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Re: Strategy for a (substantially) higher withdraw
Old 05-21-2004, 05:48 PM   #61
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Re: Strategy for a (substantially) higher withdraw

You make quotes like this:
[ quote]Whatever you want to have in the pretty box.[ /quote]
except that you need to leave out that space between the bracket and quote] or /quote]:
[quote and then the end bracket] and [/quote and then the end bracket].

Also, it seems to me that you could wait three or four years, if necessary, to get a good price.

Have fun.

John Russell
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Re: Strategy for a (substantially) higher withdraw
Old 05-21-2004, 06:56 PM   #62
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Re: Strategy for a (substantially) higher withdraw

Hey Hankjoy, good posts! Just a couple of comments:

Quote:
Then how come Warren Buffett did it?
1) He is a genius. I'm not.
2) He knows how to pick successful companies repeatedly. I don't.
3) He is willing to work very hard at it and devote his life to it. I'm not.
4) He can get access to CEOs and information I'll never get.

Quote:
The dividends will grow to keep up with inflation and we never sell shares when the market is down to make part of our withdrawal because the dividend provides or exceeds our withdrawal requirements.
Yes, IF you pick the right stocks at the right time, and that's a very big "if". Fear of messing it up and losing my shirt would prevent me from trying. There are probably a hundred ways I could conceivably improve my withdrawal rate. Finding a mix of investments that covers me in a multitude of potential future scenarios almost guarantees that my withdrawal rate will be unimpressive compared with what might be possible if I were willing to place more concentrated bets and reach further. Covering myself as best I can must take precedence despite the lost opportunity, however.
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Re: Strategy for a (substantially) higher withdraw
Old 05-21-2004, 09:50 PM   #63
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Re: Strategy for a (substantially) higher withdraw

Re: warren buffett.

How many successful stock pickers are out there that have done great and done great over a long time.

Hmmm...Buffett. If 1,000,000 people randomly chose stocks over a long period of time, I would expect there to be more than one random long term winner. Hence in simple odds, the numbers seem to hint that stock picking is a losing proposition.

I would also suggest that since Warren frequently takes a serious role in the management of the companies he buys, sits on the board of several, and exerts other direct influences that perhaps he simply buys distressed companies or ones with the right kind of cash flow and then helps manage them along to greater success...at least some of the time? In other words his success and power enables him to create further success?

Or maybe he just does have a good simple formula and nobody else on the planet can stand to keep it simple and within the boundaries of the formula.

Because surely if stock picking were possible, companies with reams of cash for analysis and hordes of experts would do better than the average person and certainly better than the average index.

They just dont. (shrug)
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 04:19 AM   #64
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Re: Strategy for a (substantially) higher withdraw

But in that book "Stocks for the Long Run" the author says something very profound about dividends and the role they play in being the driving force in the long run total return of stock investing. *It is only a few paragraphs long and most people who claim to follow that book have missed that part. *You can find it by looking up dividends in the index.

There are too many references to "dividends" in the index for me to be sure which passage you are referring to, Hankjoy. But I found the passage below both relevant and compelling, so I will pass it along. These comments also relate to the work that JWR1945 has been doing at the SWR Research Group board at NoFeeBoards.com.

Pages 70-80: "Since earnings are the ultimate source of value, the earnings yield, which is the reciprocal of the price-earnings ratio, should be the best long-term guide to the real return that the market provides shareholders. This is because earnings are derived from real assets that in the long run will appreciate with inflation.

"This observation is borne out by the data....

"If the earnings yield, or P-E ratio, remains constant, then the rate of price appreciation will equal the growth rate in per-share earnings. In this case, the total return on stocks can be expressed as the sum of the dividend yield and the rate of growth of per-share earnings....

"Some analysts have viewed the recent decline in dividend yields with alarm. They believe the low dividend yield means that future returns will be low. But this fails to recognize that the current dividend yield and the future growth rate of per-share dividends are not independent. As long as the earnings yield does not decline, a reduction in the cash dividend means greater retained earnings, and hence a higher rate of growth of future earnings and dividends."
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 04:22 AM   #65
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Re: Strategy for a (substantially) higher withdraw

Correction: The comments in the post immediately above appear on Pages 79 and 80 of Stocks for the Long Run, by Jeremy J. Siegel.
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 04:51 AM   #66
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Re: Strategy for a (substantially) higher withdraw

I recommend that you (hankjoy) look at earnings yield based on the previous ten years of earnings (whenever possible). Dividends come out of earnings and looking at earnings yield (averaged) protects you from encountering surprise cuts in dividends.

Also, it seems to me that you could wait three or four years, if necessary, to get a good price.

JWR1945:

I am persuaded by the statistical work that you and several other fine researchers have done showing that the SWR for an investment in a broad stock index is exceedingly low at today's price/dividend levels. My recollection is that the number you put forward in a post at the SWR board for the valuation levels we were at in January 2004 was 1.6 percent. I cannot afford to direct even a small percentage of my portfolio to an asset class providing only a 1.6 percent SWR, given how little slack there is in my plan.

That said, I would like to move my stock allocation up from 0 percent to 10 or 20 percent in the not too distant future. There are several reasons. One is that I like being "in the game." Another is that stocks are my favorite asset class, so I have a bit of a sentimental attachment to this asset class. A third is that I have found in the past that I learn more about investment classes by making purchases of them than by just reading and thinking about them, and I want to learn all that I can about stock investing as early in life as I can learn it. A fourth is that I have CDs that come due from time to time that I am not able to renew at rates as favorable as those at which I purchased them, and I would like to move at least some of that money to other asset classes.

I find HankJoy's argument to possess some appeal. I think it makes sense to look at earnings yield, as you suggest above. My sense is that Hankjoy does not disagree with this suggestion.

My question is--What statistically based conclusions re HanjJoy's idea can be drawn from looking at earnings yield? Is it reasonable to conclude from looking at earnings yield for stocks meeting the characteristics listed by HankJoy to up one's SWR for a stock investment significantly above the SWR that applies for investing in a broad stock index? Or are there not enough companies around meeting HankJoy's requirements to be able to form any useful conclusions about whether assigning a higher SWR to this sort of stock investment is at all reasonable?

I don't require a 4 percent SWR from stocks to justify putting 10 percent of my portfolio into them. I need something higher than the numbers that apply for the broad indexes, however. I'm not necessarily opposed to the idea of just taking a chance on following something like the HankJoy approach as a means of upping my allocation to stocks a bit. But any statistical support for the Hankjoy approach or any variation of it that you or anyone else could put forward would make me feel at least a bit more comfortable with the idea of putting cash down on the table.

I'm known for being free with my words. But I'm on the cautious side when it comes to reaching into my pocket for purposes of turning over some of those green pieces of paper with pictures of government buildings on the back.
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 05:09 AM   #67
 
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Re: Strategy for a (substantially) higher withdraw

*****,

I take it you think that the SWR presented by FIRECALC will be worse in the future than it ever has been in the past 100 years?

Calculations of stock valuations are usually flawed. People were convinced in 1958, when stock dividends fell below bonds that stocks were too expensive. They are waiting in their graves to get back into stocks.

Just something to keep in mind
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 06:40 AM   #68
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Re: Strategy for a (substantially) higher withdraw

I take it you think that the SWR presented by FIRECALC will be worse in the future than it ever has been in the past 100 years?

I think that the FIRECALC tool is a powerful tool for investment analysis that in future years will be put to use by a great many investors to serve a wide array of purposes. I certainly will be advocating that a lot more people make use of the tool in the various writings and interviews and speeches that I will be either putting forward or participating in in coming days.

That said, I also believe that in order for the FIRECALC tool to achieve its potential, it needs to be reformed. The number that it currently refers to as the "safe withdrawal rate" is not that at all. The 4 percent number is properly termed the "Historical Surviving Withdrawal Rate." The HSWR is a concept related to the SWR, but it is not at all the same thing. The HSWR is an important number for investors to know and it is a number important to calculate as part of an effort to determine the SWR. But it is not the SWR, the take-out number that will work in a worst-case scenario presuming that the future turns out something like the past.
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 02:43 PM   #69
 
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Re: Strategy for a (substantially) higher withdraw

*****,

Well I certainly agree that it is a HSWR ! - After all, no one can predict the future, so technically there is no such thing as a SWR. If anyone tells you there is, run away as fast as you can.

MY worst case scenario is that I get run over by a truck tomorrow and never get to spend my money.
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 03:03 PM   #70
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Re: Strategy for a (substantially) higher withdraw

Wow, thats a pretty good worst case scenario.

Mine is that I'm run over by a truck while Halle Berry is on her way to my house to pay me a million dollars to fool around with her.

One thing to consider is that while its fun to say "sure...its going to be different this time" - and I do it too - a civilizations economy does have a cycle and all historic powerhouse economies have conformed in somewhat similar ways. Our economy happens to be a particularly good one, and has been for an exceptionally long time. The "new world economy" is certainly more robust than the ones of old europe and the old middle east. It is however underpinned by readily available cheap oil, and currently some suspicious monetary policy.

I guess to make a long story short, its probably prudent to be conservative in ones withdrawal rate, safe or not, and also possibly prudent to look for good dividend and interest rates considering how highly priced most asset classes are today.

Might be a good idea to shift money slowly from expensive growth stocks and other highly priced, low dividend asset classes to a spectrum of high yielding value stocks across all capitalizations, high yield bonds, GNMA's, convertible securities, etc.

But I wouldnt throw the baby out with the bathwater and get rid of all my stocks, or drop below 30% stock holdings.

By the way, these days I'm about 55% bond, 45% stock. Most of the stock is large cap value with big shots of small cap value, REIT, foreign and emerging market (the latter all in my IRA). Half the bond is short term investment grade corporate, the rest is intermediate term financial and investment grade corporate.

When the dividend rates for some other asset classes goes over 8% I'm going to nibble. Inflation and interest rates dont scare me much anyhow; I dont buy much and I never carry debt.

Unless we see double digit inflation that runs on for years, I dont have a problem. If we do see that, I think we're all equally screwed excepting those 50+% in tips and ibonds.

On the other hand, if big inflation doesnt come around, tips and ibonds paying below 3.5% dont sound too enthralling either.
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 04:40 PM   #71
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Re: Strategy for a (substantially) higher withdraw

Quote:
On the other hand, if big inflation doesnt come around, tips and ibonds paying below 3.5% dont sound too enthralling either.
How much inflation do you need to make TIPS attractive? Let's say conservatively inflation will hit 4% this year. That means that a 2.5% TIPS will yield the equivalent of 6.5% nominal bonds, and the only place you can find that yield right now is in much riskier junk bonds.

And for those of you who think stocks are currently expensive, what are your metrics? Many economists like to look at the difference between the E/P yield-equivalent and the risk-free rate of return. Currently, the spread suggests that stocks are significantly *under*valued.
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 04:48 PM   #72
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Re: Strategy for a (substantially) higher withdraw

Well theoretically no matter how high inflation goes, you just get the coupon rate. And you dont get the inflation adjustment until you sell.

Since much of what I buy (food and monthly utilities) arent greatly affected by run of the mill inflation, and I'm not likely to pay much if anything in taxes for the next 3-5 years, like I said, inflation doesnt scare me much.

I guess if I was buying cars every couple of years, buying lots of consumables regularly, taking out consumer loans, etc I'd be afraid. Very afraid.
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 04:50 PM   #73
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Re: Strategy for a (substantially) higher withdraw

Stock metrics. Hmm, almost nobody I know wants to buy them, people who have them are thinking that perhaps they shouldnt, and a lot of people are largely in cash or thinking about getting there.

Mass public sentiment beats the heck out of any metric. When I hear about lots of people thinking stocks are cheap and wanting to buy them, then they'll be cheap!

Of course theres that contrarian thing, but when I think about that my head hurts.
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 05:12 PM   #74
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Re: Strategy for a (substantially) higher withdraw

Quote:
Well theoretically no matter how high inflation goes, you just get the coupon rate. *And you dont get the inflation adjustment until you sell.
But the interest payments are based upon the inflation adjusted principal. In other words, I get 3.875% of a bigger pot if inflation heats up - without selling.
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Re: Strategy for a (substantially) higher withdraw
Old 05-22-2004, 06:48 PM   #75
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Re: Strategy for a (substantially) higher withdraw

Hey whatta you guys want...I'm just a dog...
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Re: Strategy for a (substantially) higher withdraw
Old 05-23-2004, 07:01 AM   #76
 
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Re: Strategy for a (substantially) higher withdraw

Inflation doesn't scare me much either. I am loaded
with real estate, and have plenty of room to cut back,
even ay my much downsized lifestyle. Thus, although
my investment cash stream is pretty well fixed,
I feel like I have wiggle room if inflation goes nuts.

John Galt
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Re: Strategy for a (substantially) higher withdraw
Old 05-23-2004, 09:35 AM   #77
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Re: Strategy for a (substantially) higher withdraw

Quote:
But the interest payments are based upon the inflation adjusted principal. In other words, I get 3.875% of a bigger pot if inflation heats up - without selling.
Ok, the dog isnt allowed to use the computer anymore.

One question on this...dont you have to pay taxes on the inflation adjustment in each year it occurs, but you dont get to take that money until the bond matures, yes? Is that subject to both state and federal tax?
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Re: Strategy for a (substantially) higher withdraw
Old 05-23-2004, 09:35 AM   #78
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Re: Strategy for a (substantially) higher withdraw

John Galt wrote:
"inflation doesn't scare me much either, I am loaded with real estate".

If we in my lifetime ever have a 60s and 70s type inflation again it won't scare me either. I will be loaded on Jim Beam, and then later on with wine that you have to chew












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Re: Strategy for a (substantially) higher withdraw
Old 05-23-2004, 10:29 AM   #79
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Re: Strategy for a (substantially) higher withdraw

Quote:
One question on this...dont you have to pay taxes on the inflation adjustment in each year it occurs, but you dont get to take that money until the bond matures, yes? *Is that subject to both state and federal tax?
That's more than one question

Yes, you're taxed on the inflation adjustment each year, but as we all know, we ER folk are somewhat tax-advantaged.

You get to cash out the inflation adjustment at maturity or when you sell. However, some funds (like VIPSX) distribute this to you (annually?).

All treasuries, including TIPS, are exempt from state tax. Since IRA distributions are treated as income for tax purposes, an unexpected side-effect is that it may be more tax efficient to hold TIPS in your taxable account if you live in a high-tax state.
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Re: Strategy for a (substantially) higher withdraw
Old 05-23-2004, 10:31 AM   #80
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Re: Strategy for a (substantially) higher withdraw

Quote:
One question on this...dont you have to pay taxes on the inflation adjustment in each year it occurs, but you dont get to take that money until the bond matures, yes? *Is that subject to both state and federal tax?
TH, yes on the first question. I have my TIPS in IRAs for that reason. TIPS are the same as other treasuries regarding Federal/State taxes - Federal only.
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