a lot of 5-year plots to compare performance. Here's another comparing a large-cap stock (GE), an S&P Index fund (VOO), and the low-cost bond fund (VLGSX)—

https://lh3.googleusercontent.com/-SRcr3Vkg14s/V4E1cV2qM1I/AAAAAAAAK5g/5Lpqu_voJAIPh4p4-XHKjtcXQxlh8ChiQCCo/s922/vlgsx.jpg

GE edges out at the finish line, with far more volatility. After looking at many large-cap stocks, some mentioned by Norman, I'd say that a holder of a large and diverse portfolio of such stocks will come out on top, but for those holding fewer than ten such stocks, it's a risky strategy, very dependent on chance as far which which stocks you choose. That aspect is what is turning my attention to various bond instruments right now.

Norman Bernstein
07-09-2016, 01:43 PM
After looking at many large-cap stocks, some mentioned by Norman, I'd say that a holder of a large and diverse portfolio of such stocks will come out on top, but for those holding fewer than ten such stocks, it's a risky strategy, very dependent on chance as far which which stocks you choose. That aspect is what is turning my attention to various bond instruments right now.

I agree, on the first part: surely, one needs to be reasonably well diversified, under either my 'formula', or any other formula. I agree that 10 stocks, no matter what the quality, isn't enough diversity (even though its performance may be really good).

It's the reason I hold ANY mutual funds at all, in fact.... mutual funds DO provide a convenient way to diversify.... but index funds are the ultimate in diversification, as well as being cheaper to own (far lower management fees). The two equity funds I own (TWHIX and GABSX) are NOT index funds, but they've had very good records and are Morningstar 4 and 5 star rated.

As for bond funds: I hold a couple of fixed income funds which invest largely in commercial paper, not municipals... it's a bit riskier, but I'm willing to take the risk. I even recently bought two REIT's, despite the talk of real estate bubbles: CMO and ACRE have incredible yields, and it would take a pretty significant downturn for the dividends to not compensate for the likely loss of principal (still, I'm watching those very carefully, and am prepared to bail out quickly if they sag after they pay the dividend each quarter).

peb
07-09-2016, 01:44 PM
Norman, most financial advisors would be wrong, IMO. I am currently approx 75% equities and 25% bonds. By the end of the year, I will have likely switched my bond account over to a different strategy.

One of these days, people are going to loose a lot of money in bonds. They are not always the most liquid assets.

I just don't see how it works out in the ling run for a bond investor. Either interest rates go up (and bond prices crash) or money is eventually devalued via inflation (disaster for the bind investor) or both.

Norman Bernstein
07-09-2016, 01:48 PM
Norman, most financial advisors would be wrong, IMO. I am currently approx 75% equities and 25% bonds. By the end of the year, I will have likely switched my bond account over to a different strategy.

*nods* I suppose that, at an 85%/15% ratio for me, I'm probably more foolish than you :)

Also, my fixed income investments, being funds that are mostly invested in commercial paper, I'm even riskier.


One of these days, people are going to loose a lot of money in bonds. They are not always the most liquid assets.

I just don't see how it works out in the ling run for a bond investor. Either interest rates go up (and bond prices crash) or money is eventually devalued via inflation (disaster for the bind investor) or both.

I agree. The business of bonds and bond funds is speculation about interest rates.... but people will ALWAYS need toilet paper and toothpaste :):):)

Chip-skiff
07-09-2016, 01:52 PM
I just don't see how it works out in the ling run for a bond investor. Either interest rates go up (and bond prices crash) or money is eventually devalued via inflation (disaster for the bind investor) or both.

If so, why do so many large, institutional investors go for T-bills and similar government bonds? Doesn't that guarantee the principal is preserved? Naturally, actual bonds are different to bond funds, because the NAV of the fund can decrease relative to the book value of the holdings. But there's a common principle at work.

Norman Bernstein
07-09-2016, 02:04 PM
If so, why do so many large, institutional investors go for T-bills and similar government bonds? Doesn't that guarantee the principal is preserved?

Certainly... although the preservation of principal is often misunderstood. The 'principal' is priced in currency, and currency goes up and down. Ask the Brits: my British client has suddenly found out that I'm 12% more expensive, than I was, a month ago!


Naturally, actual bonds are different to bond funds, because the NAV of the fund can decrease relative to the book value of the holdings. But there's a common principle at work.

I might be wrong about this, but I believe that bond funds actually invest in a variety of types of financial instruments... some of which are more speculative than others.

Chip-skiff
07-09-2016, 02:14 PM
Certainly... although the preservation of principal is often misunderstood. The 'principal' is priced in currency, and currency goes up and down. Ask the Brits: my British client has suddenly found out that I'm 12% more expensive, than I was, a month ago!

I might be wrong about this, but I believe that bond funds actually invest in a variety of types of financial instruments... some of which are more speculative than others.

That depends on the fund. VLGSX, the fund that I showed above on the graphs, is at least 80% US treasury bonds, and in practice, more like 90% plus. A total market bond fund or broad sector fund (tax-free municipals, mid-term corporate) can have a greater variety and perhaps higher returns, with more risk.

Aren't stocks similarly dependent on exchange-rate fluctuation? Particularly where exports and foreign subsidiaries are a large part of the biz? Caterpillar (NYSE:CAT) for instance:

http://www.fool.com/investing/2016/07/09/3-ways-brexit-could-kill-caterpillar-incs-growth-p.aspx

peb
07-09-2016, 03:16 PM
If so, why do so many large, institutional investors go for T-bills and similar government bonds? Doesn't that guarantee the principal is preserved? Naturally, actual bonds are different to bond funds, because the NAV of the fund can decrease relative to the book value of the holdings. But there's a common principle at work.



Sure, you buy a bond when issued and hold it to maturity, you get your principal back. Two problems:

1) as Norman pointed out, is inflation. buy a twenty year bond and inflation is 3% per year, the purchasing power of that principle is half if what you paid for it.

2) how many people can hold til maturity? Interest rates go up, bond prices go down. If you can hold to maturity, the price change reflects what you are missing out on in the new interest rate environment. The longer the duration, the more interest rate risk you assume.



You buy a bond mutual fund, you see this reflected in the changing value of the NAV. You buy a bond fund now with the intent of holding it for 10-15 years, I think you are almost guaranteed to lose money. But that's just my guess.

Norman Bernstein
07-09-2016, 03:53 PM
S
1) as Norman pointed out, is inflation.

Actually, I wasn't thinking about inflation... just the fluctuation of exchange rates and interest rates. However, peb is certainly right about issues of inflation, which is why such things as TIPS (Treasury Inflation Protected Securities) exist.

One of the reasons I'm not a fan of bonds is because they don't really represent actual creation of value, like most stocks do. Bonds are no different than most financial instruments; their ability to grow is dependent upon the spreads of interest rates, debtor to creditor. I'd rather invest in some company that actually MAKES stuff, which is the direct conversion of money to value.

I know, it's not an especially sophisticated prejudice... it might even be naive.... but we all have our prejudices. Admittedly, I am slightly invested in things like real estate investment trusts... but these have the potential, to least, to grow fast, irrespective of the spreads.

Too Little Time
07-09-2016, 05:20 PM
If so, why do so many large, institutional investors go for T-bills and similar government bonds? Doesn't that guarantee the principal is preserved? Naturally, actual bonds are different to bond funds, because the NAV of the fund can decrease relative to the book value of the holdings. But there's a common principle at work.
They know their future expenses. They tend to buy bonds where the maturity matches their expenses. At least for the short term.

Chip-skiff
07-09-2016, 06:39 PM
My assumption has been that institutions (needing to ensure that future pensions can be paid, for instance) buy government bonds because they are safe. Individuals who have a large principal (i.e. several million) and inherited homes, property, etc. can get by on the modest percentage from a large bond portfolio and not have to play the market.

For another advantage to bonds, look back at the first graph in post #7. Bond values often seem to move the opposite way from stocks. So if stock values tank, having some bonds could save your bacon.

Our brokerage portfolio is about 60% stocks, 25% index and etf, 5% mutual funds, and 10% cash. I can afford to be patient and won't sell a stock unless the gain will pay the transaction costs and taxes, plus at least a 15% return on value. As we get closer to retiring, I'll accumulate more cash in case we need to bridge a year or two before reaching social security retirement age. At that point, we'll stop contributing to our Roth funds.

My wife's Roth is 45% mutual funds (low-cost sector), 35% index/etf (including bonds), and 11% REIT, with the balance in cash, soon to be added to the bond fund she holds. No reason to carry cash in the Roth accounts, which we'll draw on last.

Mine is 65% mutual funds (low-cost sector), 34% stock, and 1% cash. Over the next five years, I'll shift from stock to bonds and index funds.

My wife is a haphazard investor (she bought Ford stock because her dad drove Fords, and took advice from her old friends, mostly bad). The changes I've made in the last few years have rewarded us in terms of increased value and stability. We'll have plenty of income, barring absolute catastrophe, to live as we do now and to travel a bit. No kids, so we don't need to be dynastic. I'd rather die broke than rich.

Too Little Time
07-09-2016, 08:43 PM
... have to play the market.

We'll have plenty of income, barring absolute catastrophe, to live as we do now and to travel a bit. No kids, so we don't need to be dynastic. I'd rather die broke than rich.
Your first comment indicates you have the wrong view to be an investor.

Your second comment indicates that what you are doing is sufficient for your needs. That is all that matters.

skuthorp
07-10-2016, 04:23 AM
"No kids, so we don't need to be dynastic."
Ditto.
But you don't know if you got the balance right until it's too late!:ycool:

Norman Bernstein
07-10-2016, 07:28 AM
I can afford to be patient and won't sell a stock unless the gain will pay the transaction costs and taxes, plus at least a 15% return on value.

Hey, you're obviously more astute than the vast majority of Americans, when it comes to investing, and it's terrific that you've done well....

...but the line above does give me pause to think, because it implies that you could readily fall into the same trap that I have fallen into in the past: the presumption that no stock you own would dare fall in value and NOT recover to give you a profit.

I know how it happens: XYZ corp stock is in your account, you paid $20 for it, it rises to $25, you're pleased.... but then it drops to $19. "I won't sell it now, I'll wait until it recovers to $23".... but then it drops to $15. "Surely, it won't fall any further, I can afford to hold onto it until good times return...." and two weeks later, it's at $12.....

By that time, you get the sinking feeling that it's never going to recover to the $20 you paid for it.... only now, you've got a big loss on the stock.

The fact that losses can be deducted from gains is really not much comfort, is it?

It's a VERY hard lesson to learn, and I'm not sure I've fully learned it.... but I think that the time to sell a stock is when it under-performs, compared to your expectations.... and not one moment later than that.

One advantage of my style of investing is that I have little or no expectations of the price of a stock... only its dividends. With large cap stocks, a cut in dividends is exceptionally rare, so it's a more dependable stream of income to the portfolio. If the stock price goes up, well, that's the icing on the cake. Admittedly, I'm looking for a far better return than the dividend yields alone... but I've found that those sorts of stocks have enough capital appreciation, along with the dividend, to yield better than the S&P500 in general, over the long haul.

Chip-skiff
07-10-2016, 01:24 PM
Your first comment indicates you have the wrong view to be an investor.

Hogwash. I was stating my interpretation of the viewpoint of a very rich person who finds speculation rather unpleasant.

Back to reality, I decided to test Norman's strategy (large-cap stocks with substantial and increasing dividends) on two of the investments graphed above, Chevron (CVX) and Vanguard Long-Term Government Bond Index Fund Admiral Shares (VLGSX) for the last five year term.

Starting price for Chevron was $105.89, with a purchase of 100 shares. The dividends for the term add up to $18.73 per share, or $1873.00 total. The NAV per share has since declined to $104.72 for a loss of $112.00. That comes out to a total gain of $1761.00 for the five year term.

The Vanguard bond fund started at $20.89 with the equivalent value being about 507 shares. The dividends per share are $3.33, or a total $1688.31 for the term. The share value is now $29.52, or a total of $14,966.64 and a gain of $4374.49. The dividends and the gain in NAV amount to $6062.70. This is $4301.70 more than the result for Chevron stock.

I'd have to run the same test several times to draw any conclusion, but in this case the large-cap stock loses.

Nominate another stock in a healthier sector and I'll try it again.

Chip-skiff
07-10-2016, 01:39 PM
It's a VERY hard lesson to learn, and I'm not sure I've fully learned it.... but I think that the time to sell a stock is when it under-performs, compared to your expectations.... and not one moment later than that.

I agree to some extent, but have cultivated a small portfolio of stocks that I think have the potential to break out, in various new and emerging tech areas such as 3D printing and advanced biotech. The amount invested in each is modest and they are mostly down at present. If they all went to zero, the loss wouldn't affect our return by very much. But I'm betting that one or two will go huge and more than cover the losses on the others.

When I lived in Vegas, I learned that you should decide how much to gamble and put that money in a side pocket, keeping your hand strictly off your wallet. You lose your stake, you go home. This is pretty much the same thing. I love speculating, but am not mad enough to bet the farm.

Too Little Time
07-10-2016, 01:46 PM
Hogwash. I was stating my interpretation of the viewpoint of a very rich person who finds speculation rather unpleasant.
As I said "playing the market" is the wrong view for an investor. That is the same view I have for the comments "Wall Street casino" or "the market is fixed."

People with those views should stay away. But then so should people who ask strangers for investment advice.

Chip-skiff
07-10-2016, 01:49 PM
As I said "playing the market" is the wrong view for an investor. That is the same view I have for the comments "Wall Street casino" or "the market is fixed."

People with those views should stay away. But then so should people who ask strangers for investment advice.

Golly! You are really a fount of wisdom.

Dave Wright
07-10-2016, 02:01 PM
The conventional wisdom, as retirement approaches, is to shift one's investments to bonds.

A stock buyout will put a large lump sum into our (taxable) brokerage account in August, and I'm wondering about shifting the whole balance to a bond fund. The money guy who advises my wife on her TIAA-CREF retirement account claims that this is a bad time to buy bonds. I'm not so sure.

Any thoughts?


I think you're on the right track and have selected a good bond fund at a good company. I've had a substantial amount in the Vanguard Long Term Tax Exempt Bond fund Admiral Shares - VWLUX almost since inception. I've been told many times, and read many "expert" articles on how this is a problematic investment. Yet the tax free dividends keep rolling in and I'm confident and happy with it. If you have more than you need why take unnecessary risk for more? We are faced with mandatory withdrawals from retirement accounts this year. I'll just toss them into VWLUX and forget about them.

Too Little Time
07-10-2016, 03:12 PM
I've been told many times, and read many "expert" articles on how this is a problematic investment. If you have more than you need why take unnecessary risk for more?
There is no need to take the risk.

In general, financial experts don't write articles directed toward specific individuals. Your situation is not typical. Comparing $10K invested in VWLUX to the same in S&P 500 or DJIA over the last 10 years, VWLUX is now worth $17K while the others are worth about $22K. For most individuals that difference is significant.

Chip-skiff
07-10-2016, 03:25 PM
Comparing $10K invested in VWLUX to the same in S&P 500 or DJIA over the last 10 years, VWLUX is now worth $17K while the others are worth about $22K. For most individuals that difference is significant.

Here's a graph:

https://lh3.googleusercontent.com/-ujZuaAXMe1M/V4Ktu8Yd_2I/AAAAAAAAK8I/JfSKKc2AzgM_JrmtyZ2LYp4PghuUeH_SQCCo/s897/vwlux.jpg


I do a lot of graphic comparison and calculate long-term costs before deciding to lay any money down.

Chip-skiff
07-10-2016, 03:28 PM
Here's another comparison, between one of our cornerstone stocks, Church & Dwight, the SPY S&P 500 Index ETF, and the Vanguard government bond fund.

https://lh3.googleusercontent.com/-9zQ_dDsSa2k/V4KvDjBw3EI/AAAAAAAAK8c/WHTuGMfQ2TItPLUqtl31Eryt3OBqRNJpACCo/s894/CHD.jpg

The difference is obvious. So is the comparative lack of volatility.

Norman Bernstein
07-10-2016, 03:56 PM
Back to reality, I decided to test Norman's strategy (large-cap stocks with substantial and increasing dividends) on two of the investments graphed above, Chevron (CVX) and Vanguard Long-Term Government Bond Index Fund Admiral Shares (VLGSX) for the last five year term.

Whoa! This is not only a completely invalid test, but it appears you've misunderstood my approach, entirely!

You CANNOT 'test' this approach with just one stock, and one mutual fund.... I'm sure that if you cherry picked, you could find vastly better results (or vastly worse ones) with one stock and one fund.

The 'test', if there is one, would be a test of 20+ stocks and funds over a LONG period of time.

Secondly, it's an issue of expectations and results. I'm not looking to dramatically beat the market, at all... I'm simply looking to match (or slightly beat) the S&P500, but with much less downside risk in the event of a market pullback or recessions. Anyone expecting to beat the market by any significant amount is a gambler, not an investor.... and I'm not gambling here, I'm trying to build a retirement portfolio. Speculation involves risk, and I'm trying to minimize risk, not increase it.

The results are what counts, and I can give you an example, taken directly from my Schwab performance analysis. If I compare to the S&P500, here's how well I've done in different time periods (annualized appreciation):

Last three months: 6.31% versus 4.59%
Year to date: 10.46% versus 5.45%
One year: 11.64% versus 6.37%
Since 1/1/09: 14.9% versus 14.52%

As you can see, I can beat the S&P by appreciable margins in SOME time periods, while, on the overall long term, beat the S&P500 by a little. I'm sure there are time periods in which I did NOT do as well... but it's the long term that counts.

The REAL value of my approach is how well I do in market downturns. Unfortunately, Schwab's software doesn't give me a presentation to show that... but, from recollection, when the market was down almost 9% last summer/fall, I was down only 3%... and as you can see, recovered quite nicely.

I personally think that anyone who is not really a professional analyst cannot say, with any assurance, that any stock is 'ready for a breakout'. I simply don't believe that... and even the professionals can't do it with any regularity, as the performance of MOST mutual funds demonstrates.

Sure, there are some people who do vastly better than me, in the market. Whether it's skill or luck, I can't say. I can only say that my approach is a conservative one which achieves its objectives over the long haul, and does NOT depend on a crystal ball or divining rod. I only need to identify companies with very strong brands and long records of continuous and increasing dividend payouts.... and ANYONE can do that.

Chip-skiff
07-10-2016, 04:06 PM
Whoa! This is not only a completely invalid test, but it appears you've misunderstood my approach, entirely!

You CANNOT 'test' this approach with just one stock, and one mutual fund.... I'm sure that if you cherry picked, you could find vastly better results (or vastly worse ones) with one stock and one fund.

The 'test', if there is one, would be a test of 20+ stocks and funds over a LONG period of time.



I'd have to run the same test several times to draw any conclusion, but in this case the large-cap stock loses.

Nominate another stock in a healthier sector and I'll try it again.


That's what I said. A larger data set would give more accurate and trustworthy results, but a head to head comparison is perfectly valid as such, for instance if one were choosing between two or three investments.

Norman Bernstein
07-10-2016, 04:47 PM
That's what I said. A larger data set would give more accurate and trustworthy results, but a head to head comparison is perfectly valid as such, for instance if one were choosing between two or three investments.

If choosing only two or three investments, my scheme simply doesn't work, and doesn't apply. You really do seem to have missed my point.... but we each have our own approaches to this sort of thing.

Too Little Time
07-10-2016, 05:07 PM
I do a lot of graphic comparison and calculate long-term costs before deciding to lay any money down.
As I said "Your second comment indicates that what you are doing is sufficient for your needs. That is all that matters."

I don't claim to have any special knowledge of the future. But the past is well known.

http://www.aol.com/article/2016/05/25/top-25-stocks-of-the-past-25-years/21383783/#slide=983541#fullscreen
http://www.barchart.com/stocks/performance/10year.php
http://www.barchart.com/stocks/performance/5year.php
http://www.barchart.com/stocks/performance/5day.php

Chip-skiff
07-10-2016, 06:31 PM
If choosing only two or three investments, my scheme simply doesn't work, and doesn't apply. You really do seem to have missed my point.... but we each have our own approaches to this sort of thing.

I have a great deal of respect for your judgement. I've not missed your point and I got an A in graduate statistics. I'm managing about twenty-five investments right now in three portfolios. To validate your approach statistically would need (as I recall) an n of 35 investments. A longer time period wouldn't necessarily lend more validity. The duration of the sample would depend on your horizon for investing, either in terms of financial demands or evaluating and re-balancing your portfolios. (My life expectancy at this point is about twenty years.)

Our highly speculative investments are certainly a gamble. I suppose putting a little money into such wildcat schemes helps reduce my temptation to act rashly otherwise.

The counterexample I posed (simply taking investments previously mentioned on this thread) was one instance in which the sort of choice you might make following your overall approach would be a poor one. No doubt a larger sample would tend to support your approach. Just curious: did you arrive at that using statistics, according to sage advice, or was it a seat-of-the-pants thing?

Chip-skiff
07-10-2016, 06:42 PM
http://www.aol.com/article/2016/05/25/top-25-stocks-of-the-past-25-years/21383783/#slide=983541#fullscreen
http://www.barchart.com/stocks/performance/10year.php
http://www.barchart.com/stocks/performance/5year.php
http://www.barchart.com/stocks/performance/5day.php

The barchart site looks useful— first I'd heard of it.

The reason I post about finances is to learn (and to argue in a good-natured way). So this has been worthwhile for me.

Thanks.

Norman Bernstein
07-10-2016, 07:00 PM
I'm managing about twenty-five investments right now in three portfolios. To validate your approach statistically would need (as I recall) an n of 35 investments.

I'm not sure why you'd need 35.... but clearly, you need enough to keep a reasonable balance. Not every stock I own has done equivalently well.


A longer time period wouldn't necessarily lend more validity.

Actually, we're both looking at this through rose-colored glasses; we've been in a long and essentially continuous bull market, since the 'Bush' crash, so the longer time period, to encompass at least one or two sustained market downturns, would be a very good way of validating the approach. As I mentioned, I have only my recollection that my portfolio dropped by less than a third of the overall market drop, last summer/fall... which is at least an indicator that my scheme is indeed 'safer' than the S&P500 as a whole.


Our highly speculative investments are certainly a gamble. I suppose putting a little money into such wildcat schemes helps reduce my temptation to act rashly otherwise.

Well, you have more intestinal fortitude than me... or maybe you're richer and can afford to take such risks. I did my share of speculation in the 90's... and I had a few hits, and a few misses. As I approach retirement, I no longer feel i have the tolerance for it, though.... and no one stock, even if it's a huge hit, is going to make that much of a difference, unless it's an unreasonably large share of my total portfolio.


The counterexample I posed (simply taking investments previously mentioned on this thread) was one instance in which the sort of choice you might make following your overall approach would be a poor one.

Sorry, but 'a few stocks' is NOT my 'overall approach.... 20 or 30 is more like it.


No doubt a larger sample would tend to support your approach. Just curious: did you arrive at that using statistics, according to sage advice, or was it a seat-of-the-pants thing?

The latter, influenced by my father, who was a serious large cap investor. He NEVER invested in anything that was either expected to 'take off', nor did he invest in anything that was likely to 'collapse'. His portfolio consisted of blue chips, exclusively, which he held forever. The remains of that portfolio is now the possession of my mother, who lives luxuriously in a beautiful independent living facility, and cannot spend as much as the earnings of her portfolio... and will leave her grandchildren and great grandchildren one hell of a legacy, when she finally passes.

It may be corny, but it's a 'tortoise and hare' story, writ large. It may be a cliche to say that 'slow and steady wins the race'.... but it turns out not to be all that slow. A couple of friends of mine have been working together on a stock-picking system for the past 10 years, based on various 'moving day' indicators, and they've always said they've done very well.... just this evening, one of them reported HOW well... the answer: 10.10% annually. Pretty pitiful, quite frankly... and I have NO idea why they think it's a good return.

Chip-skiff
07-10-2016, 07:15 PM
A couple of friends of mine have been working together on a stock-picking system for the past 10 years, based on various 'moving day' indicators, and they've always said they've done very well.... just this evening, one of them reported HOW well... the answer: 10.10% annually. Pretty pitiful, quite frankly... and I have NO idea why they think it's a good return.

I mentioned that I used to live in Las Vegas and worked on the Strip during my high school years. Lost count of how many sob stories I heard from gamblers who had a "system." As they were trying to trade their spare tire and sundry for gas to get back to LA. I had no need for spare tires, but somehow bought a lot of gas over the years. Call me a sucker. The weekend hookers (some of whom had been rolled) returned and paid me back. The "system" guys never did.

By the way, the n (sample size) of 35 is a generic standard for statistical validation.

Norman Bernstein
07-10-2016, 07:24 PM
By the way, the n (sample size) of 35 is a generic standard for statistical validation.

Thanks. I never took a statistics course, myself.

Chip-skiff
07-10-2016, 07:26 PM
Thanks. I never took a statistics course, myself.

I hated it, but learned a lot.

Norman Bernstein
07-10-2016, 07:28 PM
I hated it, but learned a lot.

Not much need for it, in what I do. About the closest I get to it, would be the distributions of error, in data sheet specifications of IC's.... and they're ALL bell-shaped :):):)

Chip-skiff
07-10-2016, 08:45 PM
Not much need for it, in what I do. About the closest I get to it, would be the distributions of error, in data sheet specifications of IC's.... and they're ALL bell-shaped :):):)

I haven't used statistics for my sort of papers, but for things based on numerical data (e.g. ranked streamflows) it's a requirement.

Too Little Time
07-11-2016, 07:53 PM
The barchart site looks useful— first I'd heard of it.

The reason I post about finances is to learn (and to argue in a good-natured way). So this has been worthwhile for me.

Thanks.
My post was poking fun at you, Norman, myself, and anyone else who compares their performance to a major index. An idiot can match any index by simply investing it that index's tracking fund.

I don't invest in any index. So I don't expect my performance to match its performance. Over the last 27 years or so I have out performed the 2 of the 3 major indexes by a couple percentage points every year. And I am not particularly smart. The only smart thing about my investing is that I invest. My performance is due to random events rather than my skill. I am not doing any better than an idiot.

Considering how well one could have done over 5, 10, or 25 years it seems foolish to compare one's performance to that of investing idiots

Chip-skiff
07-11-2016, 08:12 PM
Krugman on bonds and investing in infrastructure. Is there a targeted fund that buys bonds issued to finance such projects? I'd buy it.

"What policy makers should be doing, instead, is accepting the markets’ offer of incredibly cheap financing. Investors are willing to pay the German government to take their money; the U.S. situation is less extreme, but even here interest rates adjusted for inflation (https://fred.stlouisfed.org/series/DFII10) are negative.

Meanwhile, there are huge unmet demands for public investment on both sides of the Atlantic. America’s aging infrastructure is legendary, but not unique: years of austerity have left German roads and railways in worse shape than most people realize. So why not borrow money at these low, low rates and do some much-needed repair and renovation (http://www.imf.org/external/pubs/ft/fandd/2015/06/elekdag.htm)? This would be eminently worth doing even if it wouldn’t also create jobs, but it would do that too."

http://www.nytimes.com/2016/07/11/opinion/cheap-money-talks.html?smprod=nytcore-ipad&smid=nytcore-ipad-share

Norman Bernstein
07-12-2016, 08:09 AM
My post was poking fun at you, Norman, myself, and anyone else who compares their performance to a major index. An idiot can match any index by simply investing it that index's tracking fund.

What they CANNOT do, by investing in index funds, is to match the index returns while minimizing the downside risk, in the event of market downturns or even recessions. THAT is the key feature of my strategy.


I don't invest in any index. So I don't expect my performance to match its performance. Over the last 27 years or so I have out performed the 2 of the 3 major indexes by a couple percentage points every year. And I am not particularly smart. The only smart thing about my investing is that I invest. My performance is due to random events rather than my skill. I am not doing any better than an idiot.

Well, it helps to take advantage of the $50K to $100K in tax free income that you claimed you got as a result of Obama's budget deal. Mystical and magical money must be a wonderful thing.... too bad you can't, or won't, substantiate that ridiculous claim... which NOBODY believes.

peb
07-12-2016, 08:21 AM
One of the reasons I'm not a fan of bonds is because they don't really represent actual creation of value, like most stocks do. .

A very strange statement. A couple of thoughts:

Hate to risk turning this into a poltical thread, but I just can't resist: If bonds do not create any value, one can only conclude that deficit spending is never justified.

More seriously: You are wrong. bonds create just as much value (if not more) than stock. To raise capital, a company can sell bonds (ie borrow) or issue stock (ie get more owners). From that point on, owning the stock or the bond does nothing directly affecting the company. Even after issued, the both are carried on the balance sheet as an offset to the company's assets (ie. A = L + E). Its just that the bond holder has more rights to those assets than the equity holder, while the equity holder has more rights to the profits than the bond holder.

peb
07-12-2016, 08:26 AM
Back to the OP question. As to bonds, the entire Swiss yield curve, out to 50 years is now negative. This is just not supposed to happen. Can you say bubble? Bonds are in a bubble, with prices being directly supported by central banks. So the bubble might last, but how long? I would be cautious about any new investment in bond funds.
Yes, stocks can go down big, and they do, but they can eventually recover via growth in earnings. If bonds crash, they could very well not reach these prices again in the next 100 years, as interest rates may never go negative again.

Danger, Danger Will Robinson!!!

Norman Bernstein
07-12-2016, 11:54 AM
A very strange statement.

Well, I'll retract that. I should have said that bondholders' expectation of benefit is limited to the agreed-upon interest rate (primarily... secondarily, the valuation of the bond can change due to interest rate changes, so it's not a guaranteed safe investment, except when held to maturity by a solvent corporation, or if the bond is called). With the exception of financial disaster for the company, bondholders are not participants in the economic success of the company. A bond's value, or its interest rate, does NOT increase, if the company releases a blockbuster product which skyrockets it's stock price.


Hate to risk turning this into a poltical thread, but I just can't resist: If bonds do not create any value, one can only conclude that deficit spending is never justified.

Sorry, but I fail to see the relationship. Governmental spending isn't investing, in the same sense; there's no profit motive. Governmental spending CAN be investing, if the result of the spending (for example, on things like education, infrastructure, or scientific research) end up paying significant dividends... to the country, that is.


More seriously: You are wrong. bonds create just as much value (if not more) than stock.

I don't see how they create MORE value, but I will agree that bonds are indeed another form of investing in a corporation... for an agreed-upon return of that investment. The bondholders aren't really participants in the economic success (or failure) of the company... at least, as long as the company is solvent. If the company goes down the toilet, of course, bondholders stand to lose much or all of their investment.

I suppose it's a prejudice of mine; I don't have all that much respect for short term trading or speculation. It goes along with my disapproval of HFT, where significant money can be made.... without generating any increase in value.

Chip-skiff
07-12-2016, 12:25 PM
There seems to be quite a lot of discussion on bonds these days—

"The stock market can rise and fall for all sorts of reasons, and sometimes for no apparent reason at all. But the bond market, where trillions of dollars change hands and long-term interest rates are determined, is steadier (normally). Its prices are generally tied closely to the outlook for growth and inflation over the years ahead.

The long-term interest rates that currently prevail across all the major advanced economies are consistent with a disastrous economic future. Taken at face value, they imply that the smart money expects inflation will remain extraordinarily low for years to come, and that growth will stay so weak that central banks won’t be able to raise rates for years. It is a shift that has accelerated since Britain’s vote on June 23 to leave the European Union, but one that has been underway for years.

Look at the current shape of the American “yield curve (http://www.nytimes.com/interactive/2015/03/19/upshot/3d-yield-curve-economic-growth.html),” the chart of how rates compare for short, medium and long-term bonds. It implies a 60 percent chance of a recession in the next year based on historical patterns, according to (http://blogs.wsj.com/moneybeat/2016/07/05/yield-curve-shows-60-chance-of-recession-deutsche-bank-says/) Deutsche Bank analysts. Long-term interest rates hit record lows (http://www.nytimes.com/aponline/2016/07/06/us/politics/ap-us-us-treasury-yield-record-low.html) last week — which is to say the lowest in the 227-year history of rates in the United States.

Prices for inflation-protected bonds suggest that consumer prices will rise only about 1.4 percent a year through 2021 — and only 1.5 percent in the five years after that. They suggest that not only is the Federal Reserve unlikely to find conditions that warrant an interest rate increase in the remainder of 2016, but also that there is only about a 50 percent chance of a rate increase in 2017.

Across other major advanced economies, the signals sent by bond prices are even worse. Ten-year bonds are now offering negative interest rates in Germany, Japan, Switzerland, Denmark and, as of Friday’s close, the Netherlands. That means buyers of these securities will get fewer euros, yen, Swiss francs or Danish kroner back than they invested, a development without precedent in hundreds of years of financial history."

http://www.nytimes.com/2016/07/12/upshot/can-we-ignore-the-alarm-bells-the-bond-market-is-ringing.html?smprod=nytcore-ipad&smid=nytcore-ipad-share


Another piece from today's NY Times—

"You will need a lot of cash, of course, when you retire or if you join the ranks of the long-term unemployed. Under those circumstances, however, you will need that money over a protracted period of time. There is no reason that the resources to finance this spending stream should take the form of low-interest bank deposits or money market funds, which inevitably will fail to keep up with a rising cost of living, even if inflation remains modest.

Instead, to minimize the real risks we all face in meeting our unknown, long-term financial obligations, you need a different strategy, one that produces reliable, spendable cash flow and superior returns, minimizing the likelihood that the inflation-adjusted value of your portfolio will decline over time.

The best way to achieve those goals is to avoid “perfectly safe” cashlike assets, relying on your savings account or money market funds only for a 30- to 60-day cushion to cover your day-to-day obligations, plus enough extra at times to satisfy those occasional outsize expenses like a child’s college tuition bill that is due in the next few months.
After that, your primary goal is to build wealth. Not surprisingly, equities do best. That’s why most of your money for your retirement should be invested in stocks.

But you may not have realized that intermediate-term bonds, over the long run, are superior not just to cash but to long-term bonds as well. So when thinking about where to invest your fixed-income assets, remember Goldilocks: The best place to be is not too long and not too short.

The return you expect to earn and the risk associated with bonds rise as maturity lengthens. But the rates at which they rise are neither uniform nor equal. At first, as you move out of cash into short-term bonds your expected return rises rapidly, but risk — if we define it as the chance that you will lose to inflation — actually diminishes.

That’s why the shortest-maturity investments like money market mutual funds (http://topics.nytimes.com/your-money/investments/mutual-funds-and-etfs/index.html?inline=nyt-classifier) and Treasury bills (http://topics.nytimes.com/top/reference/timestopics/organizations/t/treasury_department/treasury_securities/index.html?inline=nyt-classifier) are among the worst investments you can make."

https://lh3.googleusercontent.com/-gcDoRrJooh4/V4UnSSLb6CI/AAAAAAAAK9w/HbmFRpqkTVs8vKj2Y5YajTLy_yO4XlvpgCCo/s742/nyt%2Bgraph.jpg

http://www.nytimes.com/2016/07/02/your-money/the-goldilocks-strategy-for-long-term-investment.html?smprod=nytcore-ipad&smid=nytcore-ipad-share

My purpose isn't to champion one strategy or another, but simply to learn how all this finance stuff seems to work. And, likewise, not to go broke.

peb
07-12-2016, 12:30 PM
Norman, if a company goes down the toilet, bond holders have a higher claim to the assets than equity. they are less likely to loose all of their investment. Indeed bankruptcy reorgs often make the bond holders the new owners and leave stock holders with a total loss.

You have some very good investment ideas, I would suggest honing up on capital structure issues of the companies you incest in.

Chip-skiff
07-12-2016, 12:36 PM
I would suggest honing up on capital structure issues of the companies you incest in.

Talk about dirty money. Shame on you!!! :d

Norman Bernstein
07-12-2016, 02:08 PM
Norman, if a company goes down the toilet, bond holders have a higher claim to the assets than equity. they are less likely to loose all of their investment. Indeed bankruptcy reorgs often make the bond holders the new owners and leave stock holders with a total loss.

True enough.... but one has to weigh such a risk.

I submit that large cap companies with strong brands, who make things that are not especially cyclical or subject to changing trends, offer an extraordinarily low risk of collapse.... and, I still believe, a lesser likelihood to drop in value when the economy DOES turn down. I would guess that their bonds are every bit as safe.... but considering the returns, I'm not sure why I'd buy their bonds. Why would I want to expose myself to changing bond values due to interest rate changes, especially when I'm foregoing capital appreciation? It is perhaps true that the very conservative investor would want to forego capital appreciation for a portion of their investments, in favor of capital preservation... but it strikes me as too conservative, to a fault. I can withstand periodic market downturns, if, in the long term, I'm still going to do better in equities.


You have some very good investment ideas, I would suggest honing up on capital structure issues of the companies you invest [corrected] in.

Admittedly, I haven't paid much attention to the companies' capital structures. I'm guessing that the kind of companies I like are probably conservative, with regard to bond debt, but I will take a look... not sure it will change my investment style, though.

Too Little Time
07-12-2016, 02:17 PM
What they CANNOT do, by investing in index funds, is to match the index returns while minimizing the downside risk, in the event of market downturns or even recessions. THAT is the key feature of my strategy.
There is no "downside" risk unless one wants to sell a significant portion of one's assets. I sold about 5% of my investments at this February's low and felt no pain. (My wife wanted some money for some purpose.)

But you missed the big point arguing you have some edge over what idiots can do is not saying much.


Well, it helps to take advantage of the $50K to $100K in tax free income that you claimed you got as a result of Obama's budget deal. Mystical and magical money must be a wonderful thing.... too bad you can't, or won't, substantiate that ridiculous claim... which NOBODY believes.
The people who do give us tax advice believe.

peb
07-12-2016, 02:27 PM
I submit that large cap companies with strong brands, who make things that are not especially cyclical or subject to changing trends, offer an extraordinarily low risk of collapse.... and, I still believe, a lesser likelihood to drop in value when the economy DOES turn down. I would guess that their bonds are every bit as safe.... but considering the returns, I'm not sure why I'd buy their bonds. Why would I want to expose myself to changing bond values due to interest rate changes, especially when I'm foregoing capital appreciation? It is perhaps true that the very conservative investor would want to forego capital appreciation for a portion of their investments, in favor of capital preservation... but it strikes me as too conservative, to a fault. I can withstand periodic market downturns, if, in the long term, I'm still going to do better in equities.

Depends on what is long term. One can certainly find 10 periods where even T-Bills out performed US equities, investment grade corporate bonds even more so. In normal times, bonds are much more safe than stocks, and not just in a "down the toilet" scenario. In normal times, if one wants to invest in bonds and minimize interest rate risk, one simple constructs a bond latter and hold to maturity. Clip the coupon every month and be "fat,dumb, and happy". Unfortunately, normal times don't exist right now.

I should also add preferred stock, half way between stock and equity on the capital structure, has its place in one's portfolio in normal times.


But alas, these are not normal times. So your 85-15% portfolio makes perfect sense.

Too Little Time
07-12-2016, 02:46 PM
There seems to be quite a lot of discussion on bonds these days—
There is a great deal of difference between the behavior of bonds and bond funds. There is also a difference between government and corporate bonds.

Norman Bernstein
07-12-2016, 03:25 PM
Depends on what is long term. One can certainly find 10 periods where even T-Bills out performed US equities, investment grade corporate bonds even more so.

In market downturns or recessions, sure... but trying to time those periods has been shown, over and over, to be a fool's errand.


In normal times, bonds are much more safe than stocks, and not just in a "down the toilet" scenario. In normal times, if one wants to invest in bonds and minimize interest rate risk, one simple constructs a bond latter and hold to maturity. Clip the coupon every month and be "fat,dumb, and happy". Unfortunately, normal times don't exist right now.

There are lots of different kinds of 'safety', interpreted differently, by different people. True long term investors don't consider equities to be 'unsafe', even though the paper losses at any given moment in time might look impressive (or depressing, depending on your point of view). Constructing a bond ladder and holding it to maturity would be 'very safe'.... buying nothing but T-Bills would be even safer (presuming Donald Trump isn't elected, since the US will NEVER default). In both cases, as the chart in post #47 shows, the likelihood of beating inflation isn't particularly good, compared to equities. Perfect safety might be T-bills.... perfect UN-safety would be junk bonds and penny stocks. Between those two extremes, there are many levels of 'safety'.


But alas, these are not normal times. So your 85-15% portfolio makes perfect sense.

I think it does, for me, although not everyone will agree, and not everyone's circumstances and risk tolerance are the same. I continue to believe in the 'miracle' of large cap stocks with strong brands, since history, I believe, shows them in a very favorable light. I am certainly not trying to beat the S&P500... I'm just trying to at least roughly match it, but with greater 'safety'. I honestly don't see how bonds fit in that picture. In fact, the 15% in fixed income that I own isn't even invested in traditional bonds... it's in a couple of fixed income mutual funds that invest in all sorts of corporate paper. The two funds like that, which I own, have pretty good records... but I feel as if I have to watch them fairly constantly, and consider dumping them if their managers lose the 'hot hand'. Check out PONDX and PBDDX.

Too Little Time
07-12-2016, 07:37 PM
Depends on what is long term. One can certainly find 10 periods where even T-Bills out performed US equities, investment grade corporate bonds even more so. In normal times, bonds are much more safe than stocks, and not just in a "down the toilet" scenario. In normal times, if one wants to invest in bonds and minimize interest rate risk, one simple constructs a bond latter and hold to maturity. Clip the coupon every month and be "fat,dumb, and happy". Unfortunately, normal times don't exist right now.

I should also add preferred stock, half way between stock and equity on the capital structure, has its place in one's portfolio in normal times.


But alas, these are not normal times. So your 85-15% portfolio makes perfect sense.
Safety usually means return of principal. While a bond ladder may do that, there are more effective ways.


It is amazing how people can make recommendations such as 85-15% with so little information. One would expect that any portfolio that covered expenses (in a very broad sense of the word) would be sufficient. Any portfolio that did not would be insufficient.

peb
07-13-2016, 07:43 AM
Safety usually means return of principal. While a bond ladder may do that, there are more effective ways.


It is amazing how people can make recommendations such as 85-15% with so little information. One would expect that any portfolio that covered expenses (in a very broad sense of the word) would be sufficient. Any portfolio that did not would be insufficient.



No one has recommended an 85-15 split on this thread. Learn to read. Norman has explained why he uses that portfolio. I have said it makes sense (for him). I have also cautioned people about the risks I see in investing in bonds at this time. no recommendations.



As for more effective ways for safety than a bond ladder. I dont deny, though I would love to hear a couple of examples from you. All I was saying was that a ladder was a way to minimize interest rate risk when investing in bonds.



It's easy to just throw darts at anyone's investment ideas.

skaraborgcraft
07-13-2016, 07:49 AM
When a 10 year bond is giving minus return on your investment, that tells me that central banks are admitting that the fiat currency they print is basically toilet paper....... bondapocalypse coming your way sooooooon......

peb
07-13-2016, 07:58 AM
When a 10 year bond is giving minus return on your investment, that tells me that central banks are admitting that the fiat currency they print is basically toilet paper....... bondapocalypse coming your way sooooooon......



It should be telling us that the various currencies will be worth more in 10 years than now. Ie, the market (read central banks) believes we are headed for a long period of deflation.



Now, I dont believe this, just saying that's what negative rates should mean.

Norman Bernstein
07-13-2016, 08:12 AM
It should be telling us that the various currencies will be worth more in 10 years than now. Ie, the market (read central banks) believes we are headed for a long period of deflation.

Now, I dont believe this, just saying that's what negative rates should mean.

It most certainly is an extraordinary circumstance. I was only half listening to a financial pundit on NPR yesterday, who was talking about the high demand for BOTH stocks, and bonds. I just can't figure out the latter, although the low yields in bonds certainly explain the demand for stocks. An investment letter I receive, courtesy of a friend, had this to say:


You thought I was blowing smoke,didn't you? As far back as my March 15 blog, I began preparing you forthe possibility that the headline U.S. stock indexes might register an all-timehigh before the end of 2016. (Back then, many prominent Wall Street guruswere still fixated on the risk of a catastrophic bear market.)

I later refined my forecast to suggest that the new highs couldoccur this summer. Well, here we are, with the S&P 500 index havingjust posted two record closing highs in a row. Brexit wasn't the end ofthe world, after all!

I certainly can't complain about the performance of equities since the 2008 recession... although talk about reaching new highs DOES get me slightly nervous. Perhaps the demand for low yield bonds is a reflection of expectations of a big market retreat.... I don't know.

For me, the key issue is this: when the next big pullback occurs (and it will, if history teaches us anything), how big will that retreat be... and would it make sense, for ME, to try to 'get defensive'? Most recessions are short, and since I'm still in my working years, I can certainly withstand a pullback, as long as there's a recovery on the horizon.

peb, how do YOU feel? Are you retired, or close to it?

Norman Bernstein
07-13-2016, 08:39 AM
Here's an anecdote that may be of interest.

About 6 months ago, I met the brother of a friend, who was visiting from his home in London (he's an ex-pat). The brother made a fortune working for Goldman Sachs in his younger years (I suspect he's only in his mid 50's now), and now is semi-retired. When I say he made a fortune, I really mean it; until recently, he owned a 150 foot yacht which regularly made trans-Atlantic crossings, and his family used to fly to wherever the hired captain brought it, for lengthy vacations. We're talking BIG money here.

The brother turned out to be a very nice guy, and we spent an hour or two discussing financial things. He is the investment manager for my university's endowment fund (he's also an alumnus), so I think it would be fair to say that he's got some impressive financial acumen.

In the course of discussion, he gave me some 'tips' that surprised me: he touted an REIT (real estate investment trust) paying a whopping 10% dividend annually. I was rather shocked that he'd make that sort of recommendation, quite frankly... I was expecting something a great deal more conservative than that.

A week or so later, in a meeting with my lawyer, I was touted again: my lawyer recommended yet another REIT, paying 9.4% in dividends.

Now, ordinarily, that kind of stock wouldn't interest me; it's decidedly contrary to my general philosophy about investing in large cap stocks with strong brands. However, I did look into these REIT's, and was surprised with what I saw. Contrary to expectations, what I found were shockingly low P/E ratios... under 11X.

So, I bit, for a small amount, and bought one (six months ago), and sure enough, it's paying those dividends, and it has even appreciated somewhat from when I bought it. A month ago, I bought two more REIT
s.... the three are paying 9.4%, 8.4%, and 5.6%, and all three have had capital appreciation (the one paying 5.6% is already up by 10% in price, in the past 6 months, in addition to the dividend).

Perhaps the brother is a lot more adventurous than I would ordinarily be.... and perhaps my lawyer is, as well... but I dipped into these REIT's for a modest amount (3.8% of my main portfolio) and am obviously pleased with the results.

However, I feel like I have to watch these, like a hawk... the goose that lays the golden egg won't keep laying those eggs forever :)

Too Little Time
07-13-2016, 10:20 AM
No one has recommended an 85-15 split on this thread. Learn to read. Norman has explained why he uses that portfolio. I have said it makes sense (for him). I have also cautioned people about the risks I see in investing in bonds at this time. no recommendations.

As for more effective ways for safety than a bond ladder. I dont deny, though I would love to hear a couple of examples from you. All I was saying was that a ladder was a way to minimize interest rate risk when investing in bonds.

It's easy to just throw darts at anyone's investment ideas.

I am currently approx 75% equities and 25% bonds.
85%/15% ratio for me
But alas, these are not normal times. So your 85-15% portfolio makes perfect sense.
Just trying to make sure that no one takes the discussion as a recommendation.

I don't give out recommendations, but I will give some thoughts.

One could invest 100% in equities. With the exception of some investments to provide the income required for the next 5 years. Those exceptions don't have to be bonds, dividend stocks, CDs or under the mattress, but they could be.

One could take the view that safety is important only in the long term - 20 years or more, and invest 100% in stocks.

Personally, the only necessary expenses I see in the near future are my grandkids going to college (starting in 4 years) and me paying. It is an insignificant amount. We intend for them to borrow as much as possible as it gives us a long window for repaying. So everything for me is long term. By chance I am over 97% in equities - we have some cash. But I have kids with investments. I am sure they have enough cash equivalents to help me out if necessary.

Norman Bernstein
07-13-2016, 10:35 AM
Personally, the only necessary expenses I see in the near future are my grandkids going to college (starting in 4 years) and me paying. It is an insignificant amount. We intend for them to borrow as much as possible as it gives us a long window for repaying.

The very LAST thing in the world I'd want, for my grandchildren, is to actually have to borrow money for a college education. OUR family ethic is to insure that every child gets a college education without ending up in debt. My father did it for my children, and I will do it for my grandchildren.

Too Little Time
07-13-2016, 11:32 AM
The very LAST thing in the world I'd want, for my grandchildren, is to actually have to borrow money for a college education. OUR family ethic is to insure that every child gets a college education without ending up in debt. My father did it for my children, and I will do it for my grandchildren.
Perhaps you could read a bit more carefully.

We will be paying for our grandkids to go to college. It makes more financial sense to have them borrow and us repay it. That is the type of financial planning people do.

peb
07-13-2016, 11:43 AM
I don't give out recommendations, but I will give some thoughts.

One could invest 100% in equities. With the exception of some investments to provide the income required for the next 5 years. Those exceptions don't have to be bonds, dividend stocks, CDs or under the mattress, but they could be.

One could take the view that safety is important only in the long term - 20 years or more, and invest 100% in stocks.



You had said "Safety usually means return of principal. While a bond ladder may do that, there are more effective ways.", so I was wondering what you thought those ways are. I was not looking for a recommendation, just more concrete ideas you might have. A five year investment horizon for stocks is not always a way to assure return of principal.

Very few people can afford to take the view that safety is only important over 20 years.

peb
07-13-2016, 11:47 AM
Perhaps you could read a bit more carefully.

We will be paying for our grandkids to go to college. It makes more financial sense to have them borrow and us repay it. That is the type of financial planning people do.

I hope you are doing some very sound estate planning. If they borrow the money and something happens to you, its their debt. I also hope you are assured that you will have the financial resources to pay off the debt. Again, if your personal finances don't work out, they are left holding the bag.

I don't give recommendations either, but I will say that I consider any "you borrow the money, I will pay it back" deals between friends or families very bad ideas. Everyone thinks their family situation is different and its a perfectly safe thing to do. Often times it does not work out.

Too Little Time
07-13-2016, 11:58 AM
You had said "Safety usually means return of principal. While a bond ladder may do that, there are more effective ways.", so I was wondering what you thought those ways are. I was not looking for a recommendation, just more concrete ideas you might have. A five year investment horizon for stocks is not always a way to assure return of principal.

Very few people can afford to take the view that safety is only important over 20 years.
I thought I gave you some of my ideas.

Most people start investing for retirement 30 years before retirement. Many live 30 years after retirement. So 20 years is a reasonable view.

I posted this link before: http://awealthofcommonsense.com/2015/03/whats-considered-long-term-in-the-stock-market/
5 years seems to be a reasonable time frame to consider. The risk of loss is low.

But safety depends on how long one has been investing and how one views the details. I have invested long enough that I am "playing with house money" to use a gambling term. My investments would need to fall 80-90% before I was down to what I have invested.

Norman Bernstein
07-13-2016, 12:16 PM
I don't give recommendations either, but I will say that I consider any "you borrow the money, I will pay it back" deals between friends or families very bad ideas.

It doesn't even make much economic sense, unless student loans are the only way the funds can be raised. Student loans aren't free, they include interest payments.

I freely acknowledge that most people couldn't possibly bear the costs of a college education directly out of savings or investment. My daughter graduated Tufts University in 2004, and at THAT time, tuition, fees, room and board were running about $55K annually.... very few people can afford to drop $220K over 4 years right out of their savings. Tufts, now, costs $68K per year.

Of course, there are far less expensive schools, and the prestige of a university doesn't always correlate with success in life (although, for better or for worse, students from prestigious universities do tend to do quite well).

So, for many, if not most, student loans are probably the ONLY way to fund a kid's college education, regardless of who pays them off.... but aspirationally, at least in my family, the objective has always been to cover the costs, and not leave the student in debt upon graduation. When I graduated, SWMBO and I were living in a third floor walk up, on about $4000/yr.... but at least I had NO debt... and I'm sure that made a HUGE difference in my life.

peb
07-13-2016, 12:19 PM
For me, the key issue is this: when the next big pullback occurs (and it will, if history teaches us anything), how big will that retreat be... and would it make sense, for ME, to try to 'get defensive'? Most recessions are short, and since I'm still in my working years, I can certainly withstand a pullback, as long as there's a recovery on the horizon.

peb, how do YOU feel? Are you retired, or close to it?

I am probably about 8-10 years from retirement. How do I feel? This is one of the strangest time to invest I recall. Artificially low interest rates have distorted almost all markets to the extent that it is really difficult to make any reasonable forecasts. Right now I do not believe any type of bear market is in the cards in the short term (next 6-12 months). Part of that has to do with the fact that we just hit new all time highs. Now, these highs are rather unimpressive considering that the market has been flat since march of 2015. But nevertheless, markets do not tend to roll over all at once (1987 being an exception, there always is one). A sudden drop after a new all-time high is not a common start to a bear market. Other reasons for this is that I do currently buy into the fact that valuations are somewhat justifiably high due to very low interest rates. Normally, I never buy into analysis which bases stock market valuations on interest rates, but as I said these are very strange times. And while I think bonds are risky at these prices, I do not see a rise in interest rates coming in the short term.

I see very big risks in the mid to long term. There is way to much debt overhang on much of the world economy. It will continue to drag economic growth down. On top of this, the monetary policies being conducted by central banks around the world is a grand experiment that has no precedent. It seems to me extremely risky. We already have countries where there is no market besides the central bank for their government bonds. That means all debt is being monetized. That has to be a recipe for disaster at some point. It cannot go on forever. If it does, it will at least assure a no-growth economy.

Also, there is way too much talk of protectionism in the air for my tastes. Normally I do not associate politics with economics that much. But this would definitely be a different matter. Tarriff wars will be very destructive to the economies involved. That is a big risk IMO since the talk is coming from across the political spectrum.

Norman Bernstein
07-13-2016, 12:36 PM
I am probably about 8-10 years from retirement. How do I feel? This is one of the strangest time to invest I recall. Artificially low interest rates have distorted almost all markets to the extent that it is really difficult to make any reasonable forecasts. Right now I do not believe any type of bear market is in the cards in the short term (next 6-12 months). Part of that has to do with the fact that we just hit new all time highs. Now, these highs are rather unimpressive considering that the market has been flat since march of 2015. But nevertheless, markets do not tend to roll over all at once (1987 being an exception, there always is one). A sudden drop after a new all-time high is not a common start to a bear market. Other reasons for this is that I do currently buy into the fact that valuations are somewhat justifiably high due to very low interest rates. Normally, I never buy into analysis which bases stock market valuations on interest rates, but as I said these are very strange times. And while I think bonds are risky at these prices, I do not see a rise in interest rates coming in the short term.

That all sounds reasonable... except that I DO think that the low interest rates are one of many legs that the equity markets are standing on.... but I could be wrong.


I see very big risks in the mid to long term. There is way to much debt overhang on much of the world economy. It will continue to drag economic growth down. On top of this, the monetary policies being conducted by central banks around the world is a grand experiment that has no precedent. It seems to me extremely risky. We already have countries where there is no market besides the central bank for their government bonds. That means all debt is being monetized.

In countries like that, sure... but we are nowhere near that point. Unfortunately, in this global economy, we're not insulated from the rest of the world, so yeah, it has an ominous portent for the US.



Also, there is way too much talk of protectionism in the air for my tastes. Normally I do not associate politics with economics that much. But this would definitely be a different matter. Tarriff wars will be very destructive to the economies involved. That is a big risk IMO since the talk is coming from across the political spectrum.

Another excellent reason to hope that Donald Trump loses. Of all the 'talkers' in the political scene, Trump is the only one who actually threatens a global trade war. And I agree, the results could spell disaster.

Incidentally, my British client has already mentioned that my services are now nearly 14% more expensive, to him, than before Brexit. Too bad that 14% isn't going into my pocket :)

peb
07-13-2016, 01:22 PM
Other legs, besides low interest rates, supporting the stock market right now?



That's a tough one. By any reasonable historical measure, valuations are very high. So its not fundamentals.



Earnings growth? Can't be that, as earnings have declined for 5 straight quarters.



Economic growth? That can be termed sporadic at best.



Stock buybacks? Most definitely, but that is also a factor of interest rates.



Technical? Surprisingly fairly strong, despite a 15 month gap between highs. Breadth of strength is fairly good.



Perhaps one can add the potential of an energy sector rebound. But that's rather unconvincing.



Other legs Norman?





BTW: On tho topic, it should go without saying we could all be very wrong.

Norman Bernstein
07-13-2016, 01:49 PM
Other legs, besides low interest rates, supporting the stock market right now?
Other legs Norman?

Well, you mentioned stock buybacks. I'd add in dividend yields. The poorest yielding dividend I'm getting, from the 18 stocks in my main account, is 2.2%.... but the top 5 are yielding better than 4.5%.... and the REIT's yield as much as 9.4% (only 1% of the portfolio).


BTW: On tho topic, it should go without saying we could all be very wrong.

Probably the 1) most true, and 2) most likely thing being said in this thread! :D

peb
07-13-2016, 02:08 PM
Well, you mentioned stock buybacks. I'd add in dividend yields. The poorest yielding dividend I'm getting, from the 18 stocks in my main account, is 2.2%.... but the top 5 are yielding better than 4.5%.... and the REIT's yield as much as 9.4% (only 1% of the portfolio).


Norman, the dividend yields supporting this market are a function of interest rates. 4.5% percent is historically not that high for a high-yield stock. I am not for sure which REITs you are talking about, but many of the top REITs are down in the 3% range. Some are in the 2-3% category. On that I own That is very low. Their price has been appreciated to the extent that their yield is quite poor (relative to their historical norms). One that I own, EQIX is up 29% YTD on price appreciation. It's yield has sunk to 1.8%.
I also own utility stocks that have gone up sharply in price, but their yields are now 2-3%.

Yes, anything paying dividends is up, and that has certainly been a large part of the post Feb-11 market recovery. But that is nothing but a side effect of very low interest rates. Since March, REITs and utilities and other dividend stocks have moved in lock step with bonds.

Norman Bernstein
07-13-2016, 02:23 PM
Norman, the dividend yields supporting this market are a function of interest rates. 4.5% percent is historically not that high for a high-yield stock.

Ahhh, but two of the REIT's, CMO and ACRE, are yielding 9.4% and 8.4%, respectively, and their P/E's are only around 11x or so.... I'd say that's pretty remarkable. The older REIT I own, WPC, yields 5.6%, but with a very high P/E of around 38... and that's the one I'm likely to sell off.... for a 10%+ capital gain over about 6 months. I'd say it treated me VERY well.

(CMO and ACRE are relatively new to me, but both have already had price gains, on top of the dividends).


I am not for sure which REITs you are talking about, but many of the top REITs are down in the 3% range.

I wouldn't own any of them... no compelling reason to buy them, with yields no better than any of my blue chip stocks.


Yes, anything paying dividends is up, and that has certainly been a large part of the post Feb-11 market recovery. But that is nothing but a side effect of very low interest rates. Since March, REITs and utilities and other dividend stocks have moved in lock step with bonds.

I wouldn't have noticed that, myself, since I really don't look at bonds, other than my two bond funds.

peb
07-13-2016, 03:02 PM
There are two types of REITS: 1) traditional REIT which hold physical properties and lease them out and 2) Mortgage REITS: which hold Mortgage Backed Securities. CMO is a M-Reit. If you look at the stock since 2014, the price has steadily gone down. If you look at its financials, http://financials.morningstar.com/ratios/r.html?t=CMO&region=usa&culture=en-US , you will see that it has a payout ratio of around 120%. If you look at balance sheet , http://financials.morningstar.com/balance-sheet/bs.html?t=CMO&region=usa&culture=en-US , you will see shareholder equity on a continual down trend. If you look at the cash flow, http://financials.morningstar.com/cash-flow/cf.html?t=CMO&region=usa&culture=en-US , you will see that the dividends payed out regularly exceed the net income.

Taken together, I would say there is a significant probably that much of its 10% dividend is actually a return-of-capital. Check the 1099 to be sure. But if I am right, your dividend yield is quite illusionary.

peb
07-13-2016, 03:05 PM
I wouldn't own any of them... no compelling reason to buy them, with yields no better than any of my blue chip stocks.


That makes sense. We each own various securities for different reasons. I own these two primarily for short term price appreciation purposes. They stood to gain quite a bit as more and more international rates went negative and they are high quality REITS (to reduce risk) and their price trend passed my models. I suppose I will hold them as long as the trend continues.

peb
07-13-2016, 03:06 PM
I wouldn't have noticed that, myself, since I really don't look at bonds, other than my two bond funds.

If you are watching those two REITS "like a hawk" you should be paying attention to bond prices. The correlation is quite high right now.

peb
07-13-2016, 03:14 PM
ACRE is also a Mortgage Reit. It does not look as questionable from a "first-glance" as CMO. It did suffer a pretty big financial hit in 2013, suffering a a 20% drop in book value on a per share basis. This may be why the stock is priced so low (ie the yield is priced so high). The market sometimes has a fairly long memory about these types of events with small cap companies. But at first glance, their cash flow and balance sheet seems ok. I have no idea about the quality of their mortgage securities, which of course is the main determinant factor in these types of companies.

Norman Bernstein
07-13-2016, 03:20 PM
There are two types of REITS: 1) traditional REIT which hold physical properties and lease them out and 2) Mortgage REITS: which hold Mortgage Backed Securities. CMO is a M-Reit. If you look at the stock since 2014, the price has steadily gone down. If you look at its financials, http://financials.morningstar.com/ratios/r.html?t=CMO&region=usa&culture=en-US , you will see that it has a payout ratio of around 120%. If you look at balance sheet , http://financials.morningstar.com/balance-sheet/bs.html?t=CMO&region=usa&culture=en-US , you will see shareholder equity on a continual down trend. If you look at the cash flow, http://financials.morningstar.com/cash-flow/cf.html?t=CMO&region=usa&culture=en-US , you will see that the dividends payed out regularly exceed the net income.

Taken together, I would say there is a significant probably that much of its 10% dividend is actually a return-of-capital. Check the 1099 to be sure.

It wouldn't matter to me, since I'm holding it in an IRA.

I'm quite obviously not into technical analysis, and I don't even read balance sheets with all that much comprehension. I was attracted to it by the tout from a particularly savvy investor (of the multiple millionaire kind), the fact that it's yield is exceptionally high, its share price was low relative to where it had been, and the fact that the research reports listed by Schwab, including Reuters, MarketEdge, and others, were showing either 'hold' or 'outperform', with none of them (Schwab carries 8 different ones) saying 'avoid'.

So far, so good. As I mentioned in a previous post, it's certainly NOT the kind of thing I'd probably hold long term. Until perhaps 8 months ago, I owned no REIT's at all... that's when I bought WPC, which has treated me VERY well (and which I just an hour ago sold, for a nice 10% capital gain, as well as a couple of dividend payouts at a 5.6% rate).

As for CMO and ACRE, yeah, they're 'fliers', for me... but I don't see any great reason to be concerned. Just one dividend payout will yield as much as a few of my lower-paying large cap stocks... and as long as I keep an eye on them, maybe I can stick with them for a while.

Chip-skiff
07-13-2016, 03:21 PM
Ahhh, but two of the REIT's, CMO and ACRE, are yielding 9.4% and 8.4%, respectively, and their P/E's are only around 11x or so.... I'd say that's pretty remarkable. The older REIT I own, WPC, yields 5.6%, but with a very high P/E of around 38... and that's the one I'm likely to sell off.... for a 10%+ capital gain over about 6 months. I'd say it treated me VERY well.

(CMO and ACRE are relatively new to me, but both have already had price gains, on top of the dividends).


Took a shot at CMO and ACRE. The dividends are quite high, but I can't see the price gains over more than a few months (these are all 5-year graphs):

https://lh3.googleusercontent.com/-cvlg_AhpjmU/V4af29hjjtI/AAAAAAAAK_E/owjnZ_OXgxgOHS47xOEDtKZ7EWsZLQStACCo/s910/CMO.jpg

Here's ACRE:

https://lh3.googleusercontent.com/--hysKeBTVzA/V4af0rib4UI/AAAAAAAAK-8/UYKqlRC8OC8SnYEcEHPDchdKKdXmfRhyACCo/s908/ACRE.jpg


Here they are plotted against the S & P 500:

https://lh3.googleusercontent.com/-HVwJATiUXQQ/V4af13N4fyI/AAAAAAAAK_A/0mzeb11jqWI89kYonmRLX1ZTJzQjB9hpACCo/s912/ACRES-CMO-S%2526P.jpg

CMO and CRE are both real-estate companies with listed stock. We invested in a different instrument, a private, closed-end trust that buys apartment complexes and commercial buildings: http://www.steadfastcompanies.com/ (http://www.steadfastcompanies.com/)

Chip-skiff
07-13-2016, 03:49 PM
WPC is different story: high dividends and increased NAV over five years:

https://lh3.googleusercontent.com/-kwfowGylOPI/V4an7-Ok53I/AAAAAAAAK_g/vKM_-IrtLeIw_o6jhXvuixAE6mafZ1SCQCCo/s897/WPC.jpg


At present it beats the S & P 500 for increased value over a five-year term:


https://lh3.googleusercontent.com/-R-Svfe7guL8/V4an8MQGWNI/AAAAAAAAK_c/eEnOUb4BqSwwRbWpqdU0kHTAj4VLbDK-ACCo/s899/WPC-S%2526P.jpg

Selling in 2013 at the peak would have been a great coup.

peb
07-13-2016, 03:59 PM
Norman, the 1099 idea was probably misleading and misplaced. I made it not to suggest any tax implication, but as a simple means for someone such as yourself to check if the dividends are from real income or from a reduction of shareholder equity. That's the risk I was trying to highlight. The concern is not related to technical analysis but the fundamentals.



A 10% dividend payout is worthless if the company is reducing its value by 5-10% per year. Since M-Reits solely trade paper, as opposed to investing in physical properties, its very easy for them to pay dividends beyond what their cash flow would support.



I have a relatively broad universe of types of investments I will make. Mortgage-Reits are one that I never consider. They are, IMO, a very poorly structured company, they should be Closed-End-Funds. But then the management fees would be cut by an order of magnitude and they would be limited in their leverage.



Check their percentage of stock owned by institutional investors. I bet it is very low. That will tell you what a broad spectrum of "savvy" investors think of them.

Norman Bernstein
07-13-2016, 04:07 PM
Norman, the 1099 idea was probably misleading and misplaced. I made it not to suggest any tax implication, but as a simple means for someone such as yourself to check if the dividends are from real income or from a reduction of shareholder equity. That's the risk I was trying to highlight. The concern is not related to technical analysis but the fundamentals.

I understand, and appreciate the tip.


A 10% dividend payout is worthless if the company is reducing its value by 5-10% per year.

Well, THAT might be a bit overdone. The value of the investment, to me, is what it returns... and since it's a 'flier' for me (an outlier from my usual investing pattern), I can keep track of what I've made from it, and dump it rapidly if it appears to be going south. As I pointed out, I sold WPC earlier this afternoon, and it has returned VERY nicely for me in the eight months or so, that I owned it. I wouldn't want to appear callous, but what happens to it now that I don't own it, is someone else's problem! :)


I have a relatively broad universe of types of investments I will make. Mortgage-Reits are one that I never consider. They are, IMO, a very poorly structured company, they should be Closed-End-Funds. But then the management fees would be cut by an order of magnitude and they would be limited in their leverage.

I appreciate the reasoning... but the reasoning is separate from the potential gains that might be made.


Check their percentage of stock owned by institutional investors. I bet it is very low. That will tell you what a broad spectrum of "savvy" investors think of them.

66%, for CMO. 64%, for ACRE.

45%, for WPC, which is the one I sold today.

I would never have considered a REIT, if it wasn't for the fact that an exceptionally 'savvy' investor put me on to them. Incidentally, the one that my friend's brother was touting has NOT done well, so even 'savvy' has its limits. I got the WPC tip from the investment newsletter that my friend shares with me. The other two, I found on my own, having been intrigued by the dividends.

Chip-skiff
07-13-2016, 04:56 PM
Trying to digest the above, I'm getting that one sort of REIT buys actual property and the other buys debt on property, securitized in some manner. The sources of income for the former would be rent or eventual sale of the property. The sources for the latter would be interest payments/fees and/or rental or sale of foreclosed property after a default.

Is that close to the mark?

Why did you sell WPC, Norman? You didn't hold it for long.

peb
07-13-2016, 05:41 PM
My scenario for capital reduction might be overdone, but that is what CMO is averaging over the last 4 years.

I am surprised of the level of institutional holders.

peb
07-13-2016, 05:46 PM
Trying to digest the above, I'm getting that one sort of REIT buys actual property and the other buys debt on property, securitized in some manner. The sources of income for the former would be rent or eventual sale of the property. The sources for the latter would be interest payments/fees and/or rental or sale of foreclosed property after a default.

Is that close to the mark?

Why did you sell WPC, Norman? You didn't hold it for long.

That is pretty much spot on. M-Reits hold various types of MBS. They should be structured as Funds, not Reits. They typically return high dividends, and their price stays relatively flat until a bump in the market comes along and they take a step-down. Never to recover.

Traditional REITs invest in real properties, with all of the safety and advantages you would expect. If there is a real-estate market hiccup, they may loose value in their NAV, but overtime it can be made up as real estate values go up.

Perhaps M-Reits are not as bad as I make them out to be (although I actually feel I have been kind to them, I really dislike them). But one should at least know what a company does from a basic level before buying its stock.

Norman Bernstein
07-13-2016, 05:47 PM
Why did you sell WPC, Norman? You didn't hold it for long.

I held it for eight months, and it was up by about 10% in stock price, and I captured two dividend payments.... it was a good return, but with a P/E ratio of 38 or so, I figured it was time to move on. There are a couple of blue chips I DON'T currently own, which I'm looking at.

This is very much contrary to MOST of my investing, which is a 'buy and hold forever' kind of thing.... the REITs are 'fliers' for me, I have been sucked in by the big dividend payouts, but regardless, they represent only 3% or less of my portfolio.

peb
07-13-2016, 06:24 PM
REITS average around 16% of my portfolios right now.

Chip-skiff
07-13-2016, 08:01 PM
I held it for eight months, and it was up by about 10% in stock price, and I captured two dividend payments.... it was a good return, but with a P/E ratio of 38 or so, I figured it was time to move on. There are a couple of blue chips I DON'T currently own, which I'm looking at.

This is very much contrary to MOST of my investing, which is a 'buy and hold forever' kind of thing.... the REITs are 'fliers' for me, I have been sucked in by the big dividend payouts, but regardless, they represent only 3% or less of my portfolio.

Right. Given your usual approach, I wondered if there was some red light flashing. I looked at the company website and it seems fairly solid. In today's market, 38 isn't a high P/E ratio. The lowest P/E stock I hold is Apple, at 10.78. CHD, which is solid as a rock, has a 32 P/E. Caterpillar is a 38. GE is 48.45. Netflix is 333.

Norman Bernstein
07-13-2016, 08:04 PM
Right. Given your usual approach, I wondered if there was some red light flashing. I looked at the company website and it seems fairly solid. In today's market, 38 isn't a high P/E ratio. The lowest P/E stock I hold is Apple, at 10.78. CHD, which is solid as a rock, has a 32 P/E. Caterpillar is a 38. GE is 48.45. Netflix is 333.

Perhaps not too high for a very solid blue chip... but vastly higher than I would be comfortable with, in an REIT. Toilet paper and toothpaste are not volatile commodities.... but real estate certainly has been.

peb
07-14-2016, 08:06 AM
Back to the op. Bond prices overseas can't go much lower (Germany sold 10 notes at negative rates yesterday).

Why? Because there is one type of government note that will not have a negative rate of interest: Cash. Investors and banks will actually start hoarding cash.

Now central banks will fight this, they gave already announced that they wont print anymore 500 Euro bills after 2017 (and will likely print as few as possible until then).



So the overseas bond market will quit going up soon. That will likely mean the US bond market will level off, or even go down a little.



Then what? I still say bonds are very risky tight now.

peb
07-14-2016, 08:12 AM
This tidbit from this mornings WSJ.



Since 1913, stocks have averaged a total return of 9.3%, BUT when interest rates are rising, they have averaged only 2.3%.



In periods of falling rates, bonds have averaged 3.6% total return during periods of falling rates. During periods of rising rates: 0.3%.



Not much to be optimistic about with those numbers.

Norman Bernstein
07-14-2016, 08:23 AM
This tidbit from this mornings WSJ.



Since 1913, stocks have averaged a total return of 9.3%, BUT when interest rates are rising, they have averaged only 2.3%.



In periods of falling rates, bonds have averaged 3.6% total return during periods of falling rates. During periods of rising rates: 0.3%.



Not much to be optimistic about with those numbers.

Interesting, yes... although I might quibble a bit, with the validity of looking at long term results over a period of over 100 years. The financial structure in this country is VASTLY different than what it was in 1913, so while there's certainly a lot to be learned from the past, it needs to be tempered with the way the world has changed, since then.

Even the 'golden' era, from the end of WWII, until the late 60's, is probably not very instructive or predictive of current economic behavior, since we are structurally different, today, than when I was a toddler.

Finally, it might be interesting to know whether those numbers reflect the inclusion of inflation, or not.

Too Little Time
07-14-2016, 08:30 AM
Since 1913, stocks have averaged a total return of 9.3%, BUT when interest rates are rising, they have averaged only 2.3%.

In periods of falling rates, bonds have averaged 3.6% total return during periods of falling rates. During periods of rising rates: 0.3%.

Not much to be optimistic about with those numbers.
You can sell poor investments to most people. They will even beg to get in on such deals.

There is a very narrow set of personal economic conditions where bonds are a better investment than stocks.

Too Little Time
07-14-2016, 08:38 AM
Interesting, yes... although I might quibble a bit, with the validity of looking at long term results over a period of over 100 years.

Stocks had risen more than bonds over every 30-year period from 1861, according to Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia, until the period ending in Sept 30[, 2011].
You can download data from this website and generate whatever statistics you think are important

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

peb
07-14-2016, 09:11 AM
You can sell poor investments to most people. They will even beg to get in on such deals.

There is a very narrow set of personal economic conditions where bonds are a better investment than stocks.



In normal times, I would disagree. I have parents and a mother -in-law who are at the stage if their lives where they desire safety and income. Who have enoughsuch that they wont go broke in their lives unless they encounter an sudden drop in principal.



Even now, whip I am sure their bond funds have appreciated quite a bit in the last year, loosing that appreciation would not be a problem.



But a 50-60% drop in the stock market? If their investments were all in equities it would be a big problem. Why would they risk that?



Lots of people in their 70s and 80s who are likely in the same boat.

Too Little Time
07-14-2016, 11:38 AM
But a 50-60% drop in the stock market? If their investments were all in equities it would be a big problem. Why would they risk that?
That is an interesting question. And I have an answer.

In the 90's some economists did an analysis of of investing over a 30 year period. They updated their book this year. I am just recalling my conclusions from their tables.

A person with a 50/50 mix of stocks and bonds had the best probability of not running out of assets over 30 years.

But a person with 100% stocks had the best probability of not running out of assets over 32 years. In fact, 68% of people with this allocation watched their assets grow over the time period.

peb
07-14-2016, 12:12 PM
No, that answer does not suffice. People in their 70s or 80s do not have 30 years. They have 5-10-15 years. They do not have time to recover from a 2000 or 2008 type of bear market. In fact, any recession may blow them out of the water. The average stock market decline over the recessions which occurred since WWII has been 35%.

Norman Bernstein
07-14-2016, 12:27 PM
But a 50-60% drop in the stock market?

For no particular reason, I've been looking at a Dow Jones Industrial Average graph over the past 30 years, and make the following observations:

Since 1985, there have been three significant market 'crashes', if you will.

The first, starting around 9/1/87 (the infamous 'October Crash') saw the DJI drop 30%.... and it recovered to its previous peak in 22 months.
The next, starting around 3/1/02, saw the DJI drop about 27%, and it recovered to its previous peak in 21 months.
The last, starting around 10/1/07, saw the DJI drop around 50%, and it took five years to recover to its previous level.

So, the question in my mind is this: what were the precipitating events that caused those crashes, how likely is another one, and how deep or long is it likely to be?

Since the slope of the market in this latest bull run (starting coincident with Obama's inauguration) is pretty steep, it does beg the question: when will the next bear market occur, what will cause it (presuming we could identify precipitating events), how long and deep will it be?

For the 87 crash, there are numerous theories as to what caused it (see http://historynewsnetwork.org/article/895), but whatever it was, it was essentially short term in nature. As it happened, I recovered far faster than the market in general... quite possibly because, even then, whatever securities I owned, were a lot like my favored stocks today.

The 2002 crash might have been just an 'exuberant' market correction due to overvaluation, although it was also the era of Enron, Worldcom, etc., which might have had a significant effect. Like the 87 crash, it was comparatively shallow and short term.

The 2007 crash, on the other hand, had far more recognizable causes: the massive over-leveraging of mortgages, and all that that entails... and this one was both long and VERY deep... five years, and 50%.

So, it's a dilemma for today's investors.... trying to judge how soon, long, or deep, the next recession will be.

This may be purely a hunch, but.... I think the next one is far more likely to be like 87 and 02, and NOT like 2007, whose causes were recognized, and for which people are more vigilant about.

peb
07-14-2016, 01:20 PM
Norman, are you getting your numbers for the 3 crashes from dividend adjusted returns? My graphs show that the Dow peaked on 1/14/2000 at 11722. It fell to 7533 on 10/9/2002. And did not recover until 9/28/2006.
Would not have been as bad with adjustments from dividends.

Likewise the crash from 2007 high was worse than you show.

Norman Bernstein
07-14-2016, 01:27 PM
Norman, are you getting your numbers for the 3 crashes from dividend adjusted returns? My graphs show that the Dow peaked on 1/14/2000 at 11722. It fell to 7533 on 10/9/2002. And did not recover until 9/28/2006.
Would not have been as bad with adjustments from dividends.

Likewise the crash from 2007 high was worse than you show.

You could be right, I simply took my numbers off the Yahoo Finance interactive graph... so there could be discrepancies, but I don't think the overall picture is all that different.

I was just contemplating what the strategy would be for me, in the event of a market drop, when I am fully retired. We've had the biblical 7 years of 'fat', and now, we have to consider the 'lean' years. Short term fluctuations in stock prices don't bother me at all, short of a recession, because most large caps will continue to pay the dividends, undiminished.... but my retirement plan calls for a mix of dividends, and capital gains... the dividends alone won't do it. If I wanted to conservatively draw, say, 4%, even in the lean years, the question is whether it gets made up in later years, after the recession is over.

peb
07-14-2016, 02:31 PM
Ok, I just spent 30 minutes doing a little spreadsheet to show that bonds are not always as good as stocks.
Lets assume that someone turned 65 and retired on Dec.31 1996. He had 600,000 in investment assets. He needed to draw $30,000/year to supplement his social security and pension. Lets also assume that inflation has held constant at 3%/year. Please note, I cherry picked the start date to be favorable to stocks, as the stock market doubled in the following 3 years. But it wasn't the beginning of the bull market, it was in the middle, so it still seems like a good date.
If all of his/her money was in the dow jones industrial average, assume he investment in the ETF DIA (I normally do this exercise with SP 500, but Norman used the DJIA, so I went with that). Calculated based on monthly returns.
He would be starting 2016 (his 20th year of retirement) with $418,000. Not too bad, he is now 84 years old. Probably feels good right now. But when he was 77 years old, and feeling healthy, he only had $346,000 left and the market had been tanking. People were preaching gloom, and doom. He was probably having some very sleepless nights. He was able to sleep OK, but not great, through the 2000-2002 crash since he retired at a very opportune time. His investements had fallen from a high of 944K at the end of 1999, but he still had left $560K at the bottom of that downturn.

Now, his neighbor, with the exact same financial condition and birthday, instead of investing in what was then the roaring bull market that no one expected to ever end, and instead he put all of is money in the Vanguard Intermediate Term Government Bond fund (oh how boring). He would be starting 2016, his 20th year of retirement with $459,000. Actually better than the stock market over 19 years. And in the 2000-2002 market crash, at the same bottom of the stock market, he had $686K and had slept confortably thought the entire dot com crash. But then the great recession hit and when his neighbor was sweating bullets and only had 346K left, he was going on vacation with his wife to Europe and not even concerned, as his portfolio was worth $625K.

So let us end all of this talk about how it is rare when stocks are always better than bonds for the long term.

peb
07-14-2016, 02:45 PM
Please note: the boring neighbor did get lucky since interest rates have been in a long-term decline, he saw much more capital appreciation than he should have.
If interest rates would have a constant 5% on 10 year treasuries (the long term average) and never changed. He would now only have 330K and would be withdrawing 52K this year. He might be nervous. But he still won't run out of money until the age of 91.

Norman Bernstein
07-14-2016, 02:51 PM
If all of his/her money was in the dow jones industrial average, assume he investment in the ETF DIA (I normally do this exercise with SP 500, but Norman used the DJIA, so I went with that). Calculated based on monthly returns.

I probably should have looked at the S&P500 instead of the DJIA, but I suspect they weren't' all THAT different over time.


So let us end all of this talk about how it is rare when stocks are always better than bonds for the long term.

Timing is everything, right? :):)

I suppose the objective is to accumulate so much in investments that it's possible to stay with a fair percentage in equities, without the downturns affecting one's ability to draw down without having to cut back, in the lean years. We should all be so lucky!

To tell you the truth, the questions about stocks versus bonds worry me a GREAT deal less, than figuring out what I'll need to spend in retirement. I'm not exactly sure what I'll be doing with myself, then. I'm in fairly good health, but my wife has Parkinsons, and although she still works, still takes care of the grandchildren once a week, and still drives, it's not hard to see that this won't continue, as the disease takes its toll. One effect of the disease is that we don't have to worry about the expense of travel... since she can't walk far distances, and a trip would be very taxing for her. I DO worry about being able to keep my boat, whose annual expenses eat up a lot of free cash.... and, of course, any professional care for her, in future years, will eat through a great deal of money. The late stages of the disease aren't pretty. If she (God forbid) has to be institutionalized, I'm pretty sure I can live comfortably on the cheap... but it certainly won't be the retirement I was once hoping for.

But, this is my cross to bear, and its' a responsibility I willingly took on.... "In sickness, and in health", as they say.

peb
07-14-2016, 02:53 PM
Norman, prayers for your wife (and you).

I think expenses are everyone's biggest concern for retirement.

peb
07-14-2016, 03:13 PM
Timing is everything, right?

Yes it is. Its why any test of financial situations based on historical data has to be used with caution. But TLTL had posted


There is a very narrow set of personal economic conditions where bonds are a better investment than stocks.
and followed it up with a 30 year scenario to justify the statement. This drives me crazy, as I have heard financial advisors say it time and time again over the last 30 years. It has always been demonstrably false. I am a stock investor. I also invest in bonds. None of it is easy or guaranteed. And there are no simple answers for anyone.

Norman Bernstein
07-14-2016, 03:26 PM
None of it is easy or guaranteed. And there are no simple answers for anyone.

Well, none of us are nearly as smart as TLT.... after all, he told us he got $50K to $100K of tax free income as a result of Obama's budget negotiations. I'm not nearly smart enough to know how that worked... and he's not saying.

How about you? :)

Norman Bernstein
07-14-2016, 03:49 PM
Norman, prayers for your wife (and you).

Thank you. Many of us have our crosses to bear, in life, and our approach isn't without some stress and disappointment.... but we're grateful for the positives in our life. We have two wonderful daughters, two incredible granddaughters, a pleasant home, and a nice boat to escape to when we need escaping. Both of us have had successful, fulfilling careers with many opportunities. Combine that with a happy extended family who all love one another and care for one another, and I'd say that we are truly blessed!

Too Little Time
07-14-2016, 03:51 PM
No, that answer does not suffice. People in their 70s or 80s do not have 30 years. They have 5-10-15 years. They do not have time to recover from a 2000 or 2008 type of bear market. In fact, any recession may blow them out of the water. The average stock market decline over the recessions which occurred since WWII has been 35%.
I gave the data that was available to me. If you are going to make any case for investing to meet one's needs, you have to start with their needs and their assets. Feel free to do some actual math rather than just make up stuff.

I will try to adjust what I said to conform to your requirements. The median life expectancy of a 75 year old is 12 more years. Had they started their retirement at age 57 the 30 year table in that book would have been appropriate and lasted until they died (if they died after 30/32 years as I mentioned). I think you can adjust that for the actual situation.

If I plan on living 15 years and have $500K in assets, I might consider placing it under my mattress and spending $33K/year. (I think that works out.) On the other hand I could just live off of my Social Security and let my $500K in assets augment my income as I felt necessary.


There is nothing to be gained by suggesting that those with modest assets cannot live in the manner of those with no assets.

peb
07-14-2016, 03:54 PM
Tlt, starting with one's assets and one's needs and dong so.e actual math.



That's what I did in my example above. It's something I actually have real world experience in.

Too Little Time
07-14-2016, 03:59 PM
Yes it is. Its why any test of financial situations based on historical data has to be used with caution. But TLTL had posted ...


and followed it up with a 30 year scenario to justify the statement. This drives me crazy, as I have heard financial advisors say it time and time again over the last 30 years. It has always been demonstrably false. I am a stock investor. I also invest in bonds. None of it is easy or guaranteed. And there are no simple answers for anyone.

Norman you are the fellow who first posted this 4% rule stuff. I don't believe it, but you do and I referred to the book that the author's of the 4% rule wrote. Clearly you did not read the book and just listened to financial advisors.

Too Little Time
07-14-2016, 04:44 PM
Tlt, starting with one's assets and one's needs and dong so.e actual math.

That's what I did in my example above. It's something I actually have real world experience in.
Actually you gave 2 examples. In the first, you started with a 65 year old man and ran it until he was 85. In the second you made claims for a group in the 70's and 80's.

You seem to have stopped the first example prior to both the death of the person and him running out of money. He seems to have sufficient money at the end of both scenarios to last the rest of his life. After all he is 85 and is expected to live 6 years longer. There is no need for me to even look for errors. My position has always been as long as your cash flow meets your expenses you did ok.

In the second one, the one I commented on, you just made claims. Without any support.

I will make the comment: Using a specific time frame in the past is a really poor way to model the future. Most people use a Monte Carlo simulation. And they get a range of possible outcomes. Using a fixed expense pattern is just as bad.

When I model the future, I use 10% ROI. It seems to be reasonable with respect to S&P500 performance. As for expenses, I am smart enough to adjust my spending to various market conditions. There is no reason for me to attempt to be more accurate.

peb
07-14-2016, 05:58 PM
Actually you gave 2 examples. In the first, you started with a 65 year old man and ran it until he was 85. In the second you made claims for a group in the 70's and 80's.


You seem to have stopped the first example prior to both the death of the person and him running out of money. He seems to have sufficient money at the end of both scenarios to last the rest of his life. After all he is 85 and is expected to live 6 years longer. There is no need for me to even look for errors. ....

In the second one, the one I commented on, you just made claims. Without any support.



I am not for sure what you are talking about w.r.t. an examples from the 70s-80s and other comments. In post 101, I gave two examples. Both starting in 1997 and going through 2015. Both someone with 600K in liquid assets who needs 30K income from those assets. One of them invested purely in stocks, the other purely in government bonds. I showed the same results, albeit in what was intended to be clever prose, as opposed to a simple to understand table.

I then added, in post 102 the scenario of someone just getting a 5% return yearly no risk to principle at all. This was to illustrate the effect that the long-term increasing bond market had on the returns from the second example in post 101. Nothing else.


My position has always been as long as your cash flow meets your expenses you did ok.


That was not the position I was addressing. Your position was "There is a very narrow set of personal economic conditions where bonds are a better investment than stocks. ". I was trying to disprove that statement. I feel 100% certain that I did. Its a dangerous statement to make, it needs to be refuted.

As to you position "as long as your cash flow meets your expenses you did ok.", who can argue. Its practically a tautology. As a point of information, none of the examples I provided met this condition. The cash flow was below the expenses in all of them.


I will make the comment: Using a specific time frame in the past is a really poor way to model the future. Most people use a Monte Carlo simulation. And they get a range of possible outcomes. Using a fixed expense pattern is just as bad.


Of course its a poor way to model the future. I said as much myself in post 105 : "Its why any test of financial situations based on historical data has to be used with caution. " But I was not trying to model anyone's future. I was trying to disprove a statement you made about investing. And its a statement that you made, I am sure, without using any Monte Carlo simulation.


When I model the future, I use 10% ROI. It seems to be reasonable with respect to S&P500 performance. As for expenses, I am smart enough to adjust my spending to various market conditions. There is no reason for me to attempt to be more accurate.

That is not reasonable assumption at all. Certainly one should not assume a 10% ROI right now. You can look at studies of stock market performance starting from valuation multiples we now see and you will get much lower returns. Also, as I posted earlier today, if interest rates start a long term climb, SP 500 returns will also be far less than 10%.

Too Little Time
07-14-2016, 09:21 PM
I am not for sure what you are talking about w.r.t. an examples from the 70s-80s and other comments.

In post 101, I gave two examples. Both starting in 1997 and going through 2015. Both someone with 600K in liquid assets who needs 30K income from those assets. One of them invested purely in stocks, the other purely in government bonds. I showed the same results, albeit in what was intended to be clever prose, as opposed to a simple to understand table.

I then added, in post 102 the scenario of someone just getting a 5% return yearly no risk to principle at all. This was to illustrate the effect that the long-term increasing bond market had on the returns from the second example in post 101. Nothing else.
Actually my comments that you seem to be critical of were prefaced by this comment of yours (I did misspell "their" as "the"):

No, that answer does not suffice. People in their 70s or 80s do not have 30 years. They have 5-10-15 years. They do not have time to recover from a 2000 or 2008 type of bear market. In fact, any recession may blow them out of the water. The average stock market decline over the recessions which occurred since WWII has been 35%.


That was not the position I was addressing. Your position was "There is a very narrow set of personal economic conditions where bonds are a better investment than stocks. ". I was trying to disprove that statement. I feel 100% certain that I did. Its a dangerous statement to make, it needs to be refuted.
I think it takes more than one example to refute my comment. I even gave a cute reference from a book that shows that planning for your wealth to last 30 years is different than planning for it to last 32 years.


As to you position "as long as your cash flow meets your expenses you did ok.", who can argue. Its practically a tautology. As a point of information, none of the examples I provided met this condition. The cash flow was below the expenses in all of them.
The economic principle is that of "risk v. consequences": Risk is relative to the consequences of not meeting your cash flow needs. If your last comment is true, then you failed to provide examples to support your points.



Of course its a poor way to model the future. I said as much myself in post 105 : "Its why any test of financial situations based on historical data has to be used with caution. " But I was not trying to model anyone's future. I was trying to disprove a statement you made about investing. And its a statement that you made, I am sure, without using any Monte Carlo simulation.
There are better ways and worse ways to build a model. You chose one of the worse. I referenced a book. The authors used Monte Carlo simulation to model the future. My comments in this thread have been drawn from their work. So my statements were based on proper simulations.


That is not reasonable assumption at all. Certainly one should not assume a 10% ROI right now. You can look at studies of stock market performance starting from valuation multiples we now see and you will get much lower returns. Also, as I posted earlier today, if interest rates start a long term climb, SP 500 returns will also be far less than 10%.
As I have said even idiots can match indexes. I posted a link that gave 20 & 30 year ROI for the S&P500. The expected return from that link is above 10% for 30 years and maybe 20 years. That makes it reasonable for me. If you can get a more accurate prediction of the future, use it. I cannot.

Norman Bernstein
07-15-2016, 07:13 AM
That is not reasonable assumption at all. Certainly one should not assume a 10% ROI right now.

I'ts not merely 'unreasonable'..... it's damned idiotic.

I wonder about the hypothetical guy, standing at the crest in January of 2008, thinking, 'Yeah, sure, the stock market returns 10% in the long term....'

...while he watches his next couple of years collapse in front of him.

If I had the time, I'd want to run a different simulation: a constant drawdown of 4% of the starting principal, which remains fixed in absolute dollars, over a suitably long time period.... say, 25 years (very ,very roughly, the length of an average retirement of an average person who lives to age 90, which isn't uncommon these days). 4% is commonly the number that many investment advisers suggest is a reasonable draw on retirement assets... but I presume they are referring to 4% of whatever the value of the retirement assets are, in a given year. If so, that would mean that the yield drops with the value of the assets... so, someone starting at 1/1/08 (and invested mostly in equities) would be getting only half of what they had planned for, at the bottom of the last recession, and few people I know could withstand a cut of 50% of income without 'feeling' it.

Of course, people feel differently about whether they want to leave behind any economic legacy for their kids and grand-kids. Many retirement calculators project a decline in assets over the retirement period... and some people feel that they should die peacefully in their sleep right at the point where their assets have dropped to nothing. However, nobody knows when their number is up; my own mother is doing well at age 92, despite having had a number of health problems throughout her life.... she just might live to 100 (Inshallah :) ) Fortunately, my Dad insured that she'd never out-live her assets.

I feel differently than many. I'd like to leave something of a legacy for my family after I pass. While it's true that I'm opposed to rescinding the estate tax (I don't believe that huge economic legacies should escape taxation), I agree with and approve a reasonably large exemption like we currently have, and I think it's a GOOD thing to be able to help later generations, just as my father helped me and my children (he didn't live long enough to see great-grandchildren).

So, the question is simple: how much, in assets, would be needed to maintain a given lifestyle, based on a fixed drawdown.... and considering the volatility of the market?

It is a question I've wrestled with, but mostly deferred as being unanswerable, definitively. I have some numbers in mind, but I've never run the simulations to see if the number might be confirmed.

(I should note that I've neglected the effects of inflation in this exercise, but it needs to be included, even if inflation is low. DE-flation is probably a bigger risk right now, I should think.)

peb
07-15-2016, 07:25 AM
Norman, in my simple test of post 101, I had a inflation adjusted draw down, not a percentage of the asset value.

TLTL, again, I could find severs other 10-20 periods of time where bonds outperformed stocks quite easily. I also chose an asset level an income requirement that are not that uncommon. Certainly not a very narrow set I economic circumstances. But I give up, you may have the last word.

Have a blessed day.

Norman Bernstein
07-15-2016, 07:35 AM
peb,

Before you bail out from some of this absurdity, here's another item to contemplate.

I had a meeting with my lawyer about 4 months ago, on a topic unrelated to any of this... but in the course of conversation, he suggested (and I'm not sure exactly, whether his suggestion was meant to be sarcastic, ironic, or sincere) that if it looks like Donald Trump will win, by October 15th, I should sell off ALL my equities and buy Treasury securities.

I laughed it off, at the time... but I don't find it so funny now.

I am indeed afraid that the market reaction to a Trump presidency could mean a significant negative event for the market. We all know that the market reacts emotionally, far sooner than it reacts to anything substantive. Perhaps the reaction might be short term... but if Trump does manage to do some of the damage that his policies might do, the bears could predominate.

Now, I COULD, in theory, take my lawyer's advice without any tax consequence, since something like 92% of my investments are in IRA's.... so I could indeed sell off all my equities with the click of a few buttons....

... the thought scares me.

Your thoughts?

peb
07-15-2016, 09:00 AM
peb,

Before you bail out from some of this absurdity, here's another item to contemplate.

I had a meeting with my lawyer about 4 months ago, on a topic unrelated to any of this... but in the course of conversation, he suggested (and I'm not sure exactly, whether his suggestion was meant to be sarcastic, ironic, or sincere) that if it looks like Donald Trump will win, by October 15th, I should sell off ALL my equities and buy Treasury securities.

I laughed it off, at the time... but I don't find it so funny now.

I am indeed afraid that the market reaction to a Trump presidency could mean a significant negative event for the market. We all know that the market reacts emotionally, far sooner than it reacts to anything substantive. Perhaps the reaction might be short term... but if Trump does manage to do some of the damage that his policies might do, the bears could predominate.

Now, I COULD, in theory, take my lawyer's advice without any tax consequence, since something like 92% of my investments are in IRA's.... so I could indeed sell off all my equities with the click of a few buttons....

... the thought scares me.

Your thoughts?

I cannot say I have not contemplated this. I would expect an initial selloff the first 2 or 3 days after a Trump election. The market tends to hate things that upset the current state of things (even if those things are not that great). I would guess that after that it will moderate, likely bounce back ala BREXIT reaction, and wait to see what actually happens. I just don't think politics has too many immediate effects on the markets.
If the anti-trade rhetoric is bad enough during the campaign, it may be worse. But I fully expect the anti-trade rhetoric to moderate, since both Hillary and Trump are taking similar positions. It just won't be used to score that many points.
All of this assumes the economy is slugging along about like it is now. If we have some type of economic downturn before the election, a Trump victory would not have a negative effect on the market.
You have to realize that there are two sides of Trump programs that the market will react to: one negative - trade, the other positive - taxes.

If, as I expect, Trump runs his transition team fairly well and names good people for cabinet positions of Commerce and Treasury, then things will be ok.

I am not a Trump supporter, but I do not expect any big downturn in the event of a Trump victory. After that, we will have to wait and see based on policies. There will be plenty of time to react.

I should add: there is not much to Hillary's proposals that the market will like.

Norman Bernstein
07-15-2016, 09:24 AM
I cannot say I have not contemplated this. I would expect an initial selloff the first 2 or 3 days after a Trump election. The market tends to hate things that upset the current state of things (even if those things are not that great). I would guess that after that it will moderate, likely bounce back ala BREXIT reaction, and wait to see what actually happens. I just don't think politics has too many immediate effects on the markets.
If the anti-trade rhetoric is bad enough during the campaign, it may be worse. But I fully expect the anti-trade rhetoric to moderate, since both Hillary and Trump are taking similar positions. It just won't be used to score that many points.
All of this assumes the economy is slugging along about like it is now. If we have some type of economic downturn before the election, a Trump victory would not have a negative effect on the market.
You have to realize that there are two sides of Trump programs that the market will react to: one negative - trade, the other positive - taxes.

If, as I expect, Trump runs his transition team fairly well and names good people for cabinet positions of Commerce and Treasury, then things will be ok.

I am not a Trump supporter, but I do not expect any big downturn in the event of a Trump victory. After that, we will have to wait and see based on policies. There will be plenty of time to react.

I understand your explanations and assumptions.... but I have to admit that I'm not quite as sanguine, as you might be, about it.


I should add: there is not much to Hillary's proposals that the market will like.

To the contrary, I think the market would rejoice, on the principle that Hillary offers absolutely NO radical ideas about the economy... the market will see that as a continuation of the status quo (and that doesn't strike me as such a bad thing, even though I'd like to see more regulation and reform in the SEC, on taxes, etc.)

Too Little Time
07-15-2016, 11:30 AM
I'ts not merely 'unreasonable'..... it's damned idiotic.

I wonder about the hypothetical guy, standing at the crest in January of 2008, thinking, 'Yeah, sure, the stock market returns 10% in the long term....'

...while he watches his next couple of years collapse in front of him.
I cannot help with a hypothetical guy. As I am a real guy. I shrugged my shoulders. The long term is the long term. I think I said my investments have produced an annual return of over 10%. And I am little more than an idiot investor.


If I had the time, I'd want to run a different simulation: a constant drawdown of 4% of the starting principal, which remains fixed in absolute dollars, over a suitably long time period.... say, 25 years (very ,very roughly, the length of an average retirement of an average person who lives to age 90, which isn't uncommon these days). 4% is commonly the number that many investment advisers suggest is a reasonable draw on retirement assets... but I presume they are referring to 4% of whatever the value of the retirement assets are, in a given year. If so, that would mean that the yield drops with the value of the assets... so, someone starting at 1/1/08 (and invested mostly in equities) would be getting only half of what they had planned for, at the bottom of the last recession, and few people I know could withstand a cut of 50% of income without 'feeling' it.

It is interesting how little you know. Several times in this thread I mentioned a book that was issued in the mid 90's with a revision issued this year. It is the source of the 4% number that you seem fond of attributing to "many investment advisors."

The authors looked at several simple investment plans - various but unchanging %'s that track a popular bond index with the remainder tracking a popular stock index, and a very simple spending strategy - a fixed percentage of the original assets indexed or not to a popular inflation index. They varied these parameters and the length of time. I don't want to spoil the book for you. But you should read the book, before you make presumptions.

(I don't pay too much attention to that particular book or the conclusions the authors draw. I am much more complex than their simple model.)

Too Little Time
07-15-2016, 11:38 AM
TLTL, again, I could find several other 10-20 year periods of time where bonds outperformed stocks quite easily. I also chose an asset level an income requirement that are not that uncommon. Certainly not a very narrow set of economic circumstances. But I give up, you may have the last word.
It is best that you give up.

peb
07-15-2016, 12:00 PM
I cannot help with a hypothetical guy. As I am a real guy. I shrugged my shoulders. The long term is the long term. I think I said my investments have produced an annual return of over 10%. And I am little more than an idiot investor.



It is interesting how little you know. Several times in this thread I mentioned a book that was issued in the mid 90's with a revision issued this year. It is the source of the 4% number that you seem fond of attributing to "many investment advisors."

The authors looked at several simple investment plans - various but unchanging %'s that track a popular bond index with the remainder tracking a popular stock index, and a very simple spending strategy - a fixed percentage of the original assets indexed or not to a popular inflation index. They varied these parameters and the length of time. I don't want to spoil the book for you. But you should read the book, before you make presumptions.

(I don't pay too much attention to that particular book or the conclusions the authors draw. I am much more complex than their simple model.)

Ok, Norman pulled me back in and now I read this, I can't help myself. Could you please do us all a favor and tell us the name of the book and its author? You have referenced this mythical book in posts 96,108,110,113,119. But for the life of me, I cannot find where you ever gave us the name. Even though you are now shouting at Norman that he should read this book!!!

If I missed the post where you have already done so, I apologize. But please fill me in.

Norman Bernstein
07-15-2016, 12:15 PM
It is interesting how little you know.

I'll ignore that, for just a moment.


Several times in this thread I mentioned a book that was issued in the mid 90's with a revision issued this year. It is the source of the 4% number that you seem fond of attributing to "many investment advisors."

No, it's not... I have never read this in any book. I HAVE heard it many times, however, in articles and interviews......

....but I frankly don't care what you presume to think or know about me, because you have repeatedly, over the years, either misinterpreted or distorted things I've said, or attributed things to me which I NEVER said. You've put more words in my mouth than I care to count... and frankly, I don't believe much of ANYTHING you have to say about financial things... in fact, I find MANY of your pronouncements to be utterly ludicrous.

....and the point at which I stopped listening to you was when it was clear that you were NEVER going to back up that silly claim about the "$50K to $100K of tax free income" that you claimed was a result of "Obama's budget negotiations." I think that's bullsh|t, I NEVER believed it, and since you've steadfastly refused to back it up, I have on reason to believe it.

Then again, why would I put any credence in the judgment of a guy who once said he had a 300 cholesterol count, but decided that he wasn't going to take his doctor's advice about medications?

From this point on, I think I'd rather engage in discussions with just peb... although we may be miles apart, politically, he is respectful, rational, and doesn't say ludicrous things which he cannot back up.

peb
07-15-2016, 12:40 PM
But Norman, Too Little Time has outperformed the market by 2-3% for 27 straight years. You cannot ignore someone with that type of record. It is not an exaggeration to say it would be like a rookie quarterback for the Patriots ignoring advice from Tom Brady. It is an amazing investment career.

Chip-skiff
07-15-2016, 12:42 PM
Gentlemen.

http://www.myfrenchlife.org/wp-content/uploads/2013/07/Alison-Eastaway-2.7.131.jpg

Might I suggest switching to de-caf?

Chip-skiff
07-15-2016, 12:47 PM
In any event, here's an article with an author. I like what he says, but many would disagree. Yet it's nearly always worth thinking about.

Bull Market Blues

Paul Krugman (http://www.nytimes.com/column/paul-krugman) JULY 15, 2016

Like most economists, I don’t usually have much to say about stocks. Stocks are even more susceptible than other markets to popular delusions and the madness of crowds, and stock prices generally have a lot less to do with the state of the economy or its future prospects than many people believe. As the economist Paul Samuelson put it (http://www.barrypopik.com/index.php/new_york_city/entry/wall_street_indexes_predicted_nine_out_of_the_last _five_recessions), “Wall Street indexes predicted nine out of the last five recessions.”

Still, we shouldn’t completely ignore stock prices. The fact that the major averages have lately been hitting new highs — the Dow has risen (https://fred.stlouisfed.org/series/DJIA) 177 percent from its low point in March 2009 — is newsworthy and noteworthy. What are those Wall Street indexes telling us?

The answer, I’d suggest, isn’t entirely positive. In fact, in some ways the stock market’s gains reflect economic weaknesses, not strengths. And understanding how that works may help us make sense of the troubling state our economy is in.

O.K., let’s start with the myth Samuelson was debunking, the claim that stock prices are the measure of the economy as a whole. That myth used to be popular on the political right, with prominent conservative economists publishing articles with titles like “Obama’s (http://www.wsj.com/articles/SB123629969453946717?mg=id-wsj)Radicalism (http://www.wsj.com/articles/SB123629969453946717?mg=id-wsj)Is (http://www.wsj.com/articles/SB123629969453946717?mg=id-wsj)Killing the Dow.”

(http://www.wsj.com/articles/SB123629969453946717?mg=id-wsj)Strange to say, however, we began hearing that line a lot less once stock prices turned around and began their huge surge — which started just six weeks after President Obama was inaugurated. (But polling suggests (http://www.publicpolicypolling.com/pdf/2015/PPP_Release_National_51116.pdf) that a majority of self-identified Republicans still haven’t noticed that surge, and believe that stocks have gone down in the Obama era.)

The truth, in any case, is that there are three big points of slippage between stock prices and the success of the economy in general. First, stock prices reflect profits, not overall incomes. Second, they also reflect the availability of other investment opportunities — or the lack thereof. Finally, the relationship between stock prices and real investment that expands the economy’s capacity has gotten very tenuous.

On the first point: We measure the economy’s success by the extent to which it generates rising incomes for the population. But stocks don’t reflect incomes in general; they only reflect the part of income that shows up as profits.

This wouldn’t matter if the share of profits (https://research.stlouisfed.org/datatrends/net/page21.php) in overall income were stable; but it isn’t. The share of profits in national income fluctuates, but it has been a lot higher in recent years than it was during the great stock surge of the late 1990s — that is, we’ve had a profits boom without a comparably large economic boom, making the relationship between profits and prosperity weak at best. We are not, in fact, partying like it’s 1999.
On the second point: When investors buy stocks, they’re buying a share of future profits. What that’s worth to them depends on what other options they have for converting money today into income tomorrow. And these days those options are pretty poor, with interest rates on long-term government bonds not only very low by historical standards but zero or negative once you adjust for inflation. So investors are willing to pay a lot for future income, hence high stock prices for any given level of profits.

But why are long-term interest rates so low? As I argued in my last column (http://www.nytimes.com/2016/07/11/opinion/cheap-money-talks.html), the answer is basically weakness in investment spending, despite low short-term interest rates, which suggests that those rates will have to stay low for a long time.

http://www.nytimes.com/2016/07/15/opinion/bull-market-blues.html?smprod=nytcore-ipad&smid=nytcore-ipad-share&_r=0

Norman Bernstein
07-15-2016, 12:48 PM
But Norman, Too Little Time has outperformed the market by 2-3% for 27 straight years. You cannot ignore someone with that type of record. It is not an exaggeration to say it would be like a rookie quarterback for the Patriots ignoring advice from Tom Brady. It is an amazing investment career.

No, I can't ignore that kind of investing achievement.

However, I CAN indeed decide not to believe it.

Of course, I'm devilishly handsome, have awesome talents, and am brilliant beyond all possible understanding.

I just don't expect anyone online to believe it, either.

Chip-skiff
07-15-2016, 12:55 PM
Of course, I'm devilishly handsome, have awesome talents, and am brilliant beyond all possible understanding.

You, too?

https://lh3.googleusercontent.com/-_wrzA_XqUvU/V4kjUGtcr6I/AAAAAAAALAQ/fyzQBbVnMqQ4BpXYGKYPa3X25GLzWv11gCCo/s231/woof2b.jpg

Norman Bernstein
07-15-2016, 01:10 PM
You, too?



Aren't we all? :):)

peb
07-15-2016, 05:48 PM
No, I can't ignore that kind of investing achievement.

However, I CAN indeed decide not to believe it.

Of course, I'm devilishly handsome, have awesome talents, and am brilliant beyond all possible understanding.

I just don't expect anyone online to believe it, either.

not believe a WBF contributor? I'll have to actually consider this option.

Too Little Time
07-15-2016, 05:59 PM
But Norman, Too Little Time has outperformed the market by 2-3% for 27 straight years.
My comment appears to be more alone the line of "Over the last 27 years or so I have out performed the 2 of the 3 major indexes by a couple percentage points every year. My performance is due to random events rather than my skill. I am not doing any better than an idiot." The indexes are not the market.



I'ts not merely 'unreasonable'..... it's damned idiotic.

I wonder about the hypothetical guy, standing at the crest in January of 2008, thinking, 'Yeah, sure, the stock market returns 10% in the long term....'

...while he watches his next couple of years collapse in front of him.
The internet is a wonderful tool. There is a S&P500 Total Return calculator and a Treasury Return Calculator.

https://dqydj.com/sp-500-return-calculator/
https://dqydj.com/treasury-return-calculator/

Since January 2008 the S&P500 has returned 7.34% (annualized). Treasury Bonds have returned 4.43%


Ok, Norman pulled me back in and now I read this, I can't help myself. Could you please do us all a favor and tell us the name of the book and its author? You have referenced this mythical book in posts 96,108,110,113,119. But for the life of me, I cannot find where you ever gave us the name. Even though you are now shouting at Norman that he should read this book!!!

If I missed the post where you have already done so, I apologize. But please fill me in.

I have no idea what the title is. I have no idea who the authors are. I read a review of the revised book (it had 2 important tables in it). And I was not able to find review again. I expected a Google search along the line "4% retirement rule" would find the book and author. But I was not that fortunate. But there are a lot of good papers discussing the rule.


No, it's not... I have never read this in any book. I HAVE heard it many times, however, in articles and interviews..
I never said you read it. I said you should read it. It is obvious you got your information second or third hand. That is why your comments about this rule/plan are in error.

peb
07-15-2016, 06:29 PM
So you beat the indexes by a couple of percentages points for 27 straight years. I take it you mean the SP 500, DJIA, Nasdaq Comp. Any reasonable person would interpret that as someone claiming to beat the market for 27 straight years.

After screaming at people to read this book, repeatingly referencing its conclusions, questioning Norman and myself as to why we won't read it, you now say you have no idea what the book is.

I do agree with one thing you have said on this thread: you are not a complex person.

Too Little Time
07-16-2016, 12:07 PM
So you beat the indexes by a couple of percentages points for 27 straight years. I take it you mean the SP 500, DJIA, Nasdaq Comp. Any reasonable person would interpret that as someone claiming to beat the market for 27 straight years.
I thought that my comment meant that I looked at the starting point and the ending point and did some math to determine how I compared. You seem to think I looked every year.

You do realize that the DJIA only covers 30 stocks. The others include a lot of bad stocks. I gave you a couple lists that showed good stocks that get overshadowed by the poor stocks. There were a number of articles recently that claimed that only 5 stocks were driving the NASDAQ. You seem to confuse what the indices mean for an investor.


After screaming at people to read this book, repeatingly referencing its conclusions, questioning Norman and myself as to why we won't read it, you now say you have no idea what the book is.
As I said there is a lot of material on the internet that references the idea. Some in not so glowing manners. Me knowing the title is not necessary.

It is clear neither you nor Norman has any concept of the portfolio or spending patter the author of the 4% rule requires.

Chip-skiff
07-16-2016, 02:00 PM
There were a number of articles recently that claimed that only 5 stocks were driving the NASDAQ.

Which five stocks? Do you recall any titles, or could you provide a link?

Chip-skiff
07-16-2016, 02:18 PM
Found one such article. Somewhat out of date. The actual YTD record for AAPL is from a start of $105.26 to Friday's close at $98.78, which is not a 20% gain.

https://lh3.googleusercontent.com/-Cud8fyfsrMY/V4qH52Pv8vI/AAAAAAAALAw/Ramq_Ad3UZQ5EPRM4iRV4qWc0wu9d2AKgCCo/s564/n.jpg

http://www.cnbc.com/2015/02/24/these-five-stocks-are-in-the-nasdaq-drivers-seat.html

peb
07-16-2016, 04:52 PM
I thought that my comment meant that I looked at the starting point and the ending point and did some math to determine how I compared. You seem to think I looked every year.


No, that is not what you wrote. You said "Over the last 27 years or so I have out performed the 2 of the 3 major indexes by a couple percentage points every year". Which means each year, the last straight 27 years, you beat the market by a couple of points.



As I said there is a lot of material on the internet that references the idea. Some in not so glowing manners. Me knowing the title is not necessary.

It is clear neither you nor Norman has any concept of the portfolio or spending patter the author of the 4% rule requires.


BS, you were critical of us for not being will to read the book, you continually referenced the book. And you don't even know the title.

As for the 4% rule, you might notice that I have never said I believed in it or not. Norman made one reference to it in this thread and you have been going on and on about how your mythical book disproves it. I do understand investing, portfolio management and needing income from a portfolio. Its what I do. I know the 4% rule, ie one can withdraw 4% annually and never run out of money, does not work in the real world. Its really a worthless rule, I agree. But not because of the reasons you site. Because most people in their retirement HAVE to draw from their principal in order to meet living expenses. Hence in my examples I gave you, the withdrawal rate was greater than the income. What a person has to do is figure out how much he can regularly withdraw and not run out of money, with a very safe margin of error. That's the real world.

Let me tell you what is clear to me. Norman and I fight and fight over politics on this forum. But he has sound ideas when it comes to investing. His way of investing is not my way, but for many years we have had dialogues on investing and he always has input worth listening to. A lot of people would do well following his strategies.

You? Its clear to me you like to argue. Its clear to me you have a tough time making arguments that can be factually supported. Its clear to me you type faster than you think.

BTW, all characteristics shared with Norman shares when it comes to politics :)

Norman Bernstein
07-16-2016, 06:20 PM
As for the 4% rule, you might notice that I have never said I believed in it or not. Norman made one reference to it in this thread and you have been going on and on about how your mythical book disproves it. I do understand investing, portfolio management and needing income from a portfolio. Its what I do. I know the 4% rule, ie one can withdraw 4% annually and never run out of money, does not work in the real world. Its really a worthless rule, I agree.

First thing: I never read about the so-called 4% rule, in a book.... but I have read it in various articles, and have heard people speak of it. Second, I wouldn't consider it worthless, at all... for someone deeply invested, SOME number will represent an appropriate rate of drawdown which, when taken in both good times, and bad, will be unlikely to deplete one's assets earlier than desired... we can quibble about the number, if you like. Third, nobody says that any fixed percentage will meet a persons' needs, nor does it say that life circumstances will not, at some point along the path cause a person to have to change their strategy; a catastrophic illness, being the most likely cause, or an unanticipated requirement to go into some sort of managed care facility. Fourth, when I DO retire, I AM going to have to figure out how much I'll draw down to meet my living expenses, and hopefully maintain my standard of living.... and most likely, it will probably be around 4%.


Let me tell you what is clear to me. Norman and I fight and fight over politics on this forum. But he has sound ideas when it comes to investing. His way of investing is not my way, but for many years we have had dialogues on investing and he always has input worth listening to. A lot of people would do well following his strategies.

Thank you.


You? Its clear to me you like to argue. Its clear to me you have a tough time making arguments that can be factually supported. Its clear to me you type faster than you think.

BTW, all characteristics shared with Norman shares when it comes to politics :)

peb, the only problem here is that while I've convinced you of my sound investing strategies, I haven't been quite as successful with my political persuasions. Sometimes, it's tougher for some people to learn some lessons, and easy to learn others. But I haven't given up hope! :D

Too Little Time
07-17-2016, 09:22 AM
No, that is not what you wrote. You said "Over the last 27 years or so I have out performed the 2 of the 3 major indexes by a couple percentage points every year". Which means each year, the last straight 27 years, you beat the market by a couple of points.
Actually it is what I wrote. You seem to insist on your interpretation rather than mine. That appears to be your issue.


BS, you were critical of us for not being will to read the book, you continually referenced the book. And you don't even know the title.
I was critical toward Norman for mentioning this 4% rule not only here but many times in the past. Then admitting that all he knows about it is that financial advisors recommend it. It appears neither he nor you can find any book that covers the matter. You cannot even find the many posts on the internet.

I will explain the history of the 4% rule. Bill Bengen came up with this idea in the '80s. In the 90's a number of people examined it and a couple guys from Trinity University wrote a book. Benegen wrote a book. A bunch of other people wrote books. I looked at the idea and discarded it. I saw a review of a book this year - one of many covering the 4% rule. I am not going to give a title of the book or author because I might give the wrong reference. That never works out. I recently looked at the internet and found many people who raised the same issues. I also found that financial advisors (whatever that means) are being more creative in plans that look like they are based on the the 4% rule. It is reasonable to believe that the comments I have made are accurate. And that the 4% rule should never be considered.

Benegen's book is priced at $65. I am not about to buy it to see if it the correct book. Certainly, not to support a point on the internet.

Both you and Norman seem to be going on about the book. It would end if you would do a search of the internet rather than trying to beat on me.


As for the 4% rule, you might notice that I have never said I believed in it or not. Norman made one reference to it in this thread and you have been going on and on about how your mythical book disproves it. I do understand investing, portfolio management and needing income from a portfolio. Its what I do. I know the 4% rule, ie one can withdraw 4% annually and never run out of money, does not work in the real world. Its really a worthless rule, I agree. But not because of the reasons you site. Because most people in their retirement HAVE to draw from their principal in order to meet living expenses. Hence in my examples I gave you, the withdrawal rate was greater than the income. What a person has to do is figure out how much he can regularly withdraw and not run out of money, with a very safe margin of error. That's the real world.
I don't recall you objecting to Norman's mention of the 4% rule in prior threads. That and your current comment would indicate that you don't know the rule very well. You might observe that your example using 5% is identical to the 4% rule except that it has less chance of success.

Your use of "regularly withdraw" indicates that you lack experience with an income that varies from year to year. People who have incomes that vary would never consider regular withdrawals. They tend to increase spending in good years and decrease spending in poor years.

You seem to use a strange definition of income. Investments are not divided into principle and income. Investments produce income. A withdrawal of principle is income to the recipient.

Too Little Time
07-17-2016, 12:14 PM
I know the 4% rule, ie one can withdraw 4% annually and never run out of money, does not work in the real world. Its really a worthless rule, I agree.
Had you known the 4% rule you would not sound so foolish. It does work in the real world. At least, close enough for planning purposes. It offers a lot of insight.

If one looks at three of the situations one finds:

With 100/0% (bonds/stocks) it is almost certain one will run out of money within 30 years at a 4% withdrawal rate.

With 50%/50% it is almost certain one will not run out of money within 30 years at a 4% withdrawal rate.

With 0%/100% there is a 32% chance of running out of money within 30 years at a 4% withdrawal rate.

On the other hand:

With 50%/50% there is a slight chance that one will improve one's financial position by doubling their wealth over the 30 years.

With 0%/100% there is a 50% chance of improving one's financial position 9 fold over 30 years.

There is a trade off between safety - an almost certain guarantee of not running out of money over a time period, and attempting to improve one's financial assets.

Further the 4% rule covers both different time periods and rates of withdrawal. One can look at the results for these variations and determine what trade off one wants to accept.

My objection is not to the rule. My objection is to misinformation you and Norman seem to promote.

Chip-skiff
07-17-2016, 01:09 PM
Located a new version of the fabled book:

https://images-na.ssl-images-amazon.com/images/I/41zOjAamDRL.jpg

Since it costs $65.00, I assume this is the work in question. Not much bother to find it on Amazon.com.

One observation: some of the comments show a tendency to claim special knowledge without sharing it, to exclude others because they aren't worthy— not real investors— or have ideas that differ from one's own. Claiming privileged knowledge or access while not revealing the source or sharing the details is a common tactic for seizing authority (e.g. Sen. Joseph McCarthy: I have here a list. . .)

I've been making an effort to quote and link articles, copy graphs, and make my research and conclusions (such as they may be) common property. None of this is proprietary stuff: if you have a better idea, it won't hurt to share it.

Norman Bernstein
07-17-2016, 01:28 PM
One observation: some of the comments show a tendency to claim special knowledge without sharing it, to exclude others because they aren't worthy— not real investors— or have ideas that differ from one's own. Claiming privileged knowledge or access while not revealing the source or sharing the details...

...which is essentially why I pay no attention to what TLT has to say. Not only has he pulled that particularly sleazy trick in the past, but he's also uttered some monumentally STUPID things over the past few years.

I might change my mind, when he tells is all about how he got "$50K to $100K in tax free income as a result of Obama's budget negotiations."

I'm not going to hold my breath, though. I think it's all a ridiculous lie.

Too Little Time
07-19-2016, 06:23 PM
Located a new version of the fabled book:

Since it costs $65.00, I assume this is the work in question. Not much bother to find it on Amazon.com.

One observation: some of the comments show a tendency to claim special knowledge without sharing it, to exclude others because they aren't worthy— not real investors— or have ideas that differ from one's own. Claiming privileged knowledge or access while not revealing the source or sharing the details is a common tactic for seizing authority (e.g. Sen. Joseph McCarthy: I have here a list. . .)

I've been making an effort to quote and link articles, copy graphs, and make my research and conclusions (such as they may be) common property. None of this is proprietary stuff: if you have a better idea, it won't hurt to share it.
I guess you can purchase the book and determine if the tables I have referenced are in that book. If so, please post them. Others will appreciate that. If not, buy another book. (There are a number of locations on the internet that post similar tables.)

I can find a number of commentaries on the internet that make similar observations to what I made. They usually don't post links to their sources. The audience seems to know what the 4% rule is. They also seem to have more familiarity than to have heard investment advisors recommend the 4% rule.

Too Little Time
07-19-2016, 06:25 PM
I might change my mind, when he tells is all about how he got "$50K to $100K in tax free income as a result of Obama's budget negotiations."

That idea saves me $15-35K/year in taxes. I don't like you. Why would I want to save you that much money?

Chip-skiff
07-19-2016, 06:50 PM
If hemorrhoids could talk, we now have a pretty good idea what they would say.

:d :d :d

Norman Bernstein
07-19-2016, 06:54 PM
That idea saves me $15-35K/year in taxes. I don't like you. Why would I want to save you that much money?


Hahaha... So, the numbers have changed now, huh? It's no longer '$50K to $100K'?

So so much for your credibility. Well, actually, it doesn't make any difference. You lost your credibility, the very first time you made the claim, and then refused to back it up.

Now back to our regularly scheduled program.

Too Little Time
07-20-2016, 11:56 AM
Hahaha... So, the numbers have changed now, huh? It's no longer '$50K to $100K'?
I get both the income and tax break. You might only get the tax break.

You seem to not understand the difference between income and taxes on that income. But then you seem to lack understanding on so many issues.

Norman Bernstein
07-20-2016, 12:39 PM
I get both the income and tax break. You might only get the tax break.

You seem to not understand the difference between income and taxes on that income. But then you seem to lack understanding on so many issues.

Ohhh, I get it, all right. Originally, it was "$50K to $100K in tax free income, as a result of Obama's budget negotiations."

NOW, it's "That idea saves me $15-35K/year in taxes."

Suddenly, instead of 'tax free income', it has now morphed into a tax savings.

I wonder what it will be next month? :):):)

Too Little Time
07-20-2016, 07:27 PM
Ohhh, I get it, all right. Originally, it was "$50K to $100K in tax free income, as a result of Obama's budget negotiations."

NOW, it's "That idea saves me $15-35K/year in taxes."

Suddenly, instead of 'tax free income', it has now morphed into a tax savings.

I wonder what it will be next month? :):):)
You do have a reading comprehension problem.