Equities vs. Bonds in Retirement Portfolio

Comment posted to “Stocks: An Underappreciated Asset Class in Retiree Portfolios,” by Stuart Ritter, in the June 2015 AAII Journal.

I believe the theory is that money in equities shouldn’t be needed for 15 years. Thus, in 15 years, even if (or, really, when) there is an intervening bear market, that part of the portfolio will still have grown more than inflation. This seems to be a variation on the “bucket” system I am using.
— Victor Stankevich from North Carolina

The article overlooks the bond/fixed-income aspect of Social Security to retirees. This can be significant to retirees depending upon their working income stream. Nonetheless, it is a vital consideration such that it would, or should, probably increase one’s equity investments and decrease their bond investments. It also depends on whether they are renting, have a mortgage or don’t have a mortgage.
—Max Hinchman from California

Stuart Ritter offers some good advice based on the purpose of his article. However, one’s allocation of asset classes and the proportions to a retirement investment portfolio, in my opinion, should be determined only after development of a rather comprehensive and thoughtful personal financial plan. Primary factors are the person’s or family’s financial assets, the main objectives/goals and the time frame for attaining the goals.
— Jerry Boswell from Colorado

Measuring Value With Yield on Investment

Comment posted to “The Power of Compounded Growth and Reinvested Dividends,” by Lowell G. Miller, in the June 2015 AAII Journal.

This is the first article I’ve seen that discusses the yield on original investment (YOI) approach to investing. It always made more sense to me to look at your dividend yield based on what you originally paid for your investment. However, YOI is not a concept that is widely discussed or written about, so I couldn’t tell if I was on sound investment ground in looking at YOI. Your article is very helpful and reassuring to me as I believe in the dividend-yielding portfolio. Now I have the ammo to back myself up.
— Kenneth Nisbet from California

Valuation Ratios & Market Bubbles

Comment posted to “Understanding Asset Bubbles and How to React to Them,” an interview with Robert Shiller, in the June 2015 AAII Journal.

I’m disappointed in Bob Shiller’s waffling about whether or not today’s market is in a bubble, and, for that matter, what a bubble really is. I submit that any time you discuss the market as an entity instead of considering it an aggregate of real live companies—each with a tangible value to its owners based on its earning ability and potential—you are in waffling territory.

To make it simpler yet, a company has a “signature P/E,” the statistical midpoint [usually the median, to eliminate outliers] of its high and low price-earnings (P/E) ratios over a significant historical period—a minimum of five years. The “rational value” of that company is the price that would be paid for the stock were it to sell around its signature P/E. A price much above that value would be “irrational exuberance,” much below it would be “irrational despair.”

When you view it this way, you can identify a bubble easily. It is a condition in which there is a disconnect between the aggregate “rational value” of the companies that comprise the market—usually the index that identifies the “market”—and the price investors are willing to pay for them. The larger that disconnect, the bigger the bubble.
— Ellis Traub from Florida

I found the article interesting and I too am an admirer of Robert Shiller. I was hoping for more “meat,” but alas, even Shiller does not make stock market predictions. I also like Ellis Traub’s notion of a “signature P/E,” or perhaps a “baseline P/E” might be a good term for it.
— Wayne K. Robertson from Georgia