Retire at the Coffeehouse

» AL_W - Re: Re: Chapter 14: A Better Approach?

Bob, I love these charts, as it pretty well proves out what I have felt for a long time, that, even after the wild ride, a good portfolio is worth more today than in 2000, irrespective of the few market indices say.

I never wanted to do the foot work to prove that with my portfolios. My foot work would have been more complicated by the fact that 1999, 2001, and early 2002 were draw down years for me in my taxable account, as I put a kid through college.

My 401K it up nearly 30% since 2000, excluding the bankruptcy loss and deposits into, but including gains from the deposits. Again, the effort to factor out the deposit gains was more work than I wanted to put out. I'll wager the DCA Gains are a significant part of the overall gains.

I've compiled your posts "Intro" through "Conclusions" into two self contained Word Documents for my future reference. Surprising compact for all the graphics in them. Let me know via e-mail if you would like copies of them.

-- posted by AL_W

» bob90245 - Re: Even After a Wild Ride

Bob, I love these charts, as it pretty well proves out what I have felt for a long time, that, even after the wild ride, a good portfolio is worth more today than in 2000, irrespective of the few market indices say.

Back in 2000, you were definitely in the minority of investors! Everyone I knew back then (including yours truly) were in tech stocks. Yes, Bill Schulthesis had written his book The Coffeehouse Investor in 1998. But I don't remember hearing about it until around the time Paul Farrell wrote about it in his book The Lazy Person's Guide to Investing last year. And now the idea for 'Slice and Dice' has gained much more popularity.

This reminds me of another major shift in thinking on Wall Street. Back in the early 1970's, the academics were talking about the Efficient Market Theory and using the index mutual fund. It wasn't until after the 1973-74 bear market that this idea got any serious consideration.

-- posted by bob90245

» AL_W - Re: Re: Even After a Wild Ride

In response to Re: Even After a Wild Ride posted by bob90245:

Bob, I have always been concentration wary. I also never chase mutual fund returns. A couple of the good things I learned these from the old 'instructor Bob' and a couple of authors.

Kirk's Core and Explore is a good approximation of my methods, but they pre-date my association with Kirk.

So I own mainly QUALITY funds and stocks with a so-so equity asset allocation and just a handful of tech. So while the tech dived in 2001, others had gains.

Up till 2000, I was virtually all equities, but I went to 70/30 just in time for the greatest bond bull there every has been.

I also re-balance on approx a yearly basis. Some of the high flyers got cropped in 2000, so I booked some of those tech profits. I might add, I did not book enough of them.

These are some of the reasons why the CoffeHouse interests me.

Some of my holdings: ( scales are the approx time I've owned them )

http://stockcharts.com/def/servlet/Sharp...

http://stockcharts.com/def/servlet/Sharp...

http://stockcharts.com/def/servlet/Sharp...

http://stockcharts.com/def/servlet/Sharp...

And a pile in the SP500.

-- posted by AL_W

» passenger - Re: Chapter 14: A Better Approach?

Bob:

Thanks for all the postings. I think what annual rebalance do for the portfolio is enforcing a buy-low-sell-high movement. That may be why it yields better result.

-- posted by passenger

» bob90245 - Chapter 15: Rebalancing During Bear Markets

(The above discussion had me re-examining the issue of rebalancing during bear markets. So here is my new approach. I invite your comments.)

The impact of bear markets is something that every investor must face and have a plan. The plan that I proposed was to have a widely diversified portfolio such as the Coffeehouse Portfolio. And we saw that the Coffeehouse Portfolio came through the recent 2000-2002 bear market relatively well.

However, there are no guarantees. In fact, if you go back to 1973-1974, we saw that a similarly diversified portfolio, DFA, did not provide any protection from the bear market at all. Let me again show DFA returns from chapter 6.

So if another such synchronous and extended bear market happens, what will be your plan? Let me also say that as someone who has lived through the painful 2000-2002 bear market, it will take enormous courage just to take any action. This is because all you read in the financial press is pessimistic news on the economy. And the general news is usually just as gloomy.

So it will take a measure of faith to buy stocks should you choose to do so. And that is exactly what you will be doing if you rebalance in a bear market. This is because a bear market could take down your stock portfolio by a significant amount. By how much? Using past bear markets as a guide, perhaps by 50 percent. This was nearly the amount the S&P 500 dropped in the 2000-2002 bear market. So I will use a potential 50 percent drop when formulating my plan.

And here is my plan. Once the stock portion drops by 30%, that will be my trigger to start rebalancing. I chose a 30% trigger point because it is more than halfway to the possible drop of 50%.

Figure 2 shows how a 30% drop in stocks will impact a $1,000,000 portfolio. The top half of figure 2 shows that a 30% drop in stocks changes a 50:50 stock:fixed income portfolio to 42:58. Also notice that I take out $20,000 from fixed income. This approximates part of the annual withdrawal for our spending needs. Recall that in the examples in prior chapters, we started with a 4% annual withdrawal ($40,000). The other part of our annual withdrawal came from dividends and interest. And since there was a loss in stocks, they were left untouched.

Similarly, the bottom half of figure 2 shows how a 30% drop in stocks changes a 60:40 portfolio to 52:48. Notice that in both cases (50:50 and 60:40) the overall allocation shifted by nearly 8%.

Let’s go back and look at the DFA returns. This time, I’ll just show the years with losses. I will also simulate how two portfolios with different allocations (50:50 and 60:40) would have turned out.

Notice that according to the DFA returns, the asset allocation of the 2000-2002 bear market was hardly changed. However, the 1973-1974 bear market produced a drastic change. And the decline in stocks went past my trigger point of 30%.

So once a 30% trigger is tripped, what should the next course of action be? One option would be to simply rebalance at year end. If we rebalanced the 50:50 portfolio (figure 3) at the end of 1974, we would need to use $86,000 from fixed income to buy stocks. [ The formula is ($460,000 - $288,000)/2 ]

Now $86,000, to me, is a big chunk of change. It represents two years worth of expenses. What if stocks continued to go down after we rebalanced? That would only compound the losses.

So another approach would be to funnel the money gradually instead of all at once. Here’s how this could work. First, we wait for a 30% decline of our stock portfolio. That would be our trigger point and then we would start buying stocks a little bit at a time. This would be like dollar cost averaging. So for example, at the trigger point and every 3 months thereafter, we could funnel $20,000 from cash reserves into stocks until the original target allocation is again reached.

This approach would achieve a lot of objectives. First, we let the diversified stock portfolio (like the Coffeehouse Portfolio) play out. In 2000-2002, it held up relatively well. If however, all areas of the market succumb to the bear, as it did in 1973-1974, we wait until the decline of the stock portfolio reaches 30%. At that point, we begin a dollar cost averaging program whereby we take small chunks from cash reserves (for example $20,000) and buy stocks on a regular interval (for example every quarter). The advantage is that even if stocks drop further, we still have some “dry powder” to buy at lower prices. Eventually, a new bull market will begin again and the shares bought low will help fuel the recovery to our overall portfolio.

-- posted by bob90245

» Kirk - Tool for Returns between Data Points

Hi Bob

Is there a good online tool that calculates total and annualized returns for various funds and/or stocks bewtween two dates?

Mark Hulbert's January Newsletter does an interesting study that proves you don't want to use a strategy of switching to the newsletter strategy each January that led the past year. He shows this strategy actually lost about 24% annualized between 1/1/91 and 12/31/04. He then offers two strategies you can do with the data he provides over that same period which return 8 and 9% annualized. He didn't offer what would happen if you simply stuck with the Wilshire5000 over that same period which leads me to believe that would show a better result and prove that his newsletter really doesn't help you get better returns!

I can calculate this with Excel but I'd feel better with an online tool to check against.

Thanks.

PS... It would be interesting to see how the slice and dice with annual rebalancing did vs the Wilshie 5000 for this period. Perhaps we should calculate this in the Hulbert forum here and then send the results to Mark!

-- posted by Kirk

» bob90245 - Re: Tool for Returns between Data Points

Is there a good online tool that calculates total and annualized returns for various funds and/or stocks bewtween two dates?

Not really (that I know of). I like Vanguard's site to compare any of their mutual funds. Their comparison includes reinvested dividends. Click here for an example. You'll need to select another fund to see a comparison.

Mark Hulbert's January Newsletter does an interesting study that proves you don't want to use a strategy of switching to the newsletter strategy each January that led the past year.

Doesn't surprise me. Past winners don't often repeat. Remember reversion to the mean...

He didn't offer what would happen if you simply stuck with the Wilshire5000 over that same period which leads me to believe that would show a better result and prove that his newsletter really doesn't help you get better returns!

The dirty little secret is that the only one getting rich with newsletters are the newsletter writers.

It would be interesting to see how the slice and dice with annual rebalancing did vs the Wilshie 5000 for this period.

Here's a little head start to help you crunch the numbers:

http://coffeehouseinvestor.com/Returns.h...

(Keep in mind that the Coffeehouse Portfolio includes 40% bonds. So one may not be able to get a true "apples-to-apples" comparison to an all-stock fund portfolio.)

-- posted by bob90245

» Kirk - Re: Re: Tool for Returns between Data Points

He didn't offer what would happen if you simply stuck with the Wilshire5000 over that same period which leads me to believe that would show a better result and prove that his newsletter really doesn't help you get better returns!

The dirty little secret is that the only one getting rich with newsletters are the newsletter writers. *

Actually, that is far from the truth. Most newsletters would be out of business if they performed as poorly as individual investors do on their own. Here is the article "Winning on the zigs, losing on the zags" which explains how the average investor made 2.6%, roughly 1/5th the return of the S&P500 between 1984 and 2002.

Even if you "only" got 8% annualized between 1991 and 2005, you would have seen $1,000 grow to $2,937 which is far better than the $1,436 most people's 2.6% a year grows to.

Of course, some active/passive strategies like yours will beat most newsletters over time as would investing in a simple index fund.

I did the numbers for the period Hulbert covered, 1/1/91 through 12/31/04, and found the S&P500 returned 12% annualized which far exceeds the 8% his “Buy the 10 year winner” strategy! I was not surprised to discover this since he did not compare his results to the indexes over these periods. He usually does this comparison when it makes sense to his business model.

Do you have a link that shows what the Wilshire5000 did by year prior to 1992? Vanguard stops their data there. Thanks

 
                  Kirk  S&P500  NASDAQ  BRKA
2YR: 12/31/2002   +69%   +41%    +63%   +23%
4YR: 12/31/2000   +35%    -3%    -12%   +26%
6YR: 12/31/1998  +160%     7%     -1%   +27% 

Compound Annual Return from 12/31/98 to 12/31/04 is 17.2%
Compound Annual Return from 12/31/02 to 12/31/04 is 30.0%
BKRa is Legendary Warren Buffett's Berkshire Hathaway 

• Click for a free issue of my newsletter
  
• Suitable for the aggressive growth part of your diversified investment portfolio.

Even if you don’t market time or buy individual stocks, my newsletter offers quite a bit of useful information and tables (Discussion of interest rates, The Fed Model, etc.) which many say are worth the price of the subscription on its own.

-- posted by Kirk

» bob90245 - Re: Re: Re: Tool for Returns between Data Points

bob90245: The dirty little secret is that the only one getting rich with newsletters are the newsletter writers.

Kirk: Actually, that is far from the truth. Most newsletters would be out of business if they performed as poorly as individual investors do on their own.

Ironically, Kirk, you just made my point. This is because most newsletters DO go out of business!

When I read studies of mutual funds, there's this thing called survivorship bias. This means that a certain percentage of mutual funds don't survive to the end of the period under study. So the stated returns of the group as a whole are actually higher (overstated).

Same thing happens with newsletters. Most just don't survive the entire study period. In his book The Successful Investor Today, Larry Swedroe sites a study of 237 market-timing newsletters over the period June 1980-December 1992. Only 13 out of the 237 newsletters survived the entire period. Pretty amazing!

Do you have a link that shows what the Wilshire5000 did by year prior to 1992? Vanguard stops their data there.

I went to the Wilshire Associates website. They say the Wilshire 5000 index started in 1974. They do have a returns calculator there, but I couldn't get it to work. Perhaps you can contact them directly. I don't know of any other source for that index.

-- posted by bob90245

» bob90245 - Question from Bill

Hi Bob - was going to post on your thread but haven't gotten membership yet. Printed and read thru your strategy last night and really appreciate the detail and examples you've put together. One question I had was concerning you're approach of taking dividends and interest during the year. Most folks I have read recommend doing this for taxable accounts but for deferred accounts (which most of my retirement is) there are a lot of folks who recommend re-investing and let that re-investment be part of the year's total return. Why would you recommend "taking" the dividend and interest in a deferred account versus reinvesting and handling it in your yearend strategy?
thanks! bill

OK. There are a few issues that are merged in this question. So let me isolate them so as to examine them on their own.

The first issue is referred to as "Reverse Dollar Cost Averaging". I give a more detailed explanation here. What this means is that if you sell from a declining fund, you will deplete that fund sooner than necessary. That's the risk you take if you re-invest dividends and then sell fund shares when the NAV moved lower (assuming a bear market). Instead, I prefer to separate the "capital" component from the "dividend" component. The dividends make up part of your "retirement paycheck" for you to spend. Now if your funds always goes up, then forget what I just wrote. If that were the case, you can take a "total return" withdrawal from funds and have no worries. But as you know, markets fluctuate so we do have to be smart about how and when we take fund withdrawals.

The second issue you mention is asset location, i.e. taxable or tax-deferred accounts. Here I'm willing to be a little bit more flexible. Bond interest and REIT dividends are treated the same. So I hope you have these funds in your tax-deferred accounts. This will allow more room for the more tax-efficient stock funds in taxable accounts. And since bond interest and REIT dividends are treated the same from either taxable or tax-deferred accounts, I see no advantage to re-investing them. Take them as part of your "retirement paycheck".

However, if you have stock funds in deferred accounts and want to reinvest them, just know that you may have to take out a little bit more from bonds and cash when those stock funds have down years.

-- posted by bob90245