Timing the Market – How would I have done if I followed it since I graduated?

Back at the beginning of the month (Aug 5th) I wrote about Stein & DeMuth’s use of long-term metrics and trends to “time the market” in the long term (i.e. over a 10-15+ year period). Unfortunately, their book was published in 2003, and while they kept graphs up on their website (   ) for a while, they stopped updating the graphs in 2015.

I wanted to do a “what if” analysis, where if I had followed their metric strategy from when I first graduated and started investing some of my salary (1987) to the end of 2016, a 30 year period. I would take $1,000 a year and invest it either in the S&P 500 every year (dollar cost averaging) or the S&P or AAA bonds, based on the “market timing” signal that Stein & DeMuth laid out:

  1. S&P 500 price vs. 15-year average (if above average, don’t buy)
  2. S&P500 P/E vs. 15-year average (if above average, don’t buy)
  3. S&P500 Dividend yield vs. 15-year average (if above average, don’t buy)
  4. S&P500 Earnings yield vs. AAA bond average (if bond yield is higher, go with bonds, not stocks)

Base Strategy

  • Whenever I got a “buy” for S&P 500, I put in $1,000 at the beginning of the year
  • Whenever I got a “don’t buy” I put in $1,000 in the average for AAA bonds
  • I adjusted for inflation
  • I ran the numbers for each of the 4 scenarios, for the 30 year period, including the great run up of stocks in the 90s, the dotcom crash, the low bond rates of the 00s, and the crash of 2008.

The results were very interesting.

  • Dollar cost averaging into S&P500: $60,691
  • Price metic: $65,576 (8.0% better return)
  • P/E metric: $67,583 (11.4% better return)
  • Yield metric: $67,133 (10.6% better return)
  • Earnings vs bonds: $66,034 (8.8% better return)

What this shows me is that, if you have the patience and long-term outlook necessary, using the metrics outlined by Stein & DeMuth appears to offer slightly better returns. In their book , they showed higher returns (20%), but that could simply have been the timing of the book – right after the dot.com crash.

I will probably continue dollar-cost averaging in my 401K and Roth IRAs across a spectrum of investments with my allocation. I will also probably use some of this timing strategy with my “funny money.” I’ll let you know how I’m doing.

Anybody out there with an interesting market timing strategy?

 

Mr. 39 months

Book Review – Yes, You can Get a Financial Life by Ben Stein and Phil DeMuth

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a master’s & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

This is the Fourth book in the author’s five part series on finances. In the previous three they showed how to use long-term trends to “time the market” in the long term (10 – 15 years +), how to set up an income producing portfolio in these low-yield times, and finally how baby-boomers can still retire even after the dotcom crashes, through using the right steps, savings and planning. This book is written more for millennials and Gen Xers, and discusses the steps and objectives individuals should be taking throughout their lives (their 20s, 30s, 40s….). The book is chock full of bits of knowledge and wisdom for specific points of your life, and is well worth reading for those just getting started.

The book starts off discussing the four parts of getting your financial life’s crises ironed out, which are no more than having a general idea of:

  1. How much predicable events will cost (marriage, house, car, etc.)
  2. How much you’re likely to earn at different stages of your life
  3. How much money to save and when
  4. Some grasp of when and how much to borrow

One of the key points of the book is the “life cycle” model of financial planning, where a person’s income starts out low, builds up, then plateaus, while their consumption level stays relatively flat. Thus, they’ll need to do some borrowing to start with (house, college, etc.) then pay it off as they peak, while saving for that period as they retire and their income drops. It is around this cycle that the book is based.

The book then goes into numerous chapters, focused around:

  • Your 20s (challenges, saving & investing in your 20s, housing for couples & singles, babies, etc.)
  • Your 30s (challenges, saving & investing in your 30s, insurance, career advice, etc.)
  • Your 40s (challenges, saving & investing in your 40s, being sinvle and 40)
  • Your 50s
  • Your 60s and beyond

Each of these chapters has detailed graphs/charts, tables for recommended savings rates, recommended portfolio allocations, and notes on personal purchases which are typical at that point of your lifeThe only critique I would make is that this is based around the standard “work till your 60” plan for life, which for many FIRE enthusiasts is too long. We prefer to accelerate our savings and become independent much earlier. Still, I think this book would be very valuable for folks just graduating (either High School or College), probably alongside Dave Ramsey’s book.

I would rate in 3.5 stars out of 5.

 

Mr. 39 months

Timing the Market – Waiting to buy on the “dip”

Was reading an article yesterday about an interesting stock buying strategy. Apparently when folks think the market is overheated/overpriced (like some do now), folks keep their money on the sideline in cash, and wait for the market to drop 2% – 3% in a day or two, then they rush in to buy the stocks. Just another strategy for timing the market.

The article noted that folks who have been doing this since the last time the market dipped 3% or more (2016) have  lost out on a 10% increase in the S&P500 over that time period, by just leaving their cash to the side. This further validates my thoughts (and the thoughts of most folks) that you can’t time the market – at least not in the short-term. I did do a write-up (Aug 5, 2017) on Ben Stein/Phil DeMuth’s thoughts on long-term trends that you can use to determine when is a good time to buy stocks vs. buying bonds/other investments.

For now, I continue to do dollar-cost averaging with my investments, putting in a high % of my take home pay into my 401K, Roth IRA and individual investments. Been doing that for years, and it has paid off even after many of the dips and crashed.

 

Anybody out there with an interesting market timing strategy?

 

Mr. 39 months

Book Review – Yes, You can Still Retire Comfortably by Ben Stein and Phil Demuth

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a master’s & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

 

This is the third book in the author’s five part series on finances. In their first, they wrote about using certain metrics to be able to “time the market” in the long term (10 – 15 years +). In the second book, they discussed the steps to create an income producing portfolio, through the use of bonds, dividend stocks and REITs. This book, written in 2005, is mostly addressed to the baby-boom generation, who had recently seen their retirement money damaged in the dotcom meltdown. The book’s concept was that, with the right steps, savings and planning, and individual could still retire comfortably.

The book starts off with some of the basic rules for retirement (Maximize your abilities, start saving early, don’t spend more than you earn, etc.) and then flows into retirement planning by decade – what you should be doing in your teens, 20s, 30s, etc. It is all sound advice, and falls in line with other things the authors have written (like Ben Stein’s “how to screw up your life” book). It finishes its first part by discussing the coming baby-boomer retirement crisis. As many of you know, a lot of boomers have not saved anything like what they will need for retirement. They only really started to do it in the 00s and this decade. That is probably why the 2007-2008 meltdown go so much press – it hurt the boomers badly.

The second part of the book goes into topics like how much you will need, how to setup a savings plan, and at what rate you will need to get your retirement money income. The charts in chapters 3 & 4 are priceless, as they show, based on typical returns, what you’ll need to save at whatever point you are at (5, 10, 15 years from retirement) and what your overall nest egg should be, based on projected lifetimes. The second section then talks about Monte Carlo simulations (to test your plan), income investing, and how to draw down your funds over your retirement. This is the heart of the book, and its best section. The only issue I have (and it’s a personal one) is that he relies a lot on bonds (his portfolio is 50% bonds, 50% stocks). In the 80s and 90s, bonds had high rates, and there were corporate bonds at 6% and 7% in the late 90s. Based on his knowledge there, I think he believed the bonds would return to that – but in our current low interest rate environment, they are only coming in around 3% – 4%.

The third section of the book discusses what to do if you haven’t got enough. It’s a bad spot to be in, but there are some alternatives:

  • Immediate annuities (to guard against outliving your money)
  • Relocation to a less expensive area
  • Reverse mortgages

The book closes with “25 big truths of retirement planning” another list of pearls of wisdom from the authors.

This was a good one, and I refer back to it occasionally to see if I am “on track” based on his numbers.

 

I would rate in 3.5 stars out of 5.

 

Mr. 39 months

You’ve achieved Financial Independence! Now What?

In line with my previous post, I have noticed a lot of comments and articles on the FIRE blogs lately about what folks plan to do (or are doing) once they achieve financial independence. They often follow a pattern of travel and doing projects/tasks that you put off because you didn’t have the time. This typically occupies folks for the first 12-24 months once they “retire” and then the hard part comes in.

Some folks like “Mr. Retire by 40” turned into the stay-at-home dad, while his wife continued to work. His wife enjoys her job, so they’ll keep at this for some time before they both retire. In the meantime, he takes care of their child, travels in the summer, and continues his work on his blog and other activities.

Others, like Mz Liz or ESI money have taken up counseling folks on financial independence, investing, and how to financially improve their lives. They have taken something that they are good at, have a passion for, and sought to “give back” to the community.

Still, for many others enroute to financial independence, the question remains of how we are going to fill our time once we have so much of it to fill.

For me, I know that I will need to find something to occupy my time, due to my mindset. I’ve been a “go getter” all my life, rising through the corporate ranks. I don’t see myself “kicking back.” My wife says our vacations are always busy, going from place to place, always on the move. My “retirement” will probably be the same. I have a couple of things which can occupy me for the first 12-18 months (finish the Appalachian Trail hike, road trips throughout the US, visiting family and friends, etc.) – but eventually I will need something to occupy my time.

Right now, I’m looking at several options:

  1. Volunteering: I have several things I would like to volunteer for, including Habitat for Humanity, teaching, mentoring and financial advisor
  2. Real Estate: Either as a realtor or getting into flipping and renting, I have always had an interest. I need to do some informational interviewing of realtors to get more data.
  3. Finance: Either as a registered agent and counsellor, as a volunteer, or working with the web, I would like to help people achieve the financial independence that I have.

 

Of course, something else may pop its head up, so we will see.

What are you thinking of doing once you are free?

 

Mr. 39 months.

Book Review – Yes, You can be a Successful Income Investor by Ben Stein and Phil DeMuth

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a master’s & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

This is the second book in the author’s five part series on finances. In their first, they wrote about using certain metrics to be able to “time the market” in the long term (10 – 15 years +). In this book, they talk about how to set up an income portfolio that will pay you dividends – something often used by folks for their retirement. There is also a school of investing that says that the only real stocks you can count on are ones generating dividends – all the other “growth” stocks are just hot stocks that can easily come crashing down.

Written in 2005, the book discusses how, in reaction to the dot.com stock meltdown, the fed dramatically dropped rates in the US. The risk-free T-bill of 2000 was 6.2 percent, while in 2005, it was at 1.7 percent. This affected a lot of folks looking for income generating investments, like dividend stocks, bonds, annuities, etc. The book starts out explaining how the chase for growth can lead to major stock drops (like 2000) – which can be very painful depending on the timing. Their alternative is income investing, where you put money in the market when it is too expensive. Their idea is not to buy into growth, but to buy into investments that produce a regular yield.

The key measurement for them is yield – both yield from stocks, and yield from bonds. The caution that you should get your yield information from the same source for all your investments (since some calculate yield a little differently) so that you are always comparing apples-to-apples. They also caution that some of the info in the book is time sensitive (like from 2005?) so do the analysis yourself to get up-to-date information.

The book spends several chapters discussing Bonds (a topic that many FIRE folks don’t spend a lot of time on).It discusses the risks and rewards, how to measure yield, essential bonds for fixed-income investors, and then higher yielding bonds. These chapters alone are a real benefit for folks, because most people are poorly educated on the bond market.

The book then moves into income producing stocks, including preferred stocks. Much of the info here has been covered before, but the emphasis on yield and dividends, over growth, is the key concept.

The book then covers Real Estate Investment Trusts (REITs) which are another key source of income. REITs are a special class of companies, dedicated to real estate investments. Because they have to distribute 90% of their earnings as dividends each year, they benefit from certain tax codes write offs. Since they distribute so much of their earnings via dividends, they are income producing machines, and a key part of anyone’s income portfolio.

The book closes by working up some sample income portfolios:

  1. A very simple one, consisting of four index funds (20% Vanguard REITs, 20% IShares Stock select dividend, 30% Vanguard Inflation protected securities and 30% Vanguard short-term bonds). Four funds, low expenses, no fuss. In 2005, this generated a 3.8% annual yield. In 2016, it was around 2.6%.
  2. A slightly more aggressive allocation (20 different REITs, 10 dividend stock, 10% in IShares, 30% in Vanguard inflation protected securities, and 30% in Vanguard total bond market). This increased the yield in 2005 to 4.3%
  3. A very aggressive allocation (20% in leveraged REIT fund, 20% in leveraged dividend funds, 30% in Inflation-protected securities and 30% in PIMCO corporate income fund – to get some emerging markets yield). This gets the yield in 2005 up to 6.9%, even with the bump up in expenses.

The last thing they note is tax strategies. Specifically, tax sheltered accounts (401Ks, IRAs, etc.) is where you want to stock your Treasury Inflation-Protected securities. It helps avoid having to pay taxes on income that is one of the major hassles of TIPs bonds. Also consider putting REITs in your tax advantage accounts, for the same reason.

Overall, I found the book to be interesting, and I’ve used my father’s remainder IRA to setup something similar. It has produced some good yield for me (around 3.42%).

I would rate in 3.5 stars out of 5.

Mr. 39 months

Dealing with the psychological effects of FIRE

Many of the folks in the financial independence community get all “fired up” about being able to retire early and/or chart their own path through life. It can be thrilling to look forward to, and as you get closer, the excitement builds. Eventually you reach that date, and suddenly your whole life changes!

What many folks don’t talk about is some of the potential psychological pitfalls that might pop up when you reach that glorious date.

For many of the baby boom generation (I’m the last year of that group, born in 1964), we have identified ourselves by our work. We start conversations with folks and ask “so what do you do?” Our social circle and lives revolve around the people we work with, and even our conversations at home with our loved ones often times involve work related issues and “do you know what Sheila did today?” kind of conversations. Then suddenly, when you retire early, that is gone.

My sister-in-law is like that; she has more than enough to retire and wants to move out of her current home (too much for her to keep up). Yet she continues to work at her job and commute an hour to work each way because that is what she knows, that is where her social circle lies, and she doesn’t have much to do at home (she is working on developing hobbies and a support group, but it’s difficult). Most of her family lives away from her (we are 2+ hours away) so she doesn’t have that option either.

I think the following generations (millennials, Gen X, etc.) have a better work/life attitude, and often don’t suffer from this as much. I think they also are more open to retiring early, as their lives don’t revolve around work, and they seek other activities to fulfill them, rather than climbing the corporate ladder (much to the chagrin of managers of my generation).

So what do you do when you retire early, and find that people your age are still working, that there is nobody to “hang out with” during the day, and where the thing you have held out as your “value” all your life is suddenly not there? It can be the cause of some serious psychological distress.

I’m starting to deal with some of this now. While I am still 35 months away (getting there!) from financial independence, it is starting to hit me. What am I going to do with my free time? While I have some travel goals that will probably take up a lot of my time for the first couple of years that will eventually fade. My circle of friends (like most folks as they get older) has shrunk. When my wife and I recently helped a friend clear out her dad’s basement after his death, my wife and I noted that we were really the only ones left in our circle of friends that could be considered “mobile” and capable of helping folks move (Many of our friends have health related issues).

Recently there was an article on folks who don’t have a spouse, children or caregiver, and what they should do as they age  While my wife and I have each other, I can see the wisdom of some of the advice even for us.

  • Speak up: Talk to friends and colleagues about family concerns
  • Act early: Start planning for your future health and long-term care before an emergency happens
  • Make new friends and keep the old
  • Appoint a proxy: your most trusted friend or relative, in case you start losing any cognitive capacities
  • Consider moving: Move to a more walkable city or maybe a college town, where you can stay engaged with activities (mentoring on financial independence?)
  • Live well: Eat healthy foods, walk, keep your brain sharp

I hope everyone considers how their financial independence will affect their lives, and builds a life they can look forward to!

 

Mr. 39 months.

Book Review – Yes you can time the market! by Ben Stein and Phil DeMuth

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a masters & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

The book was written in 2003, after the dot-com crash. It came out of a series of lunches and bike rides in Santa Monica from 1997 to 2000, where the two argued/discussed how the market appeared to be overpriced. However, since conventional wisdom was that you couldn’t “time the market” what were you to do? Market timing “had been the province of short-term fortune-telling cranks” and has had a justified bad reputation in investing circles. What the two authors wondered (and set out to research) was that, in the long-term (10+ years) were their valuation metrics that could be used to determine when to buy, and when not to buy, stock funds. Note that they were using stock mutual funds (S&P 500 Index) for your purchasing decision here, because individual stock analysis is something completely different.

The authors then set out to look at various metrics for determining the time to purchase, compared them, provided their strengths and weaknesses, and then judged them over various time periods (5, 10 and 15 years). They also provided methods for the reader to do similar analysis in the ongoing years, so you could continue to use the methods. The list of metrics they came up with were:

  • Price vs 15-year moving average of price
  • Price-to-earnings ratio (PE) vs 15-year moving average
  • Dividend yield vs 15-year moving average
  • Fundamental value (can’t use this now, their source no longer provides the data)
  • AAA bond yield vs stock “yield”
  • Price-to-Cash Flow and Price-to-Sales (can’t use this now, their source no longer provides the data)

Each of these metrics provide a point where the investor should start purchasing stocks, or should stop purchasing (but continue to let the stocks sit and reinvest the dividends). Again, this is long-term timing, so there is nothing in here to show when to exit the market completely and put it in bonds or your bank.

They end by showing that, by combining each of these metrics, rather than using just one, and using that to determine your time to purchase, you can enjoy even greater stock.

Price: This metric is just a comparison of the current S&P 500 (adjusted for inflation) versus the 15-year moving average. When the current price is above the 15-year average, you should stop purchasing and let your stocks ride. When it dips below, you can begin purchasing again. As you would expect, since it has been climbing steadily for many years, this one doesn’t provide a signal to purchase as much. In fact, using this metric, it suggests you shouldn’t have been purchasing from 1985 to 2008 (one of the great run ups of stocks). The only time it wanted you to buy recently was from 2009 – 2012.

 

Price chart

Price-to-Earnings: This one seems to be a little more accurate, in my opinion. Many folks have used the P/E ratio for their investing decisions. Here you are measuring the current S&P500 P/E ratio versus the 15-year moving average. Again, when its above the average, you shouldn’t buy, when it is below the average, you should buy.

PE chart

Again, if you look at the chart, it recommends not continuing to buy in 1985, and only starting back up again in 2004. The book provides documentation to show that, as of 2003, this method rewarded the investor better than continuing to purchase during the great stock run up. Perhaps if t went past 2003 (when the book was written) it wouldn’t be valid. Something for me to check out in the future.

Dividend Yield: Companies can elect to distribute some of their excess earnings to their shareholders, and these take the form of dividends. Nowadays, companies don’t like to give out dividends – their CEOs think they have a better use of the earnings to grow the business. In the book, they track the S&P500’s dividend yield versus the 15-year moving average. When the current yield is below the 15-year average, the assumption is the stocks are overpriced, and you should not be purchasing new stocks (but you should continue to reinvest the dividends). Again, based on this, the book shows how, over a long period (15-20 years) the investor beat out the others (in the case of 20 years, it was almost a 50% increase in overall returns). This is also the third metric in a row which says to stop buying new stocks n 1985 (?)

Dividend yield chart

Earnings Yield vs AAA Corporate Bond: In this fourth and final metric,  the book compares the yield of a AAA corporate bond to the S&P500 Earnings Yield (you get this by dividing 1 by the P/E ratio). The earning’s yield has always been a short-hand way to compare bonds to stocks. The idea here is that if someone can earn more “yield” from a bond than a stock, they should invest in bonds. Except for a dip between 2008-2010, this metric was also suggesting investing in stocks for the past several years.

Earnings vs bonds

The book concludes with an analysis of how to use all the metrics together to significantly increase your returns. It compares using 1, 2, 3 or 4 of the metrics together, and their returns over 5, 10, 15 and 20 years, as well as comparing them with other strategies (asset allocation, other investments like real estate, etc.) In the end, this long-range market timing was shown to be more successful.

However, the authors note that this strategy is not for the faint of heart. It is a true contrarian strategy, where people will be purchasing stocks when there is “blood in the streets” and refusing to buy, when the market is going up like a rocket. It is also, very much, a long-term strategy, where you are not looking to capitalize on the investments for 15-20 years.

 

By the way, as of August 1, 2017, three of the four metrics have turned to “don’t buy” additional stocks. Only the S&P500 earnings yield vs bond yield still is pointing towards buying more, and even that is pretty close (S&P500 yield was 4.05%, AAA bonds were 3.75%). Also remember that this metric does not say to sell your stocks, just don’t buy any new ones (and continue to reinvest your dividends).

Overall, I liked the book, and may keep the metrics in mind for my “fun money” accounts. For my 401K/IRAs I plan on sticking with my asset allocation strategy.

I give it 3.5 stars out of 5

 

Mr. 39 Months

Monthly update – Aug 1, 2017

Yeah, baby! Broke past the 3-year mark, and I am 35 months from Financial Independence!

In addition, my investments went up $14,372,77 for July, a gain of 1.58% over the previous month. Here I was moping in a previous email about my investment strategy not exactly working, and the market takes off in the last week. The big gainers appear to be the S&P500 Index funds and my International Index funds (Internationals have had a great year!). Bonds are up a little, and my REITs (Real Estate Investment Trusts) continue to do poorly – though remember that my REITs did very well in the previous 2 years.

Overall, the balanced portfolio that I’m following with my 401K/IRAs (30% Bonds, 17.5% S&P500, 17.5% International, 17.5% Small Cap, 17.5% REITs) appears to be doing OK. For the year, I appear to be around 7.3% up. I know everyone is expecting a “correction” sometime soon, but until then, I will keep with my allocation and rebalancing. In fact, in July I rebalanced about $15K from stocks into Bond index fund to get back to 30%. Its not doing well now, but it puts me in better shape if there is a correction. How is that for discipline?

My stock pick portfolio (that I’ve written about before) didn’t do as well as my 401K/IRAs. This just goes to show me that the standard of having most of your money in Index funds, with a small portion for “funny money,” seems to work for me.

I’ve got an interesting book for my next post on timing the market (long term) that I will get out soon. I think you guys might find it interesting

Hope your July was fun and fulfilling!

 

Mr. 39 Months.