Who Still Offers B Shares & Best Bond Funds
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[quote=Ronnie Dobbs][quote=LSUAlum]Ok, let me ask you guys a question.
If conventional wisdom is that the majority of an investor's performance is dictated by their investment behavior and their asset allocation vs. the actual investments they hold, then why worry so much about whether your corporate office picks the funds or you do. I think most people would say that the explosion of ETF's and Indexing has really shown that the majority of investors prefer that over individual stock picking. That and the fact that very very few people (and certainly not any Financial Advisors) can 'stock pick' better than professional money managers over the long haul. Even money managers have trouble beating the 'market' over the long haul. The risk adjusted return of actively managed funds, I would argue, is better, but that is certainly an ongoing debate. I'm not digging on EDJ or anything because I don't see any problem with that. To wit, I think it makes alot of sense to not have to design the portfolio of every account. The possible exception is that if you cannot trade individual securities in the account that would bother me if I had clients that traded alot but then, they are traders and not investors for the most part. I can't speak for Gaddock or anyone else, but I know that professional money managers have alot more experience, understanding, and resources than any of us do at 'picking' investments. I honestly think one of the biggest problems with our industry stems from people like Windy who have been in the business less than 5 years and think they can 'out-pick' the professionals. They have just enough knowledge to get in trouble. There is ZERO chance that he can outperform any index or Managed Fund on a risk adjusted basis over a 5+ year span. [/quote] Or maybe it's people like you who can't read. I never said i could outperform a managed fund. I said i enjoy the process and want to learn as much as possible about it myself. Then again, whats the good in picking a managed fund, if you don't understand what you are looking at.....Thats my point LSU....You guys seem to always have it out for newer people, willing to learn more than most.....Always with the "Know enough to be dangerous" speech. Enough already. I don't do things the same as you, nor will I ever. I hae my way of doing things that has worked out very well for me and I'll continue on my path to Seg 4. I enjoy the research of funds/stocks/etc...You don't or don't believe you can do well. That's fine, but thats no reason to doubt my abilities to learn.[/quote] I applaud you for wanting to learn. What I was commenting on was your disdain for the way EDJ handles their advisory accounts. The fact that you wanted control, to presumably pick better securities for your clients, is what concerns me. Admittedly, I would want a platform that allowed me to handle individual equities based on my clients' needs / wants. I can understand that. What concerns me is that instead of say, trying to figure out what allocations your advisory accounts are allocated to by your corporate office, you want to figure it out on your own. That shows a bit of arrogance. Hence the 'enough to be dangerous' comments. In the four stages of learning (unconscious incompetence, conscious incompetence, conscious competence, and unconscious competence) you are on the first stage still. That's the dangerous part.The problem with so-called “professional money managers” and investment policy committees, etc. is the theory behind what they are doing. For some reason, most of them (excluding certain types of mutual funds) are benchmarking themselves, and trying to match or beat, an arbitrary index. I am so adamantly opposed to managing money this way. I do not claim to me able to ever pick the “winning stocks” better than many (most) of the fund managers out there. I have neither the time nor the resources. However, it is more important to MY CLIENTS that they meet their goals. If that means slightly underperforming the “indexes” for many years, I am OK with that as long as when the big “game changer” comes along, I don’t lose their shirts and forever change their financial lives.
You must understand the inherent conflict with professional money management. Money managers (SMA's, funds, ETF's, etc.) get paid to manage money. The more money, the more they get paid. The better the performance, the more money flows in, the more they earn. In addition, this is more money ot the management company as well, thus they must satisfy their bosses AND their wallets. But they are MORE concerned about losing their jobs. So what many fund managers do is essentially track the indexes, and then attempt to add some alpha with various bets on top of it. Won't win by too much, but won't lose by too much. Not too risky. So this is why MOST actively managed funds can't beat their index...they are essentially tracking it, with higher expenses, and a 50/50 shot of beating it or missing it, depending on how those little bets work out. So in many cases (especially if you are a "stylebox" investor), just buying the low-cost index fund or ETF makes the most sense. IN ADDITION, most funds that experience some unusual success for a year or two will witness a huge influx of cash. And as we all know, if your prospectus is narowly defined (ex: must invest in mid-cap US equities, and be 80%+ invested at all times), this can seriously reduce your ability to bring any alpha to the table, as you need to make pretty big bets to have any impact on the portfolio. So what to do? Just add more to the "index" positions. Why do you think nearly every large-cap U.S. equity fund always has the same positions in the top 10? Let's see....Microsoft, GE, P&G, IBM, XOM, JnJ, shall we go on? I can tell you, if every damn LC fund has all these same positions, this thing ain't gonna be outperforming anything. Now, I am NOT saying not to use money managers. That's all I use. But you have to be intelligent about the way you design a portfolio. At Jones, if I invested my clients' money the way they honestly answered a risk-tolerance questionnaire, my 55 year-old clients would be in 70% equities. 70%!! That's ludicrous! There is absolutely no need for them to be 70% equities. In my book, they MIGHT be 50% of they were definitely working another 10 years. And even then, it would depend on the economic landscape. I'm not sure why Jones is so pro-equities. This is the case even in advisory, where it doesn't matter WHAT they aer invested in. It's the same fee.[quote=B24]The problem with so-called “professional money managers” and investment policy committees, etc. is the theory behind what they are doing. For some reason, most of them (excluding certain types of mutual funds) are benchmarking themselves, and trying to match or beat, an arbitrary index. I am so adamantly opposed to managing money this way. I do not claim to me able to ever pick the “winning stocks” better than many (most) of the fund managers out there. I have neither the time nor the resources. However, it is more important to MY CLIENTS that they meet their goals. If that means slightly underperforming the “indexes” for many years, I am OK with that as long as when the big “game changer” comes along, I don’t lose their shirts and forever change their financial lives.
You must understand the inherent conflict with professional money management. Money managers (SMA's, funds, ETF's, etc.) get paid to manage money. The more money, the more they get paid. The better the performance, the more money flows in, the more they earn. In addition, this is more money ot the management company as well, thus they must satisfy their bosses AND their wallets. But they are MORE concerned about losing their jobs. So what many fund managers do is essentially track the indexes, and then attempt to add some alpha with various bets on top of it. Won't win by too much, but won't lose by too much. Not too risky. So this is why MOST actively managed funds can't beat their index...they are essentially tracking it, with higher expenses, and a 50/50 shot of beating it or missing it, depending on how those little bets work out. So in many cases (especially if you are a "stylebox" investor), just buying the low-cost index fund or ETF makes the most sense. IN ADDITION, most funds that experience some unusual success for a year or two will witness a huge influx of cash. And as we all know, if your prospectus is narowly defined (ex: must invest in mid-cap US equities, and be 80%+ invested at all times), this can seriously reduce your ability to bring any alpha to the table, as you need to make pretty big bets to have any impact on the portfolio. So what to do? Just add more to the "index" positions. Why do you think nearly every large-cap U.S. equity fund always has the same positions in the top 10? Let's see....Microsoft, GE, P&G, IBM, XOM, JnJ, shall we go on? I can tell you, if every damn LC fund has all these same positions, this thing ain't gonna be outperforming anything. Now, I am NOT saying not to use money managers. That's all I use. But you have to be intelligent about the way you design a portfolio. At Jones, if I invested my clients' money the way they honestly answered a risk-tolerance questionnaire, my 55 year-old clients would be in 70% equities. 70%!! That's ludicrous! There is absolutely no need for them to be 70% equities. In my book, they MIGHT be 50% of they were definitely working another 10 years. And even then, it would depend on the economic landscape. I'm not sure why Jones is so pro-equities. This is the case even in advisory, where it doesn't matter WHAT they aer invested in. It's the same fee.[/quote] Intellectual laziness. It takes work and the willingness to say that the business has fundamentally changed since the 50's. Things we thought were true aren't, and that's a hard pill to swallow, especially if you are an organization that has been training thousands of brokers a year to embrace the bias.I don’t think things have changed. The risks have always been there. Hoenstly, I think Jones really believes in equities for the long-term. Don’t get me wrong. I agree that over the long-haul, quality equities (which is what they advocate, which is good) will outperform bonds. However, most of our clients are not 35, and won’t stay invested in the same stuff for 30 years. So I guess investor attitude has changed. Most of our clients are boomers and older, and their time horizon is NOW. Or at least until the next big bear market. They can’t afford to recover from a 20% or 30% or 40% drop when they are taking withdrawals.
I think the whole investor psychology/time horizon thing is what trips up Jones IMHO. They follow the whole Jeremy Siegel thing. Stocks for the long run. That's fine. But who gives a fukc about a 70-year mountain chart?? 10 years is about how far we can afford to look for clients. And for those that are at or near retirement, we have to look at drawdowns (any timeframe), not 1-year or 3-year or 30-year returns. And we cannot forget COMPOUND returns, not AVERAGE returns. It's about the money stupid, not the %.If someone is 55 years old they should be in 70% equities. With life expectancy in the early to mid-80’s now (and presumably higher in the future) your client can’t afford not to be heavily weighted in equities. Their purchasing power will be radically different if they are not. Dividend growth is the best way to protect their purchasing power. I could honestly argue that at that point (55 and still working with 5-10 years till retirement) that they could easily support being 80-90% in equities.
In fact, even in this so-called lost decade, dividend paying stocks in the S&P have yielded over 5% with dividends reinvested. I don't think this decade taught us that buy and hold is dead (like some say). I think this decade showed us that 1) you need to save your way into retirement not invest your way and that 2) Good ole fashioned buy and hold works with DIVIDEND paying stocks. Fundamentally most people are UNDER allocated to stocks and within their equity allocations UNDER allocated to dividend paying stocks.[quote=LSUAlum]If someone is 55 years old they should be in 70% equities. With life expectancy in the early to mid-80’s now (and presumably higher in the future) your client can’t afford not to be heavily weighted in equities. Their purchasing power will be radically different if they are not. Dividend growth is the best way to protect their purchasing power. I could honestly argue that at that point (55 and still working with 5-10 years till retirement) that they could easily support being 80-90% in equities.
In fact, even in this so-called lost decade, dividend paying stocks in the S&P have yielded over 5% with dividends reinvested. I don't think this decade taught us that buy and hold is dead (like some say). I think this decade showed us that 1) you need to save your way into retirement not invest your way and that 2) Good ole fashioned buy and hold works with DIVIDEND paying stocks. Fundamentally most people are UNDER allocated to stocks and within their equity allocations UNDER allocated to dividend paying stocks.[/quote] I read somewhere that if you must be invested in equities that you can't afford to be invested in equities. I agree with the dividend paying stock thing, if you must (or want to, or whatever) own stocks you should find something with a decent dividend. The trade off offered by companies that don't pay dividends to their shareholders is unfairly biased to the company, and therefore doesn't appropriately compensate the investor for the use of their money.[quote=SometimesNowhere][quote=LSUAlum]If someone is 55 years old they should be in 70% equities. With life expectancy in the early to mid-80’s now (and presumably higher in the future) your client can’t afford not to be heavily weighted in equities. Their purchasing power will be radically different if they are not. Dividend growth is the best way to protect their purchasing power. I could honestly argue that at that point (55 and still working with 5-10 years till retirement) that they could easily support being 80-90% in equities.
In fact, even in this so-called lost decade, dividend paying stocks in the S&P have yielded over 5% with dividends reinvested. I don't think this decade taught us that buy and hold is dead (like some say). I think this decade showed us that 1) you need to save your way into retirement not invest your way and that 2) Good ole fashioned buy and hold works with DIVIDEND paying stocks. Fundamentally most people are UNDER allocated to stocks and within their equity allocations UNDER allocated to dividend paying stocks.[/quote] I read somewhere that if you must be invested in equities that you can't afford to be invested in equities. I agree with the dividend paying stock thing, if you must (or want to, or whatever) own stocks you should find something with a decent dividend. The trade off offered by companies that don't pay dividends to their shareholders is unfairly biased to the company, and therefore doesn't appropriately compensate the investor for the use of their money. [/quote] I disagree with the 'if you must be invested in equities then you can't afford to be' unless you are very near your 70+ birthdate. When you have roughly 10 years left in your horizon then your concerns about purchasing power degradation are much lower and fixed income and lower volatility surpass it on importance. Prior to that though, your primary long term concern is purchasing power degradation. I also am not so much conerned about the current yield on the equity as much as the divedend stability and growth. I'd rather a 2.5% yield with 10% dividend growth than 6.0% with 1% growth over the long haul.[quote=LSUAlum]If someone is 55 years old they should be in 70% equities. With life expectancy in the early to mid-80’s now (and presumably higher in the future) your client can’t afford not to be heavily weighted in equities. Their purchasing power will be radically different if they are not. Dividend growth is the best way to protect their purchasing power. I could honestly argue that at that point (55 and still working with 5-10 years till retirement) that they could easily support being 80-90% in equities.
In fact, even in this so-called lost decade, dividend paying stocks in the S&P have yielded over 5% with dividends reinvested. I don't think this decade taught us that buy and hold is dead (like some say). I think this decade showed us that 1) you need to save your way into retirement not invest your way and that 2) Good ole fashioned buy and hold works with DIVIDEND paying stocks. Fundamentally most people are UNDER allocated to stocks and within their equity allocations UNDER allocated to dividend paying stocks.[/quote] I agree with your ascertion about dividend paying stocks. Hence my commetn on "quality" stocks (that is my basic definition). However, I do not agree on your underlying theory on allocation to equities. I am not going to argue it, since I know many people are of the same persuasion. My biggest obstacle to buying and holding large amounts of equities for someone 55+ is the potential black swan effect and the market valuation problem. Investing in equities when the market is highly overvalued has zero chance historically of working. Now, if you were actively invested, and the market was at a P/E of 8 or 10 or 12 (which happens at the beginning of most bull markets, and the end of most bear markets), then you will be handsomely rewarded. However, if you were 55-60 yrs old, and the market had grown to a P/E of 20-25+, your future prospects are dim at best. This can't be disputed. It is pure market cycle economics. Bascially, market P/E changes dictate large variances from the mean over time. It's just how it works. Now, it's tough to know the depth, breadth, and length of bulls and bears. And even if you have no interest in timing the market, or investing based on these principles, you need to understand that unless you know you are at the front of a long-term bull market, you need to have more diversification than just 70-90% equities. What if your client is 60, and they are 85% equities, and the market loses like 45%? So their nest egg goes from 750,000 to $450,000. Do you just hope that it comes back quickly? Like 65% back? What if we enter a 10 year cycle of sideways growth after that 45% collapse? THEN what do you do? Look at the 70's. Look at Japan. For the most part, most equity classes are very highly correlated. Yes, some will return more or less than others. But in a big bear market, it doesn't matter how well your equities are diversified. Clients don't need 25% returns. They need to modestly exceed inflation and not lose money. Now, for your clients' "never money" (meant for inheritance, or to be saved for 25 years down the road), equities are the way to go. Some solid dividend payers/growers and just let them reinvest in perpetuity. But to tell a client getting ready to retire to just "trust me, hang in there"? That's a tough sell. It would be interesting to see if after the 50% +/- drop on the S&P, DOW, EAFE, etc., if the market just stagnated for a few years instead of exploding, how many clients would be feeling OK??? The scene would be much different.Check this out.......
U.S Stock Market*1884 – 2009
Rolling 3-Year Holding Periods
753 Observations
When the beginning (Schiller) P/E is… 11.54 or less 19.20 or more Median 3-Year Return (annualized) 16.20% 6.85% Average 3-Year Return (annualized) 17.03% 7.07% % of Periods with Negative Return 0.00% 28.10% Best 3-Year Return (total) 194.52% 134.08% Worst 3-Year Return (total) 0.85% (80.84%)
B24 - what P/E do you look at ? Current P/E ? What source ?
You may be starting to influence me on this !A standard way to investigate market valuation is to study the historic Price-to-Earnings (P/E) ratio using reported earnings for the trailing twelve months (TTM). Proponents of this approach ignore forward estimates because they are often based on wishful thinking, erroneous assumptions, and analyst bias.
The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor's website, where the latest numbers are posted on the earnings page. Click on the Index Earnings link in the right hand column. Free registration is now required to access the data. Once you've downloaded the spreadsheet, see the data in column D.
The table here shows the TTM earnings based on "as reported" earnings and a combination of "as reported" earnings and Standard & Poor's estimates for "as reported" earnings for the next few quarters. The values for the months between are linear interpolations from the quarterly numbers.
The average P/E ratio since the 1870's has been about 15. But the disconnect between price and TTM earnings during much of 2009 was so extreme that the P/E ratio was in triple digits — as high as 122 — in the Spring of 2009. At the top of the Tech Bubble in 2000, the conventional P/E ratio was a mere 30. It peaked north of 47 two years after the market topped out.
As these examples illustrate, in times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. "Why the lag?" you may wonder. "How can the P/E be at a record high after the price has fallen so far?" The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of 2008 Q4 (-$23.25) is something that has never happened before in the history of the S&P 500.
The P/E10 Ratio
Legendary economist and value investor Benjamin Graham noticed the same bizarre P/E behavior during the Roaring Twenties and subsequent market crash. Graham collaborated with David Dodd to devise a more accurate way to calculate the market's value, which they discussed in their 1934 classic book, Security Analysis. They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle. Their solution was to divide the price by the 10-year average of earnings, which we'll call the P/E10. In recent years, Yale professor Robert Shiller, the author of Irrational Exuberance, has reintroduced the P/E10 to a wider audience of investors. As the accompanying chart illustrates, this ratio closely tracks the real (inflation-adjusted) price of the S&P Composite. The historic P/E10 average is 16.3.
The Current P/E10
After dropping to 13.4 in March 2009, the P/E10 has rebounded above 20. The chart below gives us a historical context for these numbers. The ratio in this chart is doubly smoothed (10-year average of earnings and monthly averages of daily closing prices). Thus the fluctuations during the month aren't especially relevant (e.g., the difference between the monthly average and monthly close P/E10).
[quote=B24][quote=LSUAlum]If someone is 55 years old they should be in 70% equities. With life expectancy in the early to mid-80’s now (and presumably higher in the future) your client can’t afford not to be heavily weighted in equities. Their purchasing power will be radically different if they are not. Dividend growth is the best way to protect their purchasing power. I could honestly argue that at that point (55 and still working with 5-10 years till retirement) that they could easily support being 80-90% in equities.
In fact, even in this so-called lost decade, dividend paying stocks in the S&P have yielded over 5% with dividends reinvested. I don't think this decade taught us that buy and hold is dead (like some say). I think this decade showed us that 1) you need to save your way into retirement not invest your way and that 2) Good ole fashioned buy and hold works with DIVIDEND paying stocks. Fundamentally most people are UNDER allocated to stocks and within their equity allocations UNDER allocated to dividend paying stocks.[/quote] I agree with your ascertion about dividend paying stocks. Hence my commetn on "quality" stocks (that is my basic definition). However, I do not agree on your underlying theory on allocation to equities. I am not going to argue it, since I know many people are of the same persuasion. My biggest obstacle to buying and holding large amounts of equities for someone 55+ is the potential black swan effect and the market valuation problem. Investing in equities when the market is highly overvalued has zero chance historically of working. Now, if you were actively invested, and the market was at a P/E of 8 or 10 or 12 (which happens at the beginning of most bull markets, and the end of most bear markets), then you will be handsomely rewarded. However, if you were 55-60 yrs old, and the market had grown to a P/E of 20-25+, your future prospects are dim at best. This can't be disputed. It is pure market cycle economics. Bascially, market P/E changes dictate large variances from the mean over time. It's just how it works. Now, it's tough to know the depth, breadth, and length of bulls and bears. And even if you have no interest in timing the market, or investing based on these principles, you need to understand that unless you know you are at the front of a long-term bull market, you need to have more diversification than just 70-90% equities. What if your client is 60, and they are 85% equities, and the market loses like 45%? So their nest egg goes from 750,000 to $450,000. Do you just hope that it comes back quickly? Like 65% back? What if we enter a 10 year cycle of sideways growth after that 45% collapse? THEN what do you do? Look at the 70's. Look at Japan. For the most part, most equity classes are very highly correlated. Yes, some will return more or less than others. But in a big bear market, it doesn't matter how well your equities are diversified. Clients don't need 25% returns. They need to modestly exceed inflation and not lose money. Now, for your clients' "never money" (meant for inheritance, or to be saved for 25 years down the road), equities are the way to go. Some solid dividend payers/growers and just let them reinvest in perpetuity. But to tell a client getting ready to retire to just "trust me, hang in there"? That's a tough sell. It would be interesting to see if after the 50% +/- drop on the S&P, DOW, EAFE, etc., if the market just stagnated for a few years instead of exploding, how many clients would be feeling OK??? The scene would be much different.[/quote] I'm not concerned about whether the market goes down 45% when they are 65 if they are invested in quality companies that are continuously increasing their dividends. Quality dividend paying stocks will typically pay 3-5% dividend yields. Reinvesting dividends as the market declines is solid wealth building. Regardless of what the market does or does not do, the overriding issue a 65 year old entering retirement has to be concerned with is degradation of purchasing power. They must have a long term horizon, EVEN AT AGE 70, because they will live to be 83 on average. There is virtually no scenario that gives your clients a better chance to increase their standard of living, regardless of age, than equities. Even in your example chart of High PE vs. Low PE the median 3 year return during HIGH PE (read, worst time to buy) periods is 6.85% with a mean of just over 7%. Those returns alone make a better case for equity weighting than I can. Since 1926, 28% of all the years have a negative return through 2007. With only 5 of those years experiencing greater than 20% losses. Interestingly enough, even in the year of 1987 the 'CRASH of 1987' that still had a 5.23% return on the S&P. The Dot.com BUST of 2000...only a 9.11% negative return for the year. 2001 and 9/11 to follow the dot.com bust and the subsequent bear market had return ALL of the losses by 2007, not including the dividend reinvestment. All told, this decade, has over a 5% return on the S&P with dividends reinvested. I'm sorry, but that should convince anyone that even in a 'terrible lost decade' quality dividend paying stocks will still provide a very respectable return. I think the problem most people have is chasing the next google, or amazon with zero dividend growth (or zero dividend at all). They are the ones that get crushed in bear markets. I'm not a high beta stock guy for people over 50 for the most part. That is an area I think we probably agree on.[quote=LSUAlum][quote=B24][quote=LSUAlum]If someone is 55 years old they should be in 70% equities. With life expectancy in the early to mid-80’s now (and presumably higher in the future) your client can’t afford not to be heavily weighted in equities. Their purchasing power will be radically different if they are not. Dividend growth is the best way to protect their purchasing power. I could honestly argue that at that point (55 and still working with 5-10 years till retirement) that they could easily support being 80-90% in equities.
In fact, even in this so-called lost decade, dividend paying stocks in the S&P have yielded over 5% with dividends reinvested. I don't think this decade taught us that buy and hold is dead (like some say). I think this decade showed us that 1) you need to save your way into retirement not invest your way and that 2) Good ole fashioned buy and hold works with DIVIDEND paying stocks. Fundamentally most people are UNDER allocated to stocks and within their equity allocations UNDER allocated to dividend paying stocks.[/quote] I agree with your ascertion about dividend paying stocks. Hence my commetn on "quality" stocks (that is my basic definition). However, I do not agree on your underlying theory on allocation to equities. I am not going to argue it, since I know many people are of the same persuasion. My biggest obstacle to buying and holding large amounts of equities for someone 55+ is the potential black swan effect and the market valuation problem. Investing in equities when the market is highly overvalued has zero chance historically of working. Now, if you were actively invested, and the market was at a P/E of 8 or 10 or 12 (which happens at the beginning of most bull markets, and the end of most bear markets), then you will be handsomely rewarded. However, if you were 55-60 yrs old, and the market had grown to a P/E of 20-25+, your future prospects are dim at best. This can't be disputed. It is pure market cycle economics. Bascially, market P/E changes dictate large variances from the mean over time. It's just how it works. Now, it's tough to know the depth, breadth, and length of bulls and bears. And even if you have no interest in timing the market, or investing based on these principles, you need to understand that unless you know you are at the front of a long-term bull market, you need to have more diversification than just 70-90% equities. What if your client is 60, and they are 85% equities, and the market loses like 45%? So their nest egg goes from 750,000 to $450,000. Do you just hope that it comes back quickly? Like 65% back? What if we enter a 10 year cycle of sideways growth after that 45% collapse? THEN what do you do? Look at the 70's. Look at Japan. For the most part, most equity classes are very highly correlated. Yes, some will return more or less than others. But in a big bear market, it doesn't matter how well your equities are diversified. Clients don't need 25% returns. They need to modestly exceed inflation and not lose money. Now, for your clients' "never money" (meant for inheritance, or to be saved for 25 years down the road), equities are the way to go. Some solid dividend payers/growers and just let them reinvest in perpetuity. But to tell a client getting ready to retire to just "trust me, hang in there"? That's a tough sell. It would be interesting to see if after the 50% +/- drop on the S&P, DOW, EAFE, etc., if the market just stagnated for a few years instead of exploding, how many clients would be feeling OK??? The scene would be much different.[/quote] I'm not concerned about whether the market goes down 45% when they are 65 if they are invested in quality companies that are continuously increasing their dividends. Quality dividend paying stocks will typically pay 3-5% dividend yields. Reinvesting dividends as the market declines is solid wealth building. Regardless of what the market does or does not do, the overriding issue a 65 year old entering retirement has to be concerned with is degradation of purchasing power. They must have a long term horizon, EVEN AT AGE 70, because they will live to be 83 on average. There is virtually no scenario that gives your clients a better chance to increase their standard of living, regardless of age, than equities. Even in your example chart of High PE vs. Low PE the median 3 year return during HIGH PE (read, worst time to buy) periods is 6.85% with a mean of just over 7%. Those returns alone make a better case for equity weighting than I can. Since 1926, 28% of all the years have a negative return through 2007. With only 5 of those years experiencing greater than 20% losses. Interestingly enough, even in the year of 1987 the 'CRASH of 1987' that still had a 5.23% return on the S&P. The Dot.com BUST of 2000...only a 9.11% negative return for the year. 2001 and 9/11 to follow the dot.com bust and the subsequent bear market had return ALL of the losses by 2007, not including the dividend reinvestment. All told, this decade, has over a 5% return on the S&P with dividends reinvested. I'm sorry, but that should convince anyone that even in a 'terrible lost decade' quality dividend paying stocks will still provide a very respectable return. I think the problem most people have is chasing the next google, or amazon with zero dividend growth (or zero dividend at all). They are the ones that get crushed in bear markets. I'm not a high beta stock guy for people over 50 for the most part. That is an area I think we probably agree on.[/quote] respectfully, what quality companies do you have your client's in? Especially when more quality companies have cut their dividend than in the last 50 years. Andex charts and showing people statistics going back to the depression work with a small % of the investing public, tug at their heart and ask about lifestyle and you'll start to speak their language.Most of the companies I recommed to my clients that would be ‘fixed income’ clients to many are boring quality companies.
POM, NI, MO, BP, Royal Dutch Shell, Phillip Morris, Kimberly Clark, JnJ, P&G, Kimber Morgan are some examples. These all boast strong Dividends and/or good dividend growth. There is no reason to have a client in more than 10-15 different individual equities. Even in 2009 amid a recession and low earnings growth, 40 of the S&P 500 companies RAISED their dividends."I’m not concerned about whether the market goes down 45% when they are 65 if they are invested in quality companies that are continuously increasing their dividends. Quality dividend paying stocks will typically pay 3-5% dividend yields. Reinvesting dividends as the market declines is solid wealth building. Regardless of what the market does or does not do, the overriding issue a 65 year old entering retirement has to be concerned with is degradation of purchasing power. They must have a long term horizon, EVEN AT AGE 70, because they will live to be 83 on average.
There is virtually no scenario that gives your clients a better chance to increase their standard of living, regardless of age, than equities. Even in your example chart of High PE vs. Low PE the median 3 year return during HIGH PE (read, worst time to buy) periods is 6.85% with a mean of just over 7%. Those returns alone make a better case for equity weighting than I can. Since 1926, 28% of all the years have a negative return through 2007. With only 5 of those years experiencing greater than 20% losses. Interestingly enough, even in the year of 1987 the 'CRASH of 1987' that still had a 5.23% return on the S&P. The Dot.com BUST of 2000...only a 9.11% negative return for the year. 2001 and 9/11 to follow the dot.com bust and the subsequent bear market had return ALL of the losses by 2007, not including the dividend reinvestment. All told, this decade, has over a 5% return on the S&P with dividends reinvested. I'm sorry, but that should convince anyone that even in a 'terrible lost decade' quality dividend paying stocks will still provide a very respectable return. I think the problem most people have is chasing the next google, or amazon with zero dividend growth (or zero dividend at all). They are the ones that get crushed in bear markets. I'm not a high beta stock guy for people over 50 for the most part. That is an area I think we probably agree on." I think we have to agree to disagree. The weakness in your approach is the fact that during the de-cumulation phase, clients can't afford to withdraw 5% when their account just lost 45%. Example: Client has 750K. They are 70. They need $37,500 per year to live on. Client account loses ~35% and goes to $475K. They still need $37,500, which is now 7.9%of their account. They take out 37500, account is now at 437,500. Account grows 25% next year, so now at 547,000, less 37,500 = 510,000. Next year account grows 25% again. Now at 637,000 less 37,500 = 600,000. We still need another year of 25% to get back to the original 750,000. First, what are the chances that a 70 year-old sticks with enough equities to get 25% 3 years in a row? Second, what are the chances of getting 25% 3 years in a row? Point is, huge losses in equities can box you into a corner.70 percent does seem excessively high…What do you guys think is a better mix for someone that age? (generally speaking)
Off the shelf mix would be 80 / 20 in favor of bonds or 100% Investment Company of America70 percent does seem excessively high…What do you guys this is a better mix for someone that age? (generally speaking)
That is what I was thinking Ron. I just recently put together a million dollar bond ladder for a prospect who is 68 and currently has approximately 80% of his money in equities. I want him to begin transitioning towards that 80/20 mix in favor of Bonds you just mentioned, and he has 1 million that he won’t need/touch for another 10 to 12 years. I built a ladder with some corporate, muni, and government bonds but am a little nervous about the government bonds due to the fact the Fed may be increasing rates here pretty soon. Should I stay away from Govt. bonds right now or are they ok to include in this ladder?
The general rule of thumb for me is that equities should only represent money he will not need until 10-15 years. So here's an example:
Age 65: $1mm nest egg Needs $50,000/yr. I like to use 15 years, so I would put 75% in various fixed income categories from S/T to L/T, corp, muni/treas, TIPS, international, etc. So the balance, $250K would be split between conservative global equities, and a small % (like 5%) into emerging markets. That would represent the stuff being used for 20 yrs+. This is a simple illustration, but my point is that you are not putting anything at risk (relatively) that needs to be used within 10-15 years, and the quality equities and emerging market equities address the long-term inflation concerns.