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Beyond Buy-and-Hold #90
By Rob Bennett
 For stocks purchased at today’s prices, the most likely annualized 10-year return is 2.21. The highest return that could apply (assuming that U.S. stocks perform at least somewhat as they always have in the past) is 8.21 percent real. The lowest is a negative 3.79. That’s a lot of territory indeed! The factor that determines the point along that broad spectrum of possibilities on which your actual return will fall is the returns sequence that happens to pop up.
We cannot know in advance what returns sequence will pop up. That’s why the range of possibilities is so broad. First, I am going to show you why this is not a super big deal. Then I am going to show you why, while it is not a super big deal, it is a significant matter that you need to be aware of and take into consideration.
The Strategy Tester
I went to the Strategy Tester and entered the following assumptions: (1) an initial portfolio value of $10,000; (2) a $10,000 contribution to the portfolio in each of 30 years; (3) a 3.0 percent real return on money not invested in stocks; and (4) a starting P/E10 value of 20 in a secular bear market.
Continue reading The Returns Sequence That Happens to Pop Up Makes a Big Difference →
Beyond Buy-and-Hold #89
By Rob Bennett
We live in the greatest time in history to be stock investors. Why? Because it is so darn simple to a highly effective stock investor today.
In the days before index funds, investing was a complicated business. To do the job right, you had to study annual reports and Value Line and all sorts of other stuff to succeed. Not today. In the era of the index fund, there are three factors and three factors only that determine your stock return. Spend a tiny bit of time bringing yourself up to speed on those three, and you’re set for life.
Factor One: the likely long-term return for the index fund you invest in
You don’t want to invest in a fund that is going to provide poor long-term returns. The funds that provide strong long-term returns are so much more appealing!
I’m teasing. But there is a serious point to be made here. You really do want an index fund that is going to provide a strong long-term returns. The silly part in what I said above is the suggestion that it’s easy to know in advance which fund is going to provide a strong long-term return. Still, the full reality is — It IS pretty darn easy to know.
Continue reading The Three Factors That Affect Your Stock Return →
Beyond Buy-and-Hold #88
By Rob Bennett
I’ve seen a number of articles in recent years arguing that middle-class people need to continue working in retirement. The argument that is often made is that we live longer than we did in the days when age 65 became the conventional retirement age. If we are going to live longer, we cannot expect our retirements to survive until death unless we are willing to work through retirement, the thinking goes.
No. The logic here does not follow.
It IS true that adding some income from work to your retirement plan in the early years makes a huge difference. So adopting a plan to work in the early years of retirement makes a lot of sense for a lot of people. If you don’t have enough saved by the time you want to retire, the best way to cover the shortfall is to agree to work during the first ten years of retirement or so.
Why saving more doesn’t necessarily make retirement assets last longer
Continue reading Longer Retirements Don’t Cost Much More →
Beyond Buy-and-Hold #87
By Rob Bennett
I put forward some startling words in the column from three week’s ago.
I wrote: “See a return of 5 percent for each of the first 10 years and you will at the end of 30 years have a portfolio value of $998,579. See a return of a negative 5 percent for each of the first 10 years and at the end of 30 years you will have a portfolio value of $1,739, 987…. In both cases, the annualized annual return is 6.5 percent. The returns are not really better in an overall sense in the second case. They are just a whole big bunch better for you, the investor.”
Can it be so?
If the returns are the same in both of the scenarios described, how can the investors in one of the scenarios be left better off? Where did the extra money that found its way into their pocket come from?
The money comes from investors who sold stocks in the time-period shortly prior to the ten years of losses. The point made in that column is accurate. Smart investors who will be buying more stocks in coming days want prices to drop so that they will be able to buy those shares at low prices. But the opposite is so for investors who will be selling stocks rather than buying stocks. Investors who are selling stocks should want prices to rise.
How bull markets transfer wealth
Continue reading Bull Markets Transfer Wealth From One Group of Investors To Another →
Beyond Buy-and-Hold #85
By Rob Bennett
Was the return sequence we saw play out from January 2000 through December 2010 a lucky sequence or an unlucky one?
Many people think of these years as “The Lost Decade” (or, speaking strictly, “The Lost Eleven Years”). Did we indeed draw some black cards during that time–period?
By no means!
The Returns Sequence Reality Checker shows that those 11 years were lucky ones for stock investors (the calculator is not yet set up to handle questions relating to 2011). We saw a return pattern over those 11 years that was on the lucky end of the range of possibilities that were available to us beginning in January 2000.
How can price stagnation be lucky?
Continue reading The Last 11 Years Have Been Lucky Ones for Stock Investors →
Beyond Buy-and-Hold #84
By Rob Bennett
U.S. stocks have been providing a 30-year return of something in the neighborhood of 6.5 percent real for as far back as we have records. Let’s say that what has been true for the entire history of U.S. stock investing remains true for the next 30 years.
Would it be better if for the next 10 years we saw a return of 5 percent each year or if for the next 10 years we saw a return of a negative 5 percent each year?
I have a calculator at my web site that answers this sort of question. It is called The Returns Sequence Reality Checker. It tells us that the latter scenario is the far more favorable one.
Why it’s better to take losses early
The assumptions that I entered are that you start with a portfolio of $10,000 and then add $10,000 each year. See a return of 5 percent for each of the first 10 years and you will at the end of 30 years have a portfolio value of $998,579. See a return of a negative 5 percent for each of the first 10 years and at the end of 30 years you will have a portfolio value of $1,739, 987.
Continue reading Ten Years of Losses Will Leave You With a Bigger Portfolio Than Ten Years of Gains →
Beyond Buy-and-Hold #83
By Rob Bennett
For background on Valuation-Informed Indexing, please check out the “About” page at the “A Rich Life” blog.
The P/E10 level is 18. Treasury Inflation-Protected Securities (TIPS) are paying 2.5 percent real. What is the best stock allocation?
The Stock-Return Predictor tells us that the most likely annualized 10-year return on the purchase of a broad stock index made when the P/E10 level us 18 is 3.92. There’s an 80 percent chance that the 10-year return will be better than 0.92 and an 80 percent chance that it will be worse than 6.92.
Those numbers tell you what you need to know to make an informed decision. They do not provide you with a one-size-fits-all solution.
The likely return on stocks (3.92 percent real) is better than the certain return on TIPS (2.50 percent real). But is it sufficiently better to justify going with a high stock allocation? My view is that it is not.
Continue reading How a Valuation-Informed Indexer Chooses His Stock Allocation →
Beyond Buy-and-Hold #82
By Rob Bennett
My two boys received the card game Dominion for Christmas. The three of us play a game nearly every night after dinner. I wanted to learn some good strategies, so I put the phrase “Dominion strategy” into a Google search and turned up this — DominionStrategy.com.
It’s an awesome resource. It contains all the information you need to advance from novice to expert. In one place. For free.
Why can’t there be something like that for stock investing?
There isn’t. Enter a search on any basic investing question and you are going to turn up a lot of Buy-and-Hold stuff. As you know from earlier columns, Buy-and-Hold was discredited 30 years ago. If we can create super sites on how to play Dominion in three years, why can’t we create super sites on stock investing within 30 years of the time the insights we need are revealed to us through academic research?
Investing is too important.
As paradoxical as it sounds, that’s the reason.
Continue reading It’s Because Investing Is So Important That We Get It So Wrong →
Beyond Buy-and-Hold #81
By Rob Bennett
Here’s a riddle:
Does anyone truly like financial disinformation?
The trick solution to the riddle is –
Only the tens of millions of investors betting their retirement savings on it!
We all hate financial disinformation — in theory. In the real world, it’s the chocolate of the investor’s diet. I doubt that there’s ever been a single investor who never felt a temptation to give financial disinformation “just one try.” Look at the investing advice you see and hear on television and radio and the internet. It’s Buy-and-Hold for breakfast, Buy-and-Hold for lunch and Buy-and-Hold after supper time. Why? Disinformation sells.
Continue reading Financial Disinformation Is an All-or-Nothing Proposition →
Guest Post
 Spread betting is rising in popularity around the globe, but no where more than in the United Kingdom. Investors are looking for ways to manage the volatility that’s become more common in the financial markets in recent years, and spread betting is becoming one of those methods.
What is spread betting?
Financial spread betting is a way to speculate on financial markets in the same way as trading a number of derivatives. The financial derivative known as Contract For Difference (or CFDs) is similar to a spread bet. Specialized spread betting companies, such as City Index, are the market makers in the trade, and they are some of the most regulated businesses in the City of London.
Financial spread betting has become more popular in the UK in recent years, and is something like the futures and options markets, except that the charge happens within a wider bid/offer spread, they trade off-exchange (subjecting them to a lower level of regulation), and carry different tax treatment.
Continue reading Spread Betting in Volatile Markets →
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General: Any information in regard to money, credit, personal finance, or in regard to any other monetary topic, provided or shared on OutOfYourRut.com is presented for information and entertainment purposes only and does not constitute financial advice. It is intended to provide general information only and does not constitute personal financial advice in regard to your specific circumstances...MORE-->
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