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Old 02-26-2011, 10:56 AM   #1
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Stay out of the ROOM

"ROOM" is his acronym for "Run Out Of Money." This is an interesting article about the effect of initial stock-market P/E on a retiree's SWR.

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While the success rate for the entire group was 95%, for a retiree who enters retirement with a portfolio dedicated to stocks when P/E is 18.7 or higher, the expected success rate based upon history is 76%
He doesn't say how his P/E is calculated. He doesn't consider anything other than an all-stock portfolio. He has a book called Probable Outcomes an apparently goes into further detail there.

Did you consider market P/E when you made your decision to retire?

Stay Out of the ROOM - John Mauldin's Outside the Box - InvestorsInsight.com | Financial Intelligence, Advice & Research / Investment Strategies & Planning for Individual Investors.
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Old 02-26-2011, 11:20 AM   #2
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Not sure which P/E the article refers to, but evidently the S&P500 P/E was 16.8 on 2/1 and 23.91 on 2/25 - up in the top quintile...
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Old 02-26-2011, 11:26 AM   #3
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I found that same chart. It uses Shiller's method, i.e. average inflation-adjusted earnings from the previous 10 years.
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Old 02-26-2011, 11:31 AM   #4
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John Mauldin was on the housing market was in a bubble for a long time before it burst. I got tired of reading it but I should have listened to him. He also writes a great deal about the "Stock Market Mania". P/E is another perspective on it.

Hussman Funds - Weekly Market Comment: Rich Valuations and Poor Market Returns - February 14, 2011
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Old 02-26-2011, 01:04 PM   #5
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Did you consider market P/E when you made your decision to retire?
No, not at all.

When planning my retirement I did include a safety margin and a "Plan B" that involved LBYM rivaling Jacob's, if necessary. Also my portfolio includes more than just stocks.
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Old 02-26-2011, 05:51 PM   #6
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I certainly thought about it. When I retired Morningstar was saying that the market was "fairly valued". So there shouldn't have been any downward pressure just due to valuation. However that was 2007. I did listen to John Mauldin, not just about the housing market but also the negative consumer savings rate. I added gold and BEARX to my allocations and moved about 30% to cash. That saw me through the next two years just fine. I'm back where I started now.

Ed Easterling has been on this forum before, saying the same thing. We didn't give him a warm welcome, I felt. He makes sense to me.

Kind of like running FIRECalc on March 2009 at the market bottom and having it give you a bad result. One of FIRECalc's scenarios starts you at 1929. Is it really reasonable to be using your portfolio value at the bottom of a recession and have FIRECalc scenarios that assume you are starting at a market peak with a recession soon to follow? Hopefully looking at P/E provides a little guidance about how optimistic/pessimistic FIRECalc might be.

Not sure I care for a 10-year average PE that almost includes two recessions. But it's not exactly a science yet.
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Old 02-26-2011, 06:23 PM   #7
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Quote:
Originally Posted by Onward
Did you consider market P/E when you made your decision to retire?
I'm thinking I will be at least a little aware of market P/E, because I am most likely to have a portfolio that reaches the size I want as a result of a market run-up of some sort. On the other hand, I'm not going to be too concerned unless it is extreme, because I can always downsize my desired lifestyle a little, or try to convert my more-house-than-I-need into something a little smaller, and that would be a kind of safety net.
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Old 02-26-2011, 06:50 PM   #8
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I guess it makes sense. Higher P/E = lower future returns and higher failure rate, Lower P/E= higher future returns and lower failure rate. We all know that the worse possible time to retire is at the top of a bull market (1929, 1966 and probably 2000). So yes, it is always in the back of my mind.
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Old 02-27-2011, 08:00 PM   #9
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I think its wise to take valuations into account when thinking about asset allocation, and even retirement timing. It seems silly not to. It's all well and good to say that FIRECalc spits out a result showing xx% success, but how many of those runs started with earnings yields of 4.2% and 10-year bond yields of 3.4%? Not many.
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Old 02-27-2011, 09:39 PM   #10
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Originally Posted by Gone4Good View Post
I think its wise to take valuations into account when thinking about asset allocation, and even retirement timing. It seems silly not to. It's all well and good to say that FIRECalc spits out a result showing xx% success, but how many of those runs started with earnings yields of 4.2% and 10-year bond yields of 3.4%? Not many.
I read a lot of Mauldin stuff which is normally pretty good. In this case reading about ROOM, I got the been there read that before feeling. Anybody with a grasp of basic math understands that you are better off to have a bull market early in retirement and bear market late. As somebody who started their retirement at the beginning of a great bear market (2000), I will point out that you can adjust.
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