I have posted Entry #359 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Is the Year 2000 Retiree Safe Yet?

Juicy Excerpt: The usual rule that a retirement is safe if it does not experience a price crash within the first 10 years may not apply this time around. The annualized real return for stocks from January 2000 through December 2016 was 2.27 percent. A portfolio from which a 4 percent withdrawal was taken 18 times would be reduced to under $700,000.

That’s obviously not good. But in ordinary circumstances, this retirement would be highly likely to survive 30 years because the hit that it had to take as a result of the starting-point valuation level would be in the past. When stocks are priced at reasonable levels, returns are good enough to support withdrawals of a good bit more than 4 percent. So the lost ground could be made up over time.

But….

Stocks are priced today at two times fair value. The price we must pay for not having experienced a lasting price crash despite the high starting-point valuation level is that a lasting price crash remains unfinished business. There has never in the history of the US market been a secular bear market that ended before the P/E10 level dropped to 8 or lower. A drop to 8 would take the value of that $700,000 portfolio to something in the neighborhood of $200,000. A retiree who continued to take $40,000 withdrawals from a portfolio of $200,000 for another 12 years would be asking for trouble.

I’ve posted Entry #358 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Valuations Correlation Is Stronger for Safe Withdrawal Rates Than for Long-Term Returns.

Juicy Excerpt: The particular year in which the change from a secular bear market to a secular bull market takes place does not matter as much when it is the safe withdrawal rates that are being examined. When one is calculating safe withdrawal rates , one is not seeking to identify the return in any one particular year but how loss years and gain years interact to determine whether a given portfolio amount will produce enough income to survive 30 years of a specified withdrawal amount or not.

The correlations for returns are weakened by the fact that it is always one year for which the correlation is being tested. In some historical return patterns, that will be a year in which the effect of the starting-point valuation level was strong and, in other historical return patterns, that will be a year in which the effect of the starting-point valuation level was weak (depending on whether the secular bear market had been transformed into a secular bull market yet or not). So the overall historical record shows a mixed result — a correlation that is very strong in some cases but not quite as strong in others (even though the correlation was equally strong in those cases, only for different years).

I’ve posted Entry #357 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It Doesn’t Matter Much How Long It Takes for Prices to Return to Fair-Value Levels.

Juicy Excerpt: The annualized real return for stocks from January 2000 through December 2016 was 2.27 percent. We are today living through a time-period much like the one that my Buy-and-Hold friend described as a possibility a good number of years back. Investors are not earning enough to finance their retirements. Most of us think of stocks as continuing to do well enough because the only price crash experienced in that time was largely reversed within a few months. But lasting gains have been modest for nearly 18 years now. We are hurting. Our economy is hurting. We don’t talk about it much because the hurt has been delivered in a non-dramatic, below-the-surface manner.

 

I have posted Entry #356 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Valuations Explain a Lot — But Not Everything.

Juicy Excerpt: The reality, of course, is that the 6.5 percent figure is not etched in stone. It could be that the U.S. economic system has become more productive than it has ever been before in recent decades and that on a going forward basis the long-term return will be 7.0 percent real. Or of course things could go the other way and the future long-term return could be 6.0 percent real.

Even that statement highlights the danger of ignoring valuations. If you don’t take valuations into consideration when determining the true value of your portfolio, you will be fooled into thinking that annual gains of 20 percent or 30 percent or 40 percent are real and thereby mess up your financial planning efforts in a serious way. Those who presume that the 6.5 percent long-term average return will continue to apply manage to avoid falling into the trap of believing that whatever numbers are generated by widespread irrational exuberance are real.

But the average long-term return really can change. The benefit of using the historical return as one’s assumption for the going-forward return is that it is an objectively generated rule of thumb. We all want to be able to retire as soon as possible. Left to our own devices, I suspect that a lot more of us would assume a going-forward return that is higher than 6.5 percent real than would assume a going-forward return that is lower than 6.5 percent real. Still, those who have strong beliefs that economic changes justify different assumptions are being entirely reasonable in using those assumptions in their asset-allocation decision-making process.

I’ve posted Entry #355 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Hold Has Not Been a “Good Enough” Strategy Over the Years.

Juicy Excerpt: Say that we were trying to determine whether it is a good idea to smoke. Those seeking to make a case for smoking could point to millions of people who smoked and lived long, fruitful, exciting lives. That’s not an endorsement of smoking. It’s a showing that many people are so full of love that they can make successes of their lives even while their smoking habit holds them back a bit. Smoking is bad and Buy-and-Hold is bad. But there are of course successful smokers and successful Buy-and-Holders.

I’ve posted Entry #354 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Risk Increases Steadily As Stock Valuations Rise.

Juicy Excerpt: I worry about valuations a great deal. I don’t worry about bubbles at all. In fact, I would be inclined to agree with Eugene Fama, who has said that he does not believe that bubbles exist. I think that’s right. I believe that the bubble phenomenon is mythical. Overvaluation exists. Overvaluation is a big deal. But there is no knowable point at which harmless overvaluation becomes transformed into a dangerous bubble. All overvaluation is equally harmful.

I’ve posted Entry #353 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Has Lost Confidence in His Earlier Understanding of How P/E10 Can Be Used to Time the Market.

Juicy Excerpt: What made me uneasy with Shiller’s comments was that he didn’t make any more effort than the Buy-and-Holders did to note that there was more than one way that things could go. It was certainly true that prices could continue to fall and my personal assessment was that that was the most likely scenario. But chiller’s work and the work of all of the researchers who have followed in his footsteps shows not only that long-term timing always works but also that short-term timing never does. Neither Shiller nor I nor my Buy-and-Hold friends nor anyone else could say for sure which way prices were headed. To offer truly useful advice, we needed to make that clear. I didn’t think that Shiller had done that and I said so in the podcast that I recorded at the time.

I’ve posted Entry #352 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Undervaluation Is As Bad as Overvaluation.

Juicy Excerpt: When the market is priced at one-half of its real value, millions of people who could be productively employed are left without jobs because the businesses that would be happy to hire them in a world where stocks were priced properly do not have the finds needed to pay them.

When the market is priced at one-half of its real value, thousands of entrepreneurial projects that would make all of our lives better in thousands of different ways don’t get off the ground because the executives who would need to set aside money to finance them in their start-up years don’t dare risk the capital needed to do so because money is so tight.

When the market is priced at one-half of its real value, millions of people who otherwise might be good savers lose confidence in the saving project because their stock investments of earlier years have offered such disappointing returns.

Those 15 percent returns aren’t looking so hot anymore, are they?

I’ve posted Entry #351 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The 4 Percent Rule Points Us to the Average Safe Withdrawal Rate.

Juicy Excerpt: The 4 percent rule is not the product of mere foolishness. It is the product of tough logic being applied to a fundamental misunderstanding.

 

I’ve posted Entry #350 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Where Greenspan Went Wrong in Doubting His Ability to  Contain Irrational Exuberance.

Juicy Excerpt: Red lights deliver warnings to drivers not to proceed into an intersection because there is a good chance that cars will be speeding through the intersection from the other direction at the same time. Say that research showed that, out of every eight times that a driver elects to ignore a red light and continue blithely into the intersection, he ends up in a car accident in only three of them. Would any reasonable person conclude that that evidence offers a good case for ignoring traffic lights?

Greenspan is a very smart man. I am of roughly average intelligence. It took me all of five minutes to develop this rejoinder to the Greenspan observation after I was reminded of it by an article on him that I recently happened to come across while investigating an unrelated subject. My rejoinder is easy to understand. I don’t think that the claim that I am making about traffic lights would inspire even a tiny bit of controversy if I offered it in any context other than a discussion of Greenspan’s decision to let the irrational exuberance of 1996 get even more out of hand in the years that followed. Yet, in the investing context, my claim is controversial indeed.