Zvi Bodie's asset allocation
Will Trice
an unusual topic here) made me take notice when I read this:
http://www.businessweek.com/magazine/content/07_37/b4049090.htm?campaign_id=rss_magzn
Bodie is recommending 95% TIPS or I-bonds and 5% market call options for
savers at any savings phase. In another forum, he recommends the same
for retirees. Thoughts?
-Will
william dot trice at ngc dot com
joetaxpayer
> Bodie is recommending 95% TIPS or I-bonds and 5% market call options for
> savers at any savings phase. In another forum, he recommends the same
> for retirees. Thoughts?
I read his book "Worry Free Investing" and wrote a page on my site some
months back, http://www.joetaxpayer.com/bodie.html
His book revolves around the assumption that the real TIPS rate is 3%.
i.e. 3% + CPI. When I wrote my article it was down to 1.6% and is now 1.2%.
I wrote "Had I read the book in 2003 and been sold on this plan, from a
savings rate of 16% (which I wouldn't worry about), I'd find, that as
the real rates dropped, the new bonds I purchased would require a saving
rate over 27%. This is worry-free?"
The 25X (4%) rule based on historical data for stock/bond returns, needs
to be adjusted up if one expects those returns to be lower. On a real
rate of 1.2% how much would one need to save? My link above provides a
further link to both a spreadsheet (provided by Prof. Bodie) as well as
the link to the Treasury direct site, where the 1.2% is quoted.
JOE
www.blog.joetaxpayer.com
anoop
> Will Trice wrote:
> > Bodie is recommending 95% TIPS or I-bonds and 5% market call options for
> > savers at any savings phase. In another forum, he recommends the same
> > for retirees. Thoughts?
>
> I read his book "Worry Free Investing" and wrote a page on my site some
>
> His book revolves around the assumption that the real TIPS rate is 3%.
> i.e. 3% + CPI. When I wrote my article it was down to 1.6% and is now 1.2%.
> I wrote "Had I read the book in 2003 and been sold on this plan, from a
> savings rate of 16% (which I wouldn't worry about), I'd find, that as
> the real rates dropped, the new bonds I purchased would require a saving
> rate over 27%. This is worry-free?"
I tend to agree with Zvi Bodie's philosophy.
If one can't save 27% and one is investing in the stock market
_hoping_ the lower savings rate will generate the returns needed,
then that is indeed a very risky option. There's a reason why
every bank & investment house has the fine print that "past
performance is no guarantee of future returns". Basically, if
one has trouble putting away 27% or whatever other number
comes up based on the returns of risk-free investments, then
one is most likely going to be in trouble.
Living well within one's means is the first step to financial
freedom.
Anoop
Elle
snip for brevity
> Bodie is recommending 95% TIPS or I-bonds and 5% market
> call options for savers at any savings phase.
I want to read more about those call options, for one, if
only to contemplate the probabilities to which Bodie alludes
in your article.
Bodie is compared to Paul Samuelson in
http://www.economicprincipals.com/issues/02.05.05.html .
Which to me means he deserves some consideration.
OTOH, for all the criticism he seems to ladle out, it seems
to me the sound bite "real world example" (based on stock
market movements c. 1970s) of his in the econprinciples
article could stand some qualification.
As has been raised here before (by me, if no one else),
Robert Shiller seems to think a lot like Bodie. From Shiller
in 2002:
"If someone had to pick -- all my money in the stock market
or all my money in index bonds," Shiller says, "TIPS would
win hands down. But very few people are able to keep that
perspective right now. There's just so much excitement
around the stock market and so many varied games to play,
and for many people it's a part of their lives -- you know,
it's just fun to watch, and index bonds can't compete with
that."
http://cowles.econ.yale.edu/news/shiller/rjs_02-05-bloomberg_shil-sieg.htm
BreadW...@fractious.net
> "Will Trice" <wtr...@notmonitored.com> wrote
> snip for brevity
> > Bodie is recommending 95% TIPS or I-bonds and 5% market
> > call options for savers at any savings phase.
>
> I want to read more about those call options, for one, if
> only to contemplate the probabilities to which Bodie alludes
> in your article.
That portfolio generates some interesting numbers.
Some quick back-of-the-envelope (ok, spreadsheet)
calculations based on SPY at 135, and Dec2010 calls
at $22/ea and assuming TIPS net a nominal 4.5%:
that portfolio beats a 100% tips portfolio when
SPY goes up anything better than about 5.7%/yr.
When the SPY goes up at 10%/yr, the 95+5 portfolio
averages about 5.8%/yr and when the SPY goes up at
20%/yr, that portfolio goes up at a touch over 9%/yr.
And in the worst (equity) case, when the SPY does
not go up at all over the three years, that
portfolio ends up a touch over +2.7%/yr. There's
basically no downside, but you are trading a little
teeny risk for a slice of the upside of the market.
Tax consequences are messy, as is managing this
thing (do you split the options portion into thirds
and roll them like a bond ladder?). But it's an
interesting, though very very conservative, portfolio.
The tradeoff is minimal 3-yr downside risk for
severely curtailed upside potential. If you have
a longer time horizon, while you cannot guarantee
much better than that, you can get yourself some
pretty decent odds on it.
Something interesting to think about. I don't know
that many folks could really plan a retirement on
the basis of such low long-term returns, not, at least,
without saving a huge proportion of one's income along
the way. But it's certainly interesting to think about.
(options price grabbed from today's yahoo quotes
and calculations are very quick and dirty)
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
joetaxpayer
BreadW...@fractious.net wrote:
> That portfolio generates some interesting numbers.
> Some quick back-of-the-envelope (ok, spreadsheet)
> calculations based on SPY at 135, and Dec2010 calls
> at $22/ea and assuming TIPS net a nominal 4.5%:
>
> that portfolio beats a 100% tips portfolio when
> SPY goes up anything better than about 5.7%/yr.
> When the SPY goes up at 10%/yr, the 95+5 portfolio
> averages about 5.8%/yr and when the SPY goes up at
> 20%/yr, that portfolio goes up at a touch over 9%/yr.
> And in the worst (equity) case, when the SPY does
> not go up at all over the three years, that
> portfolio ends up a touch over +2.7%/yr. There's
> basically no downside, but you are trading a little
> teeny risk for a slice of the upside of the market.
I sense this thread going on a bit in a few different directions. I'll
stick with the focus on the options.
If the S&P is somewhat flat (less than 5.4%/yr over a 3 year period),
Bodie loses the 5% option each year. If TIPS are 4.5%, he just negated
their entire purpose, to provide a safe worry free return. And when that
market is on a tear, as the it was in the 90's, he'd miss out on much of
the market return. As you went on to post, I'd need to understand his
exact strategy with the options. Their use seems counter to what his
original premise is.
JOE
Will Trice
anoop wrote:
> I tend to agree with Zvi Bodie's philosophy.
Out of curiosity, are you 100% invested in TIPS/I-Bonds (or were you
until you hit your minimum required for retirement)?
Will Trice
Elle wrote:
> As has been raised here before (by me, if no one else),
> Robert Shiller seems to think a lot like Bodie. From Shiller
> in 2002:
>
> "If someone had to pick -- all my money in the stock market
> or all my money in index bonds," Shiller says, "TIPS would
> win hands down. But very few people are able to keep that
> perspective right now. There's just so much excitement
> around the stock market and so many varied games to play,
> and for many people it's a part of their lives -- you know,
> it's just fun to watch, and index bonds can't compete with
> that."
I've read this before, but I took it as Shiller expressing his concerns
over current (as of this quote) market conditions, not as a general
investing philosophy. Do you think he meant it generally?
Will Trice
BreadW...@fractious.net wrote:
<snip portfolio calculations>
Thanks for putting some numbers to this!
> Tax consequences are messy, as is managing this
> thing (do you split the options portion into thirds
> and roll them like a bond ladder?). But it's an
> interesting, though very very conservative, portfolio.
It seems like taxes may partially defeat the intentions of the inflation
adjustment on these securities, since the variable interest earned on
the inflation component is taxed just like the fixed portion. I have to
think about this some more...
joetaxpayer
Will Trice wrote:
> It seems like taxes may partially defeat the intentions of the inflation
> adjustment on these securities, since the variable interest earned on
> the inflation component is taxed just like the fixed portion. I have to
> think about this some more...
Given the current 3% (?) Inflation rate, at 25% marginal bracket, .75%
is lost to taxes. With a 1.2% 'real return', 4.2% * .75 = 3.15% or a
..15% return. And the tax is due on the inflation factor (if held in a
post tax account) each year, the actual net is that .15%. i.e. you'd
need to sell off some principal each year to spend. A bit higher
inflation, it's 0%.
Compare this today to DVY, yielding 3.66% with favored dividend rates.
And while not guaranteed, one can imagine that in the long term the
prices of the DVY stocks should at least keep up with inflation.
Back to Bodie - the spreadsheet on his book's site offers the need to
save 31% of one's gross from 21 to 62, to get a 70% replacement rate.
Tell me that for most people a 50% rate is fine with SS picking up the
difference. Ok, you only need to save 22%. That sheet also fails to make
the adjustment you observed above. Expected inflation, the tax on which
can wipe out the real return, is ignored almost completely.
His calculator is at http://www.prenhall.com/worryfree/
JOE
BreadW...@fractious.net
> BreadW...@fractious.net wrote:
>
> <snip portfolio calculations>
> Thanks for putting some numbers to this!
They were very rough, but interesting.
> > Tax consequences are messy, as is managing this
> > thing (do you split the options portion into thirds
> > and roll them like a bond ladder?). But it's an
> > interesting, though very very conservative, portfolio.
>
> It seems like taxes may partially defeat the intentions of the
> inflation adjustment on these securities, since the variable interest
> earned on the inflation component is taxed just like the fixed
> portion. I have to think about this some more...
As Zvi pointed out (and I'd have complained about it had
he not), the TIPs should only be held in an IRA (or equiv).
Outside of an IRA, one can use Series I savings bonds
(though subject to the strict purchase limit).
In a high-inflation environment, TIPs outside of an IRA
stink. The inflation adjustment gets taxed every year
along the way, (as well as the interest). Taxing the
inflation adjustment partially defeats the purpose of it.
Series I savings bonds, however, have the same (similar)
inflation adjustment, but they all the interest *and*
inflation adjustments are tax-deferred until such a time
as one cashes them in - up to 30 years. They were a
pretty sweet deal about 7 or 8 years ago with "real"
rates (before inflation adjustment) of over 3% (but
nobody wanted them at that time since everyone thought
folks make 30%/yr in stocks). Nowadays, at about 1%
"real" rate, they're a bit harder to digest, though,
again, outside of an IRA, the free tax-deferral (and
being exempt from State income taxes) still makes them
somewhat attractive compared to some other options.
I'm not exactly sure what the tax treatment of the
SPY options would be - I'll have to look it up. In
an IRA, of course, it's not an issue. But in a
taxable account, I just don't know off the top of my
head.
Elle
> his concerns over current (as of this quote) market
> conditions, not as a general investing philosophy. Do you
> think he meant it generally?
>From a careful reading, I think so. In particular this
paragraph from the economicprinciples.com site seems to
imply he means generally:
---
But would Shiller steer investors clear of the stock market
altogether, depriving them of those long-run returns (not to
mention all that fun)? "It's a little bit like alcohol," he
replies. "They say a glass of wine a day is good for your
heart. But then if someone says, 'I don't drink. Should I
start drinking?' you'll say, 'Probably not,' right? I know
some other investments that are very promising right now. So
if you're not doing it, don't start drinking wine, and don't
start investing in stocks." But if you must? "Put just a
little in stocks, and try to spread it out over a lot of
things, and do it around the world, not just in the United
States."
---
I think the words "long-run returns" imply he means, given
only a choice between stocks and TIPs, he'd go TIPs for the
long run.
But maybe like yourself, I would prefer more clarification
from other Shiller citations.
joetaxpayer
Elle wrote:
>
> I think the words "long-run returns" imply he means, given
> only a choice between stocks and TIPs, he'd go TIPs for the
> long run.
>
> But maybe like yourself, I would prefer more clarification
> from other Shiller citations.
>
I agree that's how I read his quote, but the article cited was dated May
2002. At that time the TIPS were prices at a real rate of 3.5%, much
closer to the 4% withdrawal rate we count on from stock/bond mix. (To be
sure, a chunk is still lost to taxes, but 3.5% is much better than 1.2%.)
JOE
anoop
> anoop wrote:
> > I tend to agree with Zvi Bodie's philosophy.
>
> Out of curiosity, are you 100% invested in TIPS/I-Bonds (or were you
> until you hit your minimum required for retirement)?
My 401(k) doesn't offer TIPS as an option so for
now I'm largely in a stable value fund. I had a large
portion in S&P 500, but have been gradually moving
more and more to stable value. Outside of retirement
I have little in stocks -- most stuff left over from the
2000 stock bubble. :-)
Outside of retirement, I was primarily buying I-bonds,
until the rates became so dismal that I could do
better with an online savings account.
When I see the kind of volatility we're seeing these
days, I know I'm not a stock investor. With all the corporate
scandals how can one even start to evaluate companies?
The balance sheets are all cooked with companies
restating earnings. I expect that to only get worse
with time.
Anoop
rick++
portfolios
to and from iBonds. You could gradually accumulate a large amount.
Elle
> I agree that's how I read his quote, but the article cited
> was dated May 2002.
I hear both Will and you. From my reading, I do not think
Bodie and Shiller think exactly alike. What I glean is that
Shiller has long felt (for maybe ten years or so) stocks
have been overvalued. He bases this on in-depth study of
historical company fundamentals, if memory serves something
like ten-year earnings etc. averages. OTOH, the mere fact
that he looks at valuation indicates to me that he must
think there are times to buy stocks. A Sep. 2, 2001 NY Times
article quotes Shiller:
---
Mr. Shiller said stocks [in 2001] remained so expensive that
they were likely to stay near current levels for years, much
as the Dow Jones industrial average had the same value in
late 1982 as it had in early 1966. ''You don't have to
bother with stocks at all for a while,'' he said. For people
who cannot stand to be out of the stock market, value
stocks -- those with low price-to-earnings ratios -- look
most appealing.
Mr. Shiller has owned little stock since 1998. Instead, he
has bought funds that invest in real estate and bonds. He is
also co-owner of a company called Case Shiller Weiss Inc.,
which collects real estate data.
For investors who have little experience, Mr. Shiller
suggests calling a Treasury Department phone number that he
has memorized -- 1-877-811 SAVE -- and buying bonds that pay
about 3 percent a year, on top of inflation. It is
''entirely plausible,'' he added, that after inflation is
taken into account, the Dow will be worth less in 2011 than
it is today.
---
Shiller continues to argue a lot for the madness of people
driving the occasional irrational valuing of stocks, real
estate, and other markets. Bodie obviously feels stocks are
risky, but surely that's in no small part because of the
madness of the masses.
I think the only criticism I might have on the Bodie piece
is the value he attaches to the inflation measure TIPS use.
No matter "how wild the market gets, you don't have to
worry." Well sure if one's personal inflation mimics the
index (one of the CPIs) that TIPS use. But as I have posted
before, I think the CPI being useful to individuals is
dubious. The CPI uses rent, for goodness sake, as the
measure of increased housing costs.
I am sticking with my strategy of buying stocks with
increasing dividends. I think the dividend increases will
better deal with my personal inflation concerns than TIPS
will. Not to knock Bodie. I think he has value to contribute
to discussions on financial planning.
The usual 1.5 cents.
Aside: Bread, I appreciate your post. I am studying it. Or I
may have nothing further to add to your observations.
anoop
If you thought it was harder with 30K, it even harder
now since the limit for I-bonds has been been reduced to
5K. If you're willing to do acrobatics like buy online and paper
bonds,
then you can get 10K.
Anoop
BreadW...@fractious.net
> dubious. The CPI uses rent, for goodness sake, as the
> measure of increased housing costs.
Not really. It uses a combination of rent and "owners
equivalent rent of primary residence" which values
the shelter services provided by an owner-occupied
home.
There are plenty of things to complain about the CPI -
things like the fact that each individual consumer
has his own effective CPI because he buys a different
basket of goods than every other one - but as a broad
measure, the OER is a reasonable estimate for what
it's purpose is.
Now, if you want to propose, say, a different CPI
for young folks versus older folks - which might
have a much bigger impact on financial planning -
that might make sense (especially since older folks
are hit with much higher impact from increasing
healthcare costs, for example). But the rent thing
isn't really a problem, I don't think.
> I am sticking with my strategy of buying stocks with
> increasing dividends. I think the dividend increases will
> better deal with my personal inflation concerns than TIPS
That much I agree with, and pretty strongly. To the
point where I actually own some of Vanguard's Dividend
Appreciation ETF (VIG).
> will. Not to knock Bodie. I think he has value to contribute
> to discussions on financial planning.
I'm still digesting the notion of increasing the cash/TIPS
portion of a portfolio and supplementing with calls. I'm
still skeptical, but the quick and dirty numbers I got
yesterday were certainly interesting. If I had a lot
more time, I'd have liked to dig up annual returns of
various strategies - including, say, short term investment
grade corporates - and compare over time.
> Aside: Bread, I appreciate your post. I am studying it. Or I
> may have nothing further to add to your observations.
Thanks. I think the notion of adding a little upside
exposure by calls might have a place in all this, but
I'm just not sure what that place is yet, nor if those
strategies can be implemented cheaply enough (ie. without
paying professional managers 200bp/yr to do it!) for
Joe Average Investor to make use of.
Elle
> "Elle" <honda....@nospam.earthlink.net> writes:
>> dubious. The CPI uses rent, for goodness sake, as the
>> measure of increased housing costs.
>
> Not really. It uses a combination of rent and "owners
> equivalent rent of primary residence" which values
> the shelter services provided by an owner-occupied
> home.
Yes, I know this. I do not see that the "owners equivalent
rent" makes a difference. I own my home outright. The market
for tenants seems to me to vary quite a bit more, and hence
so do rental rates.
But it's not just rent. I think I live differently than the
typical American. Like my guzillion year old car which I
maintain myself and that runs perfectly. I ski only
half-days and also bring my own food. This sort of thing.
[on stocks with healthy and increasing dividends)
> That much I agree with, and pretty strongly. To the
> point where I actually own some of Vanguard's Dividend
> Appreciation ETF (VIG).
Good to hear. I continue to scour ETF offerings for
promising dividend funds. Vanguard is a big draw, for its
reputation. I own two Vanguard ETFs and no others at
present.
> I'm still digesting the notion of increasing the cash/TIPS
> portion of a portfolio and supplementing with calls. I'm
> still skeptical, but the quick and dirty numbers I got
> yesterday were certainly interesting.
I looked at your comments more closely. They seem to jive
with Bodie's claim about how this is low risk for high
reward.
> I think the notion of adding a little upside
> exposure by calls might have a place in all this, but
> I'm just not sure what that place is yet, nor if those
> strategies can be implemented cheaply enough (ie. without
> paying professional managers 200bp/yr to do it!) for
> Joe Average Investor to make use of.
As your time allows, I'd be interested in your response to
Joetaxpayers' post on this in particular.
General aside for the thread: I should clarify that Robert
Shiller makes more sense to me than Bodie. Bodie is not in
the big leagues of financial sages the way I feel Shiller
is. This is probably because I am a Ben Graham disciple, and
Shiller is too, IIRC.
Elizabeth Richardson
<BreadW...@fractious.net> wrote in message
news:yobd4rk...@panix2.panix.com...
>
> Now, if you want to propose, say, a different CPI
> for young folks versus older folks - which might
> have a much bigger impact on financial planning -
> that might make sense (especially since older folks
> are hit with much higher impact from increasing
> healthcare costs, for example). But the rent thing
> isn't really a problem, I don't think.
>
On every issue, individual situations vary. As an "older person", I don't
see myself getting any higher impact from increasing healthcare costs. We
have excellent insurance for which we pay no premium, and which includes
very low (or zero) cost prescription drugs, for instance. And, as Elle
points out, when you own your home free and clear, housing inflation is
nearly non-existent.
Elizabeth Richardson
anoop
wrote:
> On every issue, individual situations vary. As an "older person", I don't
> see myself getting any higher impact from increasing healthcare costs. We
> have excellent insurance for which we pay no premium, and which includes
> very low (or zero) cost prescription drugs, for instance. And, as Elle
> points out, when you own your home free and clear, housing inflation is
> nearly non-existent.
What about property taxes and the cost of maintaining the house?
I guess the former depends on the state you live in, but the latter
is definitely affected by inflation.
Anoop
Douglas Johnson
>On every issue, individual situations vary.
Everyone has their own personal CPI that might vary from even from week to week.
I don't drive much, so gas prices don't bother me much. But I just got back
from a long driving trip. All of a sudden my CPI has changed.
>And, as Elle
>points out, when you own your home free and clear, housing inflation is
>nearly non-existent.
A rule of thumb that I find useful is the operating costs of a house (utilities,
taxes, maintenance, insurance, etc.) are five to six percent of the current
market price of the home. Obviously, when prices are changing quickly, the
operating costs are going to lag, but as a rule of thumb, it's not bad.
Just thinking for a second, a person who owns their home free and clear is less
protected from housing inflation that one who has a fixed rate mortgage. A
large part of the mortgage's housing costs are truly fixed for 30 years, while
almost all the housing costs of a full owner are subject to inflation.
Mutter, mutter. No wonder there is so complaining about the CPI. It doesn't
reflect anybody's rate, except by coincidence.
-- Doug
Elizabeth Richardson
"anoop" <ghan...@gmail.com> wrote in message
>>when you own your home free and clear, housing inflation is
>> nearly non-existent.
>
> What about property taxes and the cost of maintaining the house?
That's why I said "nearly" non-existent.
Elizabeth Richardson
rick++
> On every issue, individual situations vary. As an "older person", I don't
> see myself getting any higher impact from increasing healthcare costs. We
> have excellent insurance for which we pay no premium, and which includes
> very low (or zero) cost prescription drugs, for instance. And, as Elle
> points out, when you own your home free and clear, housing inflation is
> nearly non-existent.
Many companies are dropping supplimental medical for retires,
including those already retired. You situtation doesnt apply for
most
new retirees.
BreadW...@fractious.net
> <BreadW...@fractious.net> wrote
> > Not really. It uses a combination of rent and "owners
> > equivalent rent of primary residence" which values
> Yes, I know this. I do not see that the "owners equivalent
> rent" makes a difference. I own my home outright. The market
Even if you own your home outright, you're still "paying"
the owner's equivalent rent. If not out of pocket, in
opporunity cost on the capital you've tied up in the
house. Out of pocket, it may feel very different, but
economically, it's quite similar and certainly sensible
in the context of large scale statistical modeling of
the economy.
> But it's not just rent. I think I live differently than the
> typical American. Like my guzillion year old car which I
As I said, CPI is a very broad generalization which
doesn't reflect any single individual's inflation,
and it may seem reasonable to split it into more
sensible demographic buckets (certainly more sensible
than CPI-U versus CPI-W (which nobody every seems to
talk about - the CPI-W is for "urban wage earners
and clerical workers").
Anyway, this is all an aside from the point about Zvi
Bodie's suggested portfolios. As you and I agree,
there are other, very likely better ways of keeping
one's purchasing power in closer parity to the real
inflation rate out there:
> [on stocks with healthy and increasing dividends)
> > point where I actually own some of Vanguard's Dividend
> > Appreciation ETF (VIG).
> Good to hear. I continue to scour ETF offerings for
> promising dividend funds. Vanguard is a big draw, for its
> reputation. I own two Vanguard ETFs and no others at
> present.
VIG's an interesting fund with a pretty sensible index
underlying it, though it's a little spooky having the
index be more of a "black box" than more typical broader
indices out there. Nevertheless, the rough description
of the rules they use sound great and the portfolio
itself is a pretty reasonably broad representation of
the market, with 10% in energy, 20% in industrial materials,
less than 20% in financial services, 10% healthcare and
13% consumer services (and a smattering of other things).
Unlike some other dividend heavy indices, they don't
have a huge weight in sub-prime-endangered banks, nor
in utilities. Most of the companies should be able to
increase prices and earnings to at least track inflation
and are all nicely profitable. All the companies have
to have been paying (and increasing!) dividends for at
least 10 years, with some custom screens to weed out
dividend-paying stocks whos dividend growth rate is
not sustainable. The part that's not clear is how they
(quantitatively and mechanically) determine what
constitutes a sustainable dividend growth, but whatever
it is, it seems to be working, at least so far (noting,
as I said, some of the obvious dividend payers which
are absent from the portfolio). It's
got a very short track record and my big concern about
this is that it is an index-based ETF using what I'd
really have thought of as something rather difficult
to "indexify".
That all said, going back to owners equivalent rent,
it's really actually more similar to these dividend
paying stocks than you may have considered - a paid-for
house pays you an imaginary dividend which is big
enough to pay your imaginary rent - and that dividend
tends to go up at a very similar rate to that rent
(sometimes faster, sometimes slower). It's somewhat like
saying "I use $100 worth of Procter and Gamble products
each year, so I'll buy enough P&G stock that it throws
off a dividend big enough to buy those products - that
way, it's very likely that I've provided for the
purchase of those products for as long as I'll need them -
if soap and such doubles in price, it's very likely that
my dividends from the soap company will go up enough to
cover it - at the expense of having tied up that capital
in P&G stock - capital which could have been used for
other things if I weren't using it to provide for my
current and future soap-buying".
> > I'm still digesting the notion of increasing the cash/TIPS
> > portion of a portfolio and supplementing with calls. I'm
> > still skeptical, but the quick and dirty numbers I got
> > yesterday were certainly interesting.
>
> I looked at your comments more closely. They seem to jive
> with Bodie's claim about how this is low risk for high
> reward.
I looked around for a bit more of what Bodie has to say
and in some other interviews only a couple of years old,
he actually suggests 85-95% TIPS and the difference in
leveraged market exposure (ie. those call options).
The 95% in the more recent article apparently is what he
personally has done.
He also explains in more details that these highly
risk-averse numbers apply not to your entire investment
portfolio, but rather only to the part which you
can't afford to lose - ie. the part for addressing
one's *needs*. Presumably, in his book, he goes into
more detail about that, but, having not read it, I'm
going to assume that *needs* translates into things
like the retirement expenses which are non-negotiable -
like how much it costs to maintain your household,
not retirement *wants* - like the $10k/yr you'd like
to have as a travel and vacation budget.
If one can reasonably segment one's future retirement
budget into those categories - needs and wants - of
course it's more reasonable to plan on investing for
needs a lot more conservatively -- freeing one up to
invest more aggressively and taking more risk with
the capital devoted to wants.
I've addressed this idea before here - and have talked
about things like figuring out a reasonable estimate
for needs, subtracting from that reasonably secure
income (ie. SS, pension) and buying an immediate annuity
adequate to cover the rest of needs - freeing one up
to invest more aggresively for the rest.
[re: my numbers on Bodie's suggestion]
> As your time allows, I'd be interested in your response to
> Joetaxpayers' post on this in particular.
It looks like he basically came to the same conclusion as
I did when he ran similar quick numbers. Neither of us
had access to more specifics of Bodie's (ie. structure
of the TIPs portfolio and call-option portfolios and how
they are rolled forward) and both of us are, at least for
the moment, going to have to assume it's all in an IRA,
else taxes make a disaster of it anyway.
> General aside for the thread: I should clarify that Robert
> Shiller makes more sense to me than Bodie. Bodie is not in
> the big leagues of financial sages the way I feel Shiller is
I don't know about "big league" but Bodie is certainly
somone to take seriously. He's done some important work
in pension economics. Shiller's work, especially in
home price values (and some of his stuff about the
overvaluation of the stock market), is certainly more
well known and no less important, and he's certainly
written more for the general audience than Bodie, but these
guys are both the real deal (unlike certain other more
prolific authors/tv personalities) out there. None of
which really means that their work is directly applicable
to the average wage-earner's personal finances. I
think turning some of their insights into a usable
personal financial plan is non-trivial and should be
done with an eye towards details which are hard to
cover in a general-reader's popular book.
[wow - this is a much longer post than I'd thought to
write. My apologies to the mods if it's too long and
if appropriate, I'll be happy to split it into two or
three more focused posts since it seems to cover two
or three specific topic areas.]
Elizabeth Richardson
<BreadW...@fractious.net> wrote in message
news:yobir1b...@panix2.panix.com...
>
> Even if you own your home outright, you're still "paying"
> the owner's equivalent rent. If not out of pocket, in
> opporunity cost on the capital you've tied up in the
> house.
Do I really have a lost opportunity cost? I have that "rent" money in my
pocket every month. I have the opportunity to spend that "rent" money anyway
I choose, each and every month. Those of you who rent or have a mortgage
don't have that opportunity.
Elizabeth Richardson
Elle
> Even if you own your home outright, you're still "paying"
> the owner's equivalent rent.
One of the reasons my home costs (opportunity or otherwise)
vary a lot from a renter's is because I do nearly all of the
maintenance of my own home. The renter "pays someone" (via
rent) to do the maintenance. The cost of labor is not cheap.
Backing this up, several years ago a Wall Street Journal
study made a compelling argument for only owning a home if
one did one's own maintenance. Meaning the costs are quite a
bit less if one does one's own maintenance. Which is the
basis for my claim. We are going to have to disagree.
> VIG's an interesting fund with a pretty sensible index
> underlying it
snip to give the moderators a break
> Unlike some other dividend heavy indices, they don't
> have a huge weight in sub-prime-endangered banks, nor
> in utilities.
I would hazard to say the low weight in sub-prime exposed
banks was due to luck and/or diversity and/or holding only
larger banks, per the Mergent Dividend Achievers Select
criteria, on whose index VIG is based. As I noted here
recently, subprime exposure was not well known in advance
to anyone but maybe those on the inside of each bank.
Mergent's "stock cash flow volume" of $500k/day yada
requirement appears to weed out really small companies.
I see also at
http://www.dividendachievers.com/Site/FAQs/faqs.php?preview=#1
some commentary about a company's dividend having to survive
volatile markets in order for the company to make the
Mergent list. Many banks will flunk this test based on the
other recent real estate-based economy disaster c. 1990. I
was reading articles from 1991 in the NY Times on banking
problems then. Banks failing (smaller ones mostly),
dividends being cut. Those articles could just about be
reprinted today and no one would know the difference. Too
much credit freely flowing, and this is what happens. OTOH,
the banking problems resolved, more or less. Having a small
position in large banks, with one's dividend achievement
strategy, may be prudent.
The 42% turnover of VIG each year raises an eyebrow, mine
anyway. Yahoo says this is quite a bit larger than the
average for this category.
It's quite Ben Grahamian based on only the public info:
Large company; dividends for last ten years, to name two key
criteria. Mergent likely incorporates other criteria that
also are Grahamian and not publicized. It might be worth
googling to see what Ben Graham says about buying bank
stocks. Or a careful study of his "Defensive Investor"
advice may reveal that Graham feels (felt) banks are a bad
idea for defensive investors. Dapperdobbs might be able to
nail this point quickly. My eccentric relative for one notes
that the amateur investor looking for dividend achievement
should buy companies that "stay close to the man." Meaning
companies that use labor to produce a good rather than a
service. So no banks.
For financial planning purposes, any retiree wanting to use
stock dividends as one weapon in the arsenal for beating
inflation should consider "dividend achieving stocks" a la
the discussion here.
other stuff read but snipped to spare the moderators
Douglas Johnson
>Do I really have a lost opportunity cost?
Sure. You could have had the income from investing you home equity.
-- Doug
BreadW...@fractious.net
[my last post on OER - until, at least, the next time
it comes up in some other context here in mif-p]
Absolutely, it's an opportunity cost. If you had your
house's value in, say, bonds instead of the house, and
you used the dividends to pay your rent, you'd be in a
similar situation. And if instead of renting the house
you're in, you'd rented a place half the size/cost,
you'd actually have that cash to spend other ways.
A fully-paid-for house absolutely has a capital
opportunity cost. The thing is that you also have
to have a place to live - whether you rent or not -
and the point is that the cost of your housing is
either borne by paying rent out of pocket or by
the income you'd otherwise have received from that
invested capital which is currently tied up in
the homeownership.
A fully-paid-for house does *not* mean your cost
of housing is now zero. It's just hidden from
your obvious cashflow. OER is a way to make it
explicit when they compute the CPI. It's not perfect,
but it's vastly better than pretending that your
fully-paid-for house is free, since it's not.
kastnna
> <BreadWithS...@fractious.net> wrote
>
> > Even if you own your home outright, you're still "paying"
> > the owner's equivalent rent.
>
> One of the reasons my home costs (opportunity or otherwise)
> vary a lot from a renter's is because I do nearly all of the
> maintenance of my own home. The renter "pays someone" (via
> rent) to do the maintenance. The cost of labor is not cheap.
> Backing this up, several years ago a Wall Street Journal
> study made a compelling argument for only owning a home if
> one did one's own maintenance. Meaning the costs are quite a
> bit less if one does one's own maintenance. Which is the
> basis for my claim. We are going to have to disagree.
Elle, I couldn't find the article online. I would really like to read
it anyone happens to have a link handy.
Not having read the article, it seems that the study neglected one of
our largest opportunity costs: time. The time dedicated to doing the
repair one's self is time not spent doing something else. Frex, IF I
could earn $300 an hour at my usual employ or save $200 by spending
that hour doing home repairs, I effectively threw away $100 by NOT
hiring the repairman. On the other hand, if my time is only worth
$100 /hr I would be better doing the repair myself. I will be very
disappointed in WSJ if they did not acknowledge this.
Elle
Elle wrote
>> several years ago a Wall Street Journal
>> study made a compelling argument for only owning a home
>> if
>> one did one's own maintenance.
>
> like to read
> it anyone happens to have a link handy.
Currently, one can see it at
http://archive.southcoasttoday.com/daily/10-98/10-17-98/t04ho127.htm .
I think the themes stay pretty timeless.
Someone (maybe it was you?) once again noted here recently
that renting can be a superior financial investment to
owning. The net has a lot of articles looking at this in the
same vein as the WSJ article. I think a lot of folks still
buy into the tax tail wagging the dog. Namely, the
misapprehension that mortgage interest adds up to a lot of
savings in taxes today. Not so. Renting can be a superior
choice, strictly financially speaking.
> Not having read the article, it seems that the study
> neglected one of
> our largest opportunity costs: time. The time dedicated to
> doing the
> repair one's self is time not spent doing something else.
Absolutely. Though I think we could attach other qualifiers
like working with one's hands and remodeling are creative
and therapeutic outlets for some. Or some of us think we do
a better job than the guy to whom we might pay a lot for
mediocre work. Or some do not like work guys in their home.
Having to be home for the workers is an inconvenience that
can cost money, too.
I should clarify that this is not a main theme of the
article, so it is not examined in detail (read: dollars for
time). The key paragraph may be:
"... [T]he only sure way to slash repair costs is to do the
work yourself. Bruce Risser, a retired Navy officer,
estimates that he has spent less than half of his $47,500
purchase price to keep his 28-year-old home in Bethesda,
Md., shipshape. But he chose modest materials and did almost
all the work on his own, including adding a bathroom,
refinishing the basement, reroofing and recarpeting. But Mr.
Risser says he doesn't recommend such an approach to others
'unless you enjoy soldering and such like I do.' "
I hate to get so far away from the main subject on which
Will Trice wanted to gather thoughts. Fact is a lot of smart
folks do choose an all bonds (high grade bonds; no junk)
portfolio and at pretty young ages. Maybe this tells us it's
all about risk tolerance. While we can tell someone that
history says they would not do well by switching to all TIPS
(or similar) twenty years ago, fact is that person is the
one who has to sleep at night.
beli...@aol.com
> The recent thread on retirement allocation theory (not that that's such
> an unusual topic here) made me take notice when I read this:
>
> http://www.businessweek.com/magazine/content/07_37/b4049090.htm?campa...
>
> Bodie is recommending 95% TIPS or I-bonds and 5% market call options for
> savers at any savings phase. In another forum, he recommends the same
> for retirees. Thoughts?
Historically, stock index options have had a "negative volatility risk
premium" -- their returns are below what would be predicted based
solely on their "delta" (stock market exposure). This will reduce the
returns of the cited strategy. You can Google this newsgroup for
"negative volatility risk premium" to find a message I wrote about it.
I have worked as a derivatives quant.
kastnna
> > Elle, I couldn't find the article online. I would really
> > like to read
> > it anyone happens to have a link handy.
>
> Currently, one can see it athttp://archive.southcoasttoday.com/daily/10-98/10-17-98/t04ho127.htm.
> I think the themes stay pretty timeless.
Thanks.
> Someone (maybe it was you?) once again noted here recently
> that renting can be a superior financial investment to
> owning. The net has a lot of articles looking at this in the
> same vein as the WSJ article. I think a lot of folks still
> buy into the tax tail wagging the dog. Namely, the
> misapprehension that mortgage interest adds up to a lot of
> savings in taxes today. Not so. Renting can be a superior
> choice, strictly financially speaking.
It was not me, but all the same, I am not die-hard one or the other. I
think whether to rent or buy is situation specific and under the right
circumstances either one may prove advantageous. I THINK you are of
the same mindset.
> Absolutely. Though I think we could attach other qualifiers
> like working with one's hands and remodeling are creative
> and therapeutic outlets for some. Or some of us think we do
> a better job than the guy to whom we might pay a lot for
> mediocre work. Or some do not like work guys in their home.
> Having to be home for the workers is an inconvenience that
> can cost money, too.
Agreed. Being an economics major, I always had a difficult time
working around the near impossibility of quantifying certain
opportunity costs. Some people (myself included) take great pride in
their own handywork and ENJOY doing home repairs. That's surely worth
something. If I could include the kids, it would be a double bonus to
do the work myself. In Econ, those intangibles are a component of
"Utility". Unfortunately, everyone's utility is unique to their
values.
<snipped but not ignored>
Will Trice
Elle wrote:
> The 42% turnover of VIG each year raises an eyebrow, mine
> anyway. Yahoo says this is quite a bit larger than the
> average for this category.
That is eyebrow raising especially since only 12 index constituents have
had changes out of 214 companies in the index. But perhaps the changes
they list don't include removals/additions to the list?
Thanks for posting the relationship between Mergents and VIG. I
actually use Mergent's publications to help me pick equities, but now I
just might buy my first ETF...
>
> Or a careful study of his "Defensive Investor"
> advice may reveal that Graham feels (felt) banks are a bad
> idea for defensive investors. Dapperdobbs might be able to
> nail this point quickly.
I'll beat dd to it --- Graham considered banks as good as any other
company for defensive investors:
"We have no very helpful remarks to offer in this broad area of
investment [financial companies, in particular banks and insurance
companies] - other than to counsel that the same arithmetical standards
for price in relation to earnings and book value be applied to the
choice of companies in these groups as we have suggested for industrial
and public-utility investments."
> My eccentric relative for one notes
> that the amateur investor looking for dividend achievement
> should buy companies that "stay close to the man." Meaning
> companies that use labor to produce a good rather than a
> service. So no banks.
Do you know his reasoning behind this advice?
Elizabeth Richardson
"Douglas Johnson" <po...@classtech.com> wrote in message
news:m3s1q31gp1asoujd4...@4ax.com...
> "Elizabeth Richardson" <eric...@worldnet.att.net> wrote:
>
>>Do I really have a lost opportunity cost?
>
> Sure. You could have had the income from investing you home equity.
>
Ok, sales of similar housing in my area are $130k, but rents for a similar
house are ~1150/mo. My insurance and taxes are less than $200/mo, so my
"income" from my $130k is about 8.7%. If you're making that, then, yes, I
have lost opportunity cost. But remember, that's an absolutely risk free
8.7%, and I don't know where you can get a risk free 8.7% return, so I'll
continue to say a paid for house has no lost opportunity cost.
Elizabeth Richardson
Douglas Johnson
>Ok, sales of similar housing in my area are $130k, but rents for a similar
>house are ~1150/mo. My insurance and taxes are less than $200/mo, so my
>"income" from my $130k is about 8.7%. If you're making that, then, yes, I
>have lost opportunity cost. But remember, that's an absolutely risk free
>8.7%, and I don't know where you can get a risk free 8.7% return, so I'll
>continue to say a paid for house has no lost opportunity cost.
Well, 30 year treasuries are yielding 4.39%, so you have at least that
opportunity cost. You didn't mention maintenance, so your "income" is somewhat
less than that, especially if you reserve for roofs, appliances, carpets...
I'm not anti-owning, I do. I'm not against owning free and clear, I do. But I
don't see how it can be risk free and without opportunity cost. That kind of
asset doesn't exist.
-- Doug
Elizabeth Richardson
>
> Well, 30 year treasuries are yielding 4.39%, so you have at least that
> opportunity cost.
No, you still don't see. You have to have shelter, so if you don't own, you
have outgo. I have eliminated much of that outgo by owning free and clear.
Not having to pay most of my shelter costs puts that money in my pocket,
effectively giving me "income" from that capital on which you say I have
lost opportunity cost. Above, I say that effective income is at the rate of
return of 8.7% - twice the rate of treasuries, not a lost opportunity.
Elizabeth Richardson
joetaxpayer
Elizabeth Richardson wrote:
> "Douglas Johnson"
>
>>Well, 30 year treasuries are yielding 4.39%, so you have at least that
>>opportunity cost.
>
> Above, I say that effective income is at the rate of
> return of 8.7% - twice the rate of treasuries, not a lost opportunity.
>
> Elizabeth Richardson
I think the expression implies a choice, not a judgment. In your case,
you are indeed 'giving up' the 4.39% return Doug cites as opportunity
cost, but your math shows it was and is a smart decision.
I found this quote, "the opportunity cost of a decision is based on what
must be given up (the next best alternative) as a result of the
decision. Any decision that involves a choice between two or more
options has an opportunity cost."
JOE
Elizabeth Richardson
"joetaxpayer" <joeta...@nospam.com> wrote in message
news:EdWdnRxfFI2Cyzza...@comcast.com...
>
>
> I think the expression implies a choice, not a judgment. In your case, you
> are indeed 'giving up' the 4.39% return Doug cites as opportunity cost,
> but your math shows it was and is a smart decision.
> I found this quote, "the opportunity cost of a decision is based on what
> must be given up (the next best alternative) as a result of the decision.
> Any decision that involves a choice between two or more options has an
> opportunity cost."
Well, I thought opportunity cost more like I choose to buy bonds rather than
stocks. When I would have made more money on the stocks than I made on the
bonds, the difference is lost opportunity cost. In the situation we have
been discussing, there is no such loss, and therefore no cost.
I know you're trying to help me see it differently, but I don't think there
is a different way of seeing it. I've never bought into the lost opportunity
cost theory of having a mortgage and investing in the stock market. It's
almost impossible to pre-pay your retirement shelter without having a
mortgage while you're young. But your house is shelter, not primarily an
investment. And it seems foolhardy to me to try to save enough when you're
young to support, in retirement, both normal living expenses and a mortgage.
I guess you're right. My lost opportunity cost by paying my mortgage is not
having to pay a mortgage. But that's a circular argument, no?
Elizabeth Richardson
joetaxpayer
Elizabeth Richardson wrote:
> Well, I thought opportunity cost more like I choose to buy bonds rather than
> stocks. When I would have made more money on the stocks than I made on the
> bonds, the difference is lost opportunity cost. In the situation we have
> been discussing, there is no such loss, and therefore no cost.
> Elizabeth Richardson
If I am choosing between any two places to put the money there is
"opportunity cost". Even when the choice is pretty clear. You've done
the math, you've proven by a wide margin that the choice you made was
wise and economically well reasoned. From my quote, "the next best
alternative" as suggested by Doug was the T-bond which had a much lower
return than the rent-return you are achieving. Drop the word 'lost'. It
may be what is confusing the issue.
As I have accepted your advice and am paying my mortgage at a rate to
coincide with the Mrs and my retirement, my opportunity cost is simply
the expected alternate return (had I used the money to invest in
whatever that next choice would be for me).
JOE
Elle
> Elle wrote:
>
>> The 42% turnover of VIG each year raises an eyebrow, mine
>> anyway. Yahoo says this is quite a bit larger than the
>> average for this category.
>
> That is eyebrow raising especially since only 12 index
> constituents have had changes out of 214 companies in the
> index. But perhaps the changes they list don't include
> removals/additions to the list?
I think this requires further investigation, because now we
have the following turnover figures for VIG:
dividendachievers.com fact sheet = 14% for the year ending
Dec. 31, 2007
Vanguard VIG "Fund Holdings" site = 12% for year ending in
January
Yahoo's 42%
Your source for roughly 12/214 =~ 6% turnover
I think the point merits attention for those considering VIG
and like funds for a source of income that deals with
inflation etc. I am too lazy to look into this at the
moment. One of the regulars (I forget his name) at MIMF
could nail this in minutes, probably.
> Thanks for posting the relationship between Mergents and
> VIG. I actually use Mergent's publications to help me
> pick equities, but now I just might buy my first ETF...
I should have wrote that VIG duplicates the Mergent Broad
Achievers Select index. It's not merely based on it.
The five-year dividend growth rate of 15% given for the
index does impress. I go hunting for dividend achieving
stocks, examining five and ten year growth rates of
dividends. Given what's out there, any stock dividend rowing
annually on average at about 10% or more for both five and
ten years gets a "pass" from me for dividend growth. Meaning
10% is my crude anecdotal approximation for "above average"
dividend growth for large, old companies, based on a lot of
reading and quick calculating.
Re Ben Graham on banks, per my query:
> Graham considered banks as good as any other company for
> defensive investors:
>
> "We have no very helpful remarks to offer in this broad
> area of investment [financial companies, in particular
> banks and insurance companies] - other than to counsel
> that the same arithmetical standards for price in relation
> to earnings and book value be applied to the choice of
> companies in these groups as we have suggested for
> industrial and public-utility investments."
Thanks much for the citation. I took some of the phrases
above and googled for the source. I see this is from
Graham's tome _Intelligent Investor_ (1949). Your paragraph
above is also quoted at
http://seekingalpha.com/article/53557-valuation-of-financial-institutions-explained .
Also quoted at this site, from Graham's 1934 _Security
Analysis_:
"The securities analyst, in discharging his function of
investment counselor, should do his best to discourage the
purchase of stocks of banking and insurance institutions by
the ordinary small investor."
As the web site proposes, this surely reflects the times.
Namely, Graham wrote this in the Great Depression. As you
know, banks were not as well regulated and credit was
ridiculously rampant. And yet, I see some application today.
Perhaps, for the investor interested in dividend
achievement, we might argue that one be more conservative in
the fraction of one's portfolio allotted to banks. I would
want to continue to study the period from about 1990 to 1995
or so, when bank dividends (rationally, IMO) etc. took a
hit.
>> My eccentric relative for one notes that the amateur
>> investor looking for dividend achievement should buy
>> companies that "stay close to the man." Meaning companies
>> that use labor to produce a good rather than a service.
>> So no banks.
>
> Do you know his reasoning behind this advice?
His father :-) and subsequent experience with his own
investing. The relative is in his 80s and has been picking
stocks for 50+ years. He's a "Millionaire Next Door" type,
frugal and hard-working. Specifically, my relative says his
dad advised, "put your money as close as possible to the man
who is making things." I had written the relative I'd taken
a hit on my bank positions, and this was the gist of his
response. He added his father had not followed his own
advice rigorously. If the relative completely loathed
banking, he would have said so.
Elle
> Vanguard VIG "Fund Holdings" site = 12% for year ending in
> January
Post-o, it is 20%.
Tad Borek
>> The 42% turnover of VIG each year raises an eyebrow, mine anyway.
>> Yahoo says this is quite a bit larger than the average for this category.
>
> That is eyebrow raising especially since only 12 index constituents have
> had changes out of 214 companies in the index. But perhaps the changes
> they list don't include removals/additions to the list?
I have never looked at VIG but I believe it's a relatively new ETF. If
that's the case you should look at the average assets month to month. If
they've grown a great deal during the period being reported, it inflates
the turnover figure.
-Tad
Will Trice
Elle wrote:
> I should have wrote that VIG duplicates the Mergent Broad
> Achievers Select index. It's not merely based on it.
Sorry, I'm a little confused now. I see that Mergents has a Broad
Dividend Achievers index (which is the source I typically use) and a
Dividend Achievers Select index. Is there another or do you have an
extra word above? The reason I ask is that it would be a really good
match to one of the investment strategies I already use if it is the former.
Elle
Post-o by me. Per the Vanguard web site, VIG is "designed to
track the performance of the Dividend Achievers Select Index
[symbol DVG]. This index is a subset of the Broad Dividend
Achievers Index [symbol DAA] and is administered exclusively
for Vanguard by Mergent, Inc. The fund attempts to replicate
the target index by investing all, or substantially all, of
its assets in the stocks that make up the index, holding
each stock in approximately the same proportion as its
weighting in the index."
The dividendachievers.com site does not explain the
difference very well, if at all, from my quick check. DAA
holds 215 stocks. DAA holds 319 stocks. I'd be searching the
two sites (Vanguard's and dividendachievers.com's) like
anyone else to glean more info. I have yet to buy any fund
specialized in dividend growth, though I do consider them a
few times a year. About a year ago I did take note of some
div achievers ETFs offered by Powershares.com. In
particular, its international dividend achieving fund, PID.
BreadW...@fractious.net
[Thanks for further looking into VIG, and my apologies for
not having gotten back to it sooner]
> "Will Trice" <wtr...@notmonitored.com> wrote
> > Elle wrote:
> >
> >> The 42% turnover of VIG each year raises an eyebrow, mine
> >> anyway. Yahoo says this is quite a bit larger than the
> >> average for this category.
It appears that that's likely a very misleading number.
> > That is eyebrow raising especially since only 12 index
> > constituents have had changes out of 214 companies in the
> dividendachievers.com fact sheet = 14% for the year ending
> Dec. 31, 2007
> Vanguard VIG "Fund Holdings" site = 12% for year ending in
> January
Yahoo and Morningstar are still showing 42%.
Vanguard's "Holdings page, as of 12/31/07" says 20% (now)
Vanguard's semi-annual report (7/2007) says 2% ("annualized")
The numbers are probably still evolving - this is a small
and relatively new fund still -
From 3/06 - 1/07 it grew from _zero_ to $274million
from 1/07 - 7/06 it grew from $274MM to $418MM
Bearing in mind that the reported turnover is derived
using the net assets as the denominator, a small and/or
very fast changing denominator may make a mess of those
numbers (depending on actual calculation details). It's
no surprise that we can't seem to get a very solid stable
answer from the various sources for this number right now.
In time, and given how the index itself is composed, I
don't expect turnover for this fund to be quite as low as,
say, the S&P500, but it should be substantially lower than
any typical actively managed (even a relatively low-turno) one.
> I should have wrote that VIG duplicates the Mergent Broad
> Achievers Select index. It's not merely based on it.
Which is a subset of the broader Div Achievers index, but
the details of the filter which narrows it down are apparently
not public.
Anyway, as an inflation hedge - a somewhat risky one, as
would be any equity investment - the more I examine VIG,
the more I like it. I'd really love to hear what Bodie
would have to say about it...
Elle
snip but comments noted. On the fund VIG:
> In time, and given how the index itself is composed, I
> don't expect turnover for this fund to be quite as low as,
> say, the S&P500, but it should be substantially lower than
> any typical actively managed (even a relatively low-turno)
> one.
To me, the dividendachievers.com site is the best source on
this. It says the Broad Dividend Achiever Index was not
compiled until 2004. I gather that's the earliest it
compiled the Select Index as well. Mergent apparently
extrapolated back about ten years to gage how this index
would do against the S&P 500, so those charts at the
indices' fact sheets are a bit misleading as far as how far
the indices have been around.
I'd be inclined to believe that the turnover is what the
DividendAchievers.com site says (14%) or less, for the
reasons you suggest.
I would be interested in the current overlap of VIG and an
S&P 500 ETF such as SPY. If forced to bet, I'd say they
track pretty closely. It's large, old companies that make up
both, mostly. Sector weightings are not so far apart.
OTOH, using Shiller's data, the dividend achievement for the
S&P 500 has been nowhere near 15% per year. So there may be
a lot to funds like VIG. The charts at the Mergent web site
going back ten years sure suggest it.
> Anyway, as an inflation hedge - a somewhat risky one, as
> would be any equity investment - the more I examine VIG,
> the more I like it. I'd really love to hear what Bodie
> would have to say about it...
My take is Bodie is all about the safest approach to
retirement savings. Namely, one should first ensure one has
enough for retirement, without any risk and with some
planning for inflation, then if one has some left over, go
ahead and gamble (as Bodie might put it) on stocks. I do not
think he'd have any comment differing from this with regard
to dividend achievers. The underlying share price should be
about as volatile as the S&P 500, after all, and this is
Bodie's main concern.
I'm really not sure if he deserves the credit that Shiller
and Siegel get. I cannot get past his blind faith in the
inflation index on which TIPS relies. The guy expresses
nothing about planning for really rainy days, or how
uncertain one's future costs will be due to unforeseen
events. Investing in stocks for the long run is not just
about beating inflation. It's a lot of crude guesswork
evading precision. Like most real-world problems. Still, one
should plan the best one can, with the best assumptions
possible. I have doubts Bodie's are the best.
Maybe Bodie's thoughts should be bore in mind with the fact
that he is a PhD specialist in pensions. Which to me means
he's watching the abuses individuals heap upon their 401(k)
and IRA savings and saying, "Dimwits! Since corporations no
longer invest on your behalf in pension plans, and since you
will be tempted like the usual amateur to trade when you
should not, buy all TIPS!"
Re not posting right away: No sweat AFAIC. People respond or
do not respond. It's still the ultimate marketplace of ideas
here on the internet, IMO.
Will Trice
Elle wrote:
> To me, the dividendachievers.com site is the best source on
> this. It says the Broad Dividend Achiever Index was not
> compiled until 2004. I gather that's the earliest it
> compiled the Select Index as well. Mergent apparently
> extrapolated back about ten years to gage how this index
> would do against the S&P 500, so those charts at the
> indices' fact sheets are a bit misleading as far as how far
> the indices have been around.
I believe Mergents bought the Dividend Achievers franchise from Moody's
(or perhaps Mergent was spun off of Moody's) back in 2004, so results
probably go back to the Moody's days.
Elle
snip for brevity per moderation guidelines
> I believe Mergents bought the Dividend Achievers franchise
> from Moody's (or perhaps Mergent was spun off of Moody's)
> back in 2004, so results probably go back to the Moody's
> days.
What's at
http://www.dividendachievers.com/Site/About%20Dividend%20Achievers/da_history.php?preview=
seems to suggest otherwise.
I tried a few online stock quote graphing sites and cannot
get data on DAA or DVG going back further than about 2004. I
googled using the index names and overwhelmingly got hits
announcing Vanguard's new ETFs based on the indices.
I do see that Vanguard's much older "dividend growth" fund
is VDIGX. It has a turnover rate of 41%, according to the
Vanguard site and yahoo.
I think whether to attach much meaning to a single year's
turnover rate is another question.
Will Trice
Elle wrote:
>>I believe Mergents bought the Dividend Achievers franchise
>>from Moody's (or perhaps Mergent was spun off of Moody's)
>>back in 2004, so results probably go back to the Moody's
>>days.
>
>
> What's at
> http://www.dividendachievers.com/Site/About%20Dividend%20Achievers/da_history.php?preview=
> seems to suggest otherwise.
Hmm, you're right. I guess that they applied their selection guidelines
going back ten years to see what the index theoretically would have
been. That seems kind of like they were cherry picking a time period
since they presumably could have gone back to 1979 when the Dividend
Achievers list was established and reported those results...
BreadW...@fractious.net
intercepted by moderator. I'll try to be more brief]
"Elle" <honda....@nospam.earthlink.net> writes:
> I do see that Vanguard's much older "dividend growth" fund
> is VDIGX. It has a turnover rate of 41%, according to the
> Vanguard site and yahoo.
> I think whether to attach much meaning to a single year's
> turnover rate is another question.
VDIGX is actively managed and has been around a lot longer.
It's also got only about a fourth as many holdings, though
spread out more evenly between them (because VIG is weighted
on a modified market-cap scale). The upshot of all that is
that expected turnover in VDIGX should be substantially
higher than in VIG. And VDIGX's reported turnover number, since
it's long established and fairly stable fund, should be reasonbly
accurate. The reported turnover numbers (the variety of them)
for VIG probabl won't have much meaning until it stabilizes,
and given the (general) method of index construction, that
turnover should be pretty low.
That all said, I'm a bit surprised by the returns volatility
(and the two-years-in-a-row huge losses) for VDIGX and hope
that VIG will do better. The backtested index on Mergent's
site surely indicates that it would have.
Lastly, re: inflation hedge for these versus TIPS, these
funds both throw off dividend yields of around 1.9%,
substantially above the "real" yield across the whole
TIPS yield curve (even the 20yr tips only have 1.7%).
Given a reasonable expectation that these dividends will
grow at at least the rate of inflation, if one is satisfied
with the dividend (ie. one's expenses are tied to divs,
not principal), these should be a superior inflation hedge
over longer periods, bearing in mind, of course, normal
volatility of equity prices - which don't matter very much
as long as you don't have to sell any and can live off
those dividends.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
======================================= MODERATOR'S COMMENT:
Much appreciated. Good post.
Elle
On Moody's, Mergent and their Dividend Achievers stocks:
> I guess that they applied their selection guidelines going
> back ten years to see what the index theoretically would
> have been. That seems kind of like they were cherry
> picking a time period since they presumably could have
> gone back to 1979 when the Dividend Achievers list was
> established and reported those results...
My feeling through all this is that dividend achieving
stocks largely or entirely are simply a value stock (in the
Grahamian sense) portfolio. Graham style value stock picking
historically has been very successful, as Tad often points
out. Right now, I doubt cherry picking the timeframe would
have been necessary. Admittedly a more complete picture is
always nice. I would love to see a report on the 1989-1994
period or so in particular, since I think what's happening
today with banks mirrors that period well. It's largely an
academic matter but it might "soothe the beast" of those who
are cussing about buying into the S&P at a peak last summer.
Elle
On a fund's stock turnover rates:
> VDIGX is actively managed and has been around a lot
> longer.
> It's also got only about a fourth as many holdings, though
> spread out more evenly between them (because VIG is
> weighted
> on a modified market-cap scale). The upshot of all that
> is
> that expected turnover in VDIGX should be substantially
> higher than in VIG.
This may be the general trend. Yet I need more info to bet
it would always apply. I would have to know more about the
criteria for VIG and VDIGX. In particular, both are about
half giant caps and a third large caps. Weighting may mean
the two funds have considerable overlap every year. Meaning
turnover may be similar.
We may be overfocused on turnover, though. Buying VIG where
one may pay a bit more (or not; remains to be seen) in
capital gains each year may still be far superior to holding
a few individual positions or even 30 positions where one
periodically adjusts the portfolio.
> And VDIGX's reported turnover number, since
> it's long established and fairly stable fund, should be
> reasonbly
> accurate.
I am not sure. Does the mere fact that a fund has been
around a long time mean its turnover rate will not vary
much? In particular, turnover is going to depend on economic
conditions. Who is cutting a dividend, and so forth, will
depend on the climate for each sector blah blah. I think it
is too hard to say without seeing each of the last ten
year's numbers.
> re: inflation hedge for these versus TIPS, these
> funds both throw off dividend yields of around 1.9%,
> substantially above the "real" yield across the whole
> TIPS yield curve (even the 20yr tips only have 1.7%).
> Given a reasonable expectation that these dividends will
> grow at at least the rate of inflation, if one is
> satisfied
> with the dividend (ie. one's expenses are tied to divs,
> not principal), these should be a superior inflation hedge
> over longer periods,
snip for brevity
That's what my eccentric, but often right on with stocks,
relative says. :-) The numbers above make the point even
better.
JB
"Elle" <honda....@nospam.earthlink.net> wrote in message
news:13qjhi4...@corp.supernews.com...
Elle,
In those days the fund was a utilities sector fund. I've forgottem when
they switched to the current objective.
JB
Elle
Regarding VDIGX, Vanguard's Dividend Growth Fund
> In those days the fund was a utilities sector fund. I've
> forgottem when they switched to the current objective.
This is helpful. Consistent with what you say, I see that
the Vanguard site states: "Effective December 6, 2002,
[VDIGX] changed its investment objective and concentration
policy. Prior to making these modifications, the fund was
called Vanguard Utilities Income Fund, reflecting its former
policy of investing in income-producing stocks of utilities
companies. The performance prior to December 6, 2002
reflects the fund's performance under its former investment
objective and concentration policy."
This would explain the long term graph of VDIGX at yahoo.
VDIGX did not track the S&P very well until about 2003
(doh). As I wrote earlier, I expect a true "dividend
achieving portfolio" to follow the S&P for the most part.