I have posted a Guest Blog Entry at the My Personal Finance Journey blog. It is called Investors Who Ignore Valuations Are Like Overeaters Who Ignore the Risk of Heart Disease.
Juicy Excerpt: Raddr examines the numbers and concludes that: “The poor retiree’s real net worth has dropped nearly two-thirds (from $1,000 to $367) in only 11 years, and he is now withdrawing about 11 percent of his portfolio per year, which is a recipe for disaster even if the market heads up big-time from here. It looks like his portfolio very likely will fail in the next decade and is virtually certain to fail in the 30-year time frame which was touted as “100 percent safe” by many respectable market gurus and financial planners just a decade ago.”
Juicy Site Owner Comment #1: If you’ve done much reading about investing strategies, you’ve probably heard that one of the most devastating things that someone can do is bounce around to different approaches, following whatever advice happens to be given to you. While I’m not saying that VII is some shady penny stock newsletter/tip, I feel it would keep me too far from the performance of the market that I might not keep to the plan. Just think for a second – would you really be able to hold to only investing 30% of your money in stocks during the late 90’s through 2008 if you are trying to aggressively save money for retirement? It’s likely that most people would not be able to stick to this plan.
Juicy Site Owner Comment #2: Nevertheless, I do hope that we can one day tweak the VII strategy in such a way that I can become convinced enough to switch. As I mentioned in my analysis post, I really do believe it has potential since VII provides a concrete numerical system (using PE10 values, which keeps emotions from getting in the way) and so effectively reduces risk / standard deviation.
Juicy Site Owner Comment #3: The concerns about safe rates of withdrawal for providing income during retirement are well-founded in my opinion, as this is a serious issue to consider. In particular, if you had a high-stock allocation portfolio at the time of retirement, I do agree with the fact that you would do well to consider market valuation (because your all-stock nest egg could drastically decrease) when thinking about rates of withdrawal. However, I personally do not believe people should have a high stock allocation portfolio at the time of retirement in the first place.
Juicy Site Owner Comment #4: Should market valuations be considered with how quickly or slowly you withdrawal your retirement savings? Should you use Valuation Informed Indexing in your investment strategy? This is a much more complex set of questions, and I’ll have to do some more research and come back to you all in a future post about this!