Set forth below are links to eight articles posted at the Value Walk site describing the four unique calculators provided at the www.PassionSaving.com site: (1) The Stock-Return Predictor;(2) the Retirement Risk Evaluator; (3) The Investor’s Scenario Surfer; and (4) The Investment Strategy Tester.
Juicy Excerpt: The Stock-Return Predictor is a stock valuation calculator that performs a regression analysis of the historical stock-return data to reveal to investors the most likely annualized ten-year return for U.S. stocks starting from any of the various valuation levels. The calculator is rooted in a belief in Yale Professor Robert Shiller’s finding that valuations affect long-term returns and that, thus, long-term returns are to a significant extent predictable.
Juicy Excerpt: The Retirement Risk Evaluator is a retirement calculator that reveals to aspiring retirees the safe withdrawal rate (the inflation-adjusted amount that they can take from their investment portfolio to cover each year’s living expenses with virtual certainty that the retirement plan will survive at least 30 years) that applies for retirements beginning at any of the various possible valuation levels. The calculator permits the user to compare the results obtained for portfolios with different stock allocations and for retirement plans calling for different minimum ending balances.
Juicy Excerpt: The Retirement Risk Evaluator is a second generation retirement calculator. The Risk Evaluator is the first retirement calculator to consider the effect of the starting-point valuation level in identifying the safe withdrawal rate. It is the first retirement calculator to get the numbers right (presuming that the research of Yale Professor Robert Shiller and others finding that valuations affect long-term returns is right).
Juicy Excerpt: The price paid for a huge swing in valuations (the difference between the Scenario One and the Scenario Two results) is stunningly great. But the price paid for demanding that the ending-point portfolio value be as great as the starting-point portfolio value (the difference between the Scenario Three and the Scenario Four results) is not terribly significant. I believe that the future of investing analysis is educating investors about the tradeoffs inherent in all investment decisions. The new calculator indicates that today’s general understanding of these tradeoffs is not well-formed. The good news, of course, is that this reality encourages us that we can achieve great progress in a short amount of time if we focus our energies on coming to a better understanding of the many investment analysis topics that remain a bit beyond our grasp today.
Juicy Excerpt: The Investor’s Scenario Surfer is a portfolio allocation calculator that permits investors to compare the results of three rebalancing strategies (80 percent stocks, 50 percent stocks, and 20 percent stocks) with a Valuation-Informed Indexing strategy (changing your stock allocation in response to big valuation shifts) over the course of a randomly chosen 30-year return sequence consistent with those we have seen in the historical record. Valuation-Informed Indexing strategies show better results in roughly nine out of ten of the tests performed. This result challenges the conventional investing wisdom of recent decades that “timing doesn’t work” and that rebalancing is an effective way for an investor to “Stay the Course” for the long term.
Juicy Excerpt: I believe that the Valuation-Informed Indexing strategy helped me do about as good as I could hope to do, given the circumstances. I beat the 80 percent rebalancing portfolio by only $63,000. I often see differentials far greater than that. It is not out of the question to see the Valuation-Informed Indexing portfolio come in at the end of 30 years at double the size of the best of the rebalancing portfolios. But in a return sequence like this one, in which exciting possibilities are unavailable to all investors, that $63,000 differential looms larger than it would in more inviting circumstances. If we see a scenario like this turn up in the real world, investors are going to be looking for whatever edges they can obtain. The new asset allocation strategy offers small edges where those are the best than can be hoped for and big edges in the different sorts of circumstances which of course we all hope will be the ones that will play out in real life.
To obtain the full benefit of The Investor’s Scenario Surfer, you need to perform multiple runs of the calculator. This is a training tool. Thinking about how best to respond to all of the possibilities that may play out over time trains you to be able to handle emotionally just about anything that Mr. Market happens to throw at you. I hope!
Juicy Excerpt: The Strategy Tester is an investment strategy calculator that permits users to create up to four strategies and compare how they perform in 1,000 30-year return sequences. The return sequences are generally random but not entirely so; statistical filters are applied to insure that they play out in a manner similar to how we have seen 30-year sequences play out throughout the historical record. That is, a Reversion to the Mean phenomenon works to pull valuations down when they get absurdly high and to pull valuations up when they get absurdly low.
The results of each strategy tested are reported in the form of color bars comprised of four colors: (1) green; (2) blue; (3) yellow; and (4) red. Each of the colors points to 25 percent of the results obtained from the 1,000 tests performed. Thus, the red color bar points to the worst possible results that could turn up for the indicated strategy, assuming that stocks perform in the future at least somewhat as they always have in the past. The green color bar, in contrast, points to the best results possible. The point at which the yellow color bar meets the blue color bar is the midpoint of all possible return sequences; the investor choosing that strategy knows at the outset of the 30-year time-period that there is a 50 percent chance that his real-world results will be better than the result shown at the midpoint and a 50 percent chance that his real-world result will be worse than the result shown at the midpoint. Results are shown at five years out, ten years out, fifteen years out, twenty years out, twenty-five years out and thirty years out.
Juicy Excerpt: It’s true that the most important decision that an investor makes is his choice of a stock allocation. It is not true that an investor can afford to make this decision once and then stick with the allocation chosen forever. Stocks are riskier at high valuation levels and provide lower returns at high valuation levels. All investors should be changing their stock allocations in response to big valuation shifts. We need to move beyond the one-stock-allocation-fits-all-valuation-levels mentality of the Buy-and-Hold Era and begin teaching investors how to go about knowing when to change their stock allocations and how much to change them. This is the future of investing analysis, in my view.