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Re: Asset based or dividend based
Old 12-24-2003, 10:48 AM   #1
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Re: Asset based or dividend based

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Perhaps I am jaded, because of my experience in the good old days, but buying long term bonds now is buying at the top of the mkt. , and the extra yield that you can get would look puny indeed if we even get half of the inflation that we got then.
Good point, Jarhead. One thing I'm having trouble getting a feel for is how long term TIPS prices and yields will change as market conditions change. Would one be buying TIPS at the top now? If five years from now we had conditions similar to 1980, what would TIPS yields do? And what accounts for the drop in TIPS yields over the past 3 or 4 years? Why were they yielding 4.3% in 2000, and only 2.3% now? Is it because their yields experience the same fate as regular bonds? If it is, why would that be so when they are essentially immune from the impact of inflation?
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Re: Asset based or dividend based
Old 12-24-2003, 11:11 AM   #2
 
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Re: Asset based or dividend based

Even though I am loaded up with long term bonds, I
won't be buying any more now. Fortunately, I have a bunch of pretty safe bonds at pretty high yields and do
not anticipate having to sell them ((forever money).
Most are callable at some point, but I will worry about that if it happens. Also, if I find myself awash in cash
(unlikely), I will look for something very conservative
and a bit more liquid. I am assuming inflation and higher
rates will drive down my bond values, but I will still
keep getting those checks each month and that was
really what I wanted. If all goes as planned
(when did that ever happen?) I will be heavily into
real estate by the end of 2004. So. my "no stocks"
approach to investing will continue.

John Galt
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Re: Asset based or dividend based
Old 12-24-2003, 04:12 PM   #3
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Re: Asset based or dividend based

Bob Smith:

Your inability to wrap your head around how tips would react versus regular same length bonds is a question that nobody can answer long term.
After discussing that point, and a number of others with the Vanguard people, and also Fidelity, there hasn"t been enough of a track record to have any degree of accuracy.
However, beings there are two components in the total return, yield and inflation return, it appears to me that the yield has dropped since coming out a few years back is there has been during that period of time, a worry more about deflation than inflation.
Regarding buying tips at this point being the top of the cycle, I think it is probably close to that. But there is the inflation factor that would give you total return that would, especially if inflation gets humming, give one a large leg up on non adjusted funds.
Also, remember that if you buy a fund rather than individual bonds, the total return would be adjusted by buying new bonds on a continual basis. (Replacing older bonds.
I have never been a fan of bonds. (Beings we have been in a 20 year bull mkt. , its hard to admit that. But finding I was in a position where my stock portion of my retirement kitty reached about 85% a few weeks ago, and considering my age, figured I had best do some heavy duty reallocation. (It took 4 years to get back to even after the bad old bear took hold). (I hate the dry heaves).
My choice then was narrowed down to Tips, Short term corporates, or money mkt. Although the yield on the tips has dwindled down, I feel comfortable with them as part of my choice. Short term corporates should be able to handle most any situation without much change. (If the yields go back up on tips , I can always invade my short term bonds and add to that position.
I think we are in for a pretty tough environment for a while, and preservation of capital has jumped to the forefront of my thinking. Regards, Jarhead
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Re: Asset based or dividend based
Old 12-24-2003, 04:21 PM   #4
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Re: Asset based or dividend based

FWIW, Vanguard estimates that their TIPS fund with an average maturity of 11.4 years will behave more like a treasury fund with an average duration of 6 years in terms of interest rate risk (i.e., TIPS will be significantly less sensitive to interest changes due to their inflation index component).
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Re: Asset based or dividend based
Old 12-24-2003, 05:38 PM   #5
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Re: Asset based or dividend based

I believe that TIPS respond more to REAL interest rates rather than nominal interest rates, while nominal bonds (like Treasuries) respond more to nominal rates rather than real rates.

So, if inflation starts rearing its ugly head, but real interest rates don't change all that much, TIPS should be okay, as compared with similar maturity Treasuries.

Although, I could be wrong.

- Alec
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Re: Asset based or dividend based
Old 12-25-2003, 05:59 AM   #6
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Re: Asset based or dividend based

Alec hit the nail on the head. I think that the reason why TIPs were yielding around 4% back in 2000 is that they had to compete with the inflated and unsustainable returns being delivered at the time by stocks.

This logic suggests that the thing that would cause the yield on TIPs to go back up (thereby causing the current market price to drop) would be another boom in the stock market. I don't expect stocks to boom again the way they did in the late 1990's, but even if that happened, a person holding both TIPs and stocks would do OK in terms of their overall portfolio performance.

If a person chooses to be very conservative and invest a large part of their assets in TIPs, they could protect against a price decline in TIPs by holding some TIPs of a shorter term, such as 5 years. If the long term rates went up, they could sell some of their shorter term TIPs and lock in the higher rates on long term ones.
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Re: Asset based or dividend based
Old 12-25-2003, 02:01 PM   #7
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Re: Asset based or dividend based

Starting in 1994, purchased Moody's now Mergent's Handbook of Dividend Achievers every couple of years and purchased dividend stocks listed by Moneypaper as having good DRIP Plans and gradually built a taxable income stream equal to 50% of my small fixed pension using about 15% of total assets - the bulk was balanced index funds in IRA.

Nowadays my 85% balanced index is down to 72-3% due to the runup in the market - partially also the interest sensitivity of my utilities.

I'm still old school enough to keep a toe in the dividend plus div. growth camp - call them hobby stocks(con ed, exon mobil, jp morgan, national fuel, SBC, new plan, etc.) - Ben Graham's page 325 of the fourth edition - 'the middle course.'

So next year - plan to bring balanced indexes back toward 80% by selling DRIPS and possibly trying some new ones - focusing on div. growth since div. yields are so low.

The VG target retirement series will be given a hard look. ER'd 1993 age 49.
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Re: Asset based or dividend based
Old 12-26-2003, 06:03 AM   #8
 
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Re: Asset based or dividend based

Good morning unclemick. As you know I also retired
in 1993 at age 49. Interesting.

You have mentioned "hobby stocks" several times.
I can understand this. A good friend (retired dentist)
plays around with a very small part of his portfolio in
the same way. It wouldn't appeal to me. I agonize
over my money and where to put it. But, once I have made a decision, I like to forget about it and go on to
something else. Events sometimes force me to
revisit a decision, but otherwise I like to leave things
alone.

John Galt
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Re: Asset based or dividend based
Old 12-26-2003, 03:07 PM   #9
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Re: Asset based or dividend based

Other than pure personal preference, there are some facts that bear on the question of asset based vs. dividend based retirement portfolios. First, I'll state that my preference is for a dividend based program. It is an historical fact that dividends are much less volatile than asset prices. Since volatility is the enemy of a portfolio subject to withdrawals, this alone is a good argument for dividend based allocations.

Someone (I think Jarhead) mentioned the danger of reaching for yield. This is very true, but a separate problem. Say you have USD 1 million. The real yield on the fixed part, in TIPs, will be slightly over 2.25%. You can expect roughly the same on the dividend paying part, if you stay away from high yielding but risky situations- e.g. tobaccos. One would also need to avoid techs and other low current yield stocks; which will bias the resulting portfolio. The real yield on the strongest REITs will probably be better, so let’s assume 5% there. If we go with $250000 in REITs @5%, $250,000 in stocks at 2.25%, and $500,000 in TIPs at 2.25%, we will have $11.250 from REITs, $5,625 from stocks, and #12,500 from TIPs, giving $29,375 per year. Would this be safe to consume? Very probably yes, if the REITs and stocks were well chosen. Could more current income be squeezed out of a 1 Mill portfolio? Probably yes, but we would have to be very concerned with quality.

Would a well diversified asset allocation/drawdown style plan support withdrawals of $29.375 per year? Yes, if we believe what Firecalc tells us. In fact, it should support $40,000 per year, according to many inputs.

So maybe it is a situation where neither approach is clearly best.

Note: I spell checked this with Word, and then cut and pasted into Notepad, then cut from Notepad and pasted to this site. I don't know why the codes that cause garbage in the formatted copy persisted.

Mikey
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Re: Asset based or dividend based
Old 12-26-2003, 06:26 PM   #10
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Re: Asset based or dividend based

Mikey, I used to go through the same routine with MS Word in order to access spell check. A few months back I tripped upon a little spell check program that integrates into Internet Explorer. Now I can type directly into the text input box on this site (or any other site), then simply right click and select "Check Spelling", and then send it off. For anyone who does a lot of web-based text entry, it comes in handy. It can be found here, and it is free:

http://www.iespell.com/
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Re: Asset based or dividend based
Old 12-26-2003, 08:12 PM   #11
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Re: Asset based or dividend based

This was typed in word: don't.

The only way to strip the special characters I know of is to save as text from word. Then open it in notepad. cut and paste doesn't seem to work.

I think this always works though - save as text in word. Open it in notepad. Cut and paste to web.

Wayne
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Re: Asset based or dividend based
Old 12-27-2003, 11:21 AM   #12
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Re: Asset based or dividend based

Thanks Bob_Smith and wzd. I am downloading the spellchecker now. I get frustrated when I create weird looking copy!

Mikey
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Re: Asset based or dividend based
Old 12-29-2003, 08:06 AM   #13
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Re: Asset based or dividend based

Another way to get word to work is to turn off the auto-formatting that replaces regular ASCII characters with windows special characters (like angled quotes and dashes). Go to "Tools/Auto Correct Options" then "Auto Format as you Type" and turn off the "replace as you type" options.
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Re: Asset based or dividend based
Old 01-02-2004, 12:08 PM   #14
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Re: Asset based or dividend based

I paste from word and then I use the preview again and again. One trick that comes in handy: put in a space.

Anything from Word with quotes is in trouble. Using the brackets with [b ] and [/b] or [i ] and [/i] is a good substitute for quotes.

Have fun.

John R.
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Re: Asset based or dividend based
Old 01-02-2004, 04:35 PM   #15
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Re: Asset based or dividend based

I have a truly frugal method of spell checking.

I spell lousy, and dont care
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Re: Asset based or dividend based
Old 01-02-2004, 07:26 PM   #16
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Re: Asset based or dividend based

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I have a truly frugal method of spell checking.

I spell lousy, and dont care *
What a coincidence. That's my favorite spellchecker too. I've been using it since before I ever got a computer and I've never had a problem with it.
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Re: Asset based or dividend based
Old 01-03-2004, 05:15 AM   #17
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Re: Asset based or dividend based

I were an en-ga-near,-got webtv,-sticky keyboard and don't like grammar much either.

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Re: Asset based or dividend based
Old 01-05-2004, 10:52 AM   #18
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Re: Asset based or dividend based

every once in a while someone mentions tobacco stocks as being risky. yes and no.
take MO (Altria) for example, they have increased their dividend for 23 consecutive years. A super strong company. I'll continue to keep my REITs for their dividend, but I'll also, keep my MO for the same reason.
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Re: Asset based or dividend based
Old 01-05-2004, 11:44 AM   #19
 
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Re: Asset based or dividend based

I notice tobacco companies are advertising urging people not to use their products. In our PC/victim
oriented/litigious
world I understand this completely.
It is a good example of irony though.

John Galt
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Re: Asset based or dividend based
Old 01-05-2004, 01:04 PM   #20
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Re: Asset based or dividend based

Re: tobacco stocks. I owned 'em up until last year, every time someone would whack them in the knees with a lawsuit and the share price dropped, i'd pick them up and collect the yield until the $950B jury award was thrown out by an appeals court and the share price shot back up again.

I did see something a few months ago that outlined the total number of acres of tobacco growth per year, and it was shrinking rapidly and on a pretty consistent decline level.

I also wonder how long it will be before the health care companies say "enough. if you smoke we wont cover you at all, no matter how high a premium you pay".
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Be fearful when others are greedy, and greedy when others are fearful. Just another form of "buy low, sell high" for those who have trouble with things. This rule is not universal. Do not buy a 1973 Pinto because everyone else is afraid of it.
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