Growth and risk are not necessarily related. What you want is dividend
returns. Don't confuse returns with risk. The best way to insure a
fair rate of returns with a fair risk level is to diversify your
portfolio.
Mark Demers
EquityValue Investments
http://groups-beta.google.com/group/equityvalue?hl=en

[Opinions expressed are Mark's and not necessarily related to those of
EquityValue.]

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

But I hope I was clear (or at least hinted) that a particular stock may move
in and out of "value" territory a lot more readily than growth stocks. (I'm
sure you have a better handle on this particular bit of minutiae than I.) As
a result, people "knowing" this information really don't know anything
useful other than to watch closely when a stock moves into value territory
and so pounce upon it. Maybe the very concept of a "market premium going
away as information spreads" can't be applied as easily here.

It's not something I've examined closely, though (obviously). Like I said,
you and others probably know more about how long, say, a particular stock
stays a value stock. I imagine they're not held as long in a fund dedicated
to value, for one thing.

snip
- quote -

Oh I agree that the way (and so the speed with which) the markets take into
account information is going to vary one heckuva lot from one market or
market sector to another. The "conservative house buying" thread touched on
this when it contrasted housing market responses to stock market responses,
for example. (I know you know this. Just trying to put people on the same
page.)

- quote -

I'd have to read up more on the meaning of "value stock" to comment
intelligently. I'm not so sure it's as likely to go away as Beanie Babies
and Ponzi schemes or whatever the latest fad is. It seems almost like it's
simply "a stock that is a great buy." Like a new Lexus automobile being sold
down the street at half-invoice because the dealership owner is going
bankrupt. This sort of stuff is always going to happen somewhere, sometime.
Are such occurences great deals? Of course, without question. Will there
always be a great deal now and then? Sure.

Of course judging whether a certain stock is a great buy can be trickier.
Yet there is a methodology. So we have whole index mutual funds that buy
"value stocks" (either large, mid, or small cap value, or a combination).

- quote -

I have doubts about this statement but I think it's a little too complex to
tackle here. Maybe I'll try to in the new thread I started on measuring fund
manager performance. (Admittedly a much discussed topic over the years here
and elsewhere. But the newbies will like it!)

- quote -

I just pulled that out of thin air to help some other guy asking for some
kind of quick and dirty measure of how a fund manager does. I agree with
your criticism above that such criterion is not exactly fair nor necessarily
reasonable. Probably no one single numeric measure is.

- quote -

Yes, good point.

Tack on all this recognition fund managers get for even just ONE-year of
outstanding performance, and we have this problem. (Emphasizing short term
gains also promotes problems within individual stock companies, as well, as
you know. Same idea.)

- quote -

Good one, and right on target.

- quote -

Again, I agree that value has a place in a properly diversified portfolio.

So does growth.

- quote -

You seem to be positing that stocks that meet "growth" criteria could
suddenly go away. I think then you'd be talking about a newly-born market,
like say the first five years of the U.S. stock market. Growth didn't exist
then (there wasn't enough time), or if it did, because of the short time
period, the criteria for it then wouldn't be like that of today. But we
could argue value stocks existed then, right? Or at least we could apply
some of the value criteria of today to stocks back then, assuming record
keeping was as good. ;-)

Getting a little abstract here, but I haven't considered the haziness of
some of the allocation category definitions, so it's interesting.


======================================= MODERATOR'S COMMENT:
This is a lot to wade through. Please shorten your posts.

"Michael Sullivan" <michael[at]bcect.com> wrote
snip
- quote -

I absolutely think "value stocks" have a place in a diverse portfolio.
Indeed, I just checked two online allocation tools that include suggestions
on value stocks, and by my judgement, the output is very close. (Details
below.) This suggests a certain amount of consensus on having a certain
fraction of value stock in one's portfolio for most age groups.

My objection arises when people assert they can prove that "value stocks"
are a superior investment. At best, one can make arguments like yours that
suggest they are, but (1) they are only suggestions, and (2) there are
counters to these arguments. The proof that these counters exist is in the
fact that I know of no reputable advisor or experienced DIY-er who would say
put only value stocks in one's retirement portfolio.

For my situation, www.ifa.com 's long survey spewed out the following "value
stock" allocations:
17% large cap domestic value
8.5% small cap domestic value
8.5% international value
4% international small cap value
3% emerging markets value
Total = 41%

www.fincalc.com :
15% large cap domestic value
Some proportion of the 15% recommended for small/mid domestic stock is
probably value. Same for the 15% recommended for international stock.

Michael Sullivan wrote:
- quote -


Michael,
Those are all really good points and I like what you said about
overreaction. To add to what you said...Elle - it does seem that if
there's a value premium, it should go away, and it of course it might in
the future. So far it hasn't, to the point where it's earned that rare
status of "anomaly". And it's not like this is at all a new idea, it's
had plenty of time to get worked out of the market. Ben Graham wrote
about it 50 years ago, and many times after, and these books are
regarded as "investing classics" and widely read. David Dreman's first
book on contrarian investing was in 1982. The Fama-French research is
now 13 years old, and it certainly wasn't the first to notice higher
returns from value stocks.

And of course the dot-com bubble (and corresponding value stock boom)
happened despite all this information being out there well in advance of
it. An investor spending 4 hours reading about investment-picking should
have stumbled across it.

I'm convinced it's rooted in a combination of human nature and realities
of investing, and is as likely to go away as, I don't know, phenomena
like Beanie Babies and Ponzi schemes. And dot-com stocks for that matter.

As a direct example: your suggestion of a criteria for mutual fund
selection "beating the S&P 10 years out of 10" by nature will point
towards the growth side of the market. Why? The manager on the other
side of that criteria faces, at the start of each calendar year, the
difficult task of identifying stocks that will beat the S&P 500 within
12 months. Given the tendency for autocorrelation with individual stocks
("momentum") your best bet is focusing on growth stocks (which are
usually rising) not value stocks (which are usually falling).

I'm not creating a straw man either...your very-reasonable requirement
of consistent (and immediate) outperformance is more the rule than the
exception. Managers don't typically have the luxury of a five-year
window to generate higher returns, or of inconsistency. It creates a
systemic tendency towards seeking short-term profits. And I think that
creates a focus on growth - both on the institutional and retail side of
things. This despite the fact that "everybody knows" not to do this.

Dreman begins his book describing the "blue wing" and the "red wing" in
a casino. The blue has 60/40 odds and everyone's gradually getting rich,
as long as they can stomach the dips and keep playing. Red is a lot more
exciting with higher payouts for winning bets, but it has 40/60
odds...ultimately wallet-depleting for a long-term participant. "But
then a strange thing happens. You walk into the red wing and start to
play." (Contrarian Investment Strategies, D.Dreman)

I said before I don't like comparisons to casinos because stocks are
businesses with expected returns. But his analogy has some sense. Value
has outperformed growth in over 80% of the rolling 10-year time periods
- check the Ibbotson data sources for example. Yet growth continues to
attract more attention and dollars. Which is good, because once it
didn't, this anomaly might go away.

-Tad

Elle <elle_navorski[at]nospam.earthlink.net> wrote:
- quote -

Well, one opinion on the subject is that stocks the market underprices
relative to various "value" measures are more risky, and thus deserve a
higher return, and the market has efficiently priced that in.

That's something of a tautology so it doesn't carry a lot of weight as
an argument to hold together strong EMT, but it's a legitimate
possibility.

If that's accurate, then in fact the spread between "value" and "growth"
may be a permanent part of the market, and choosing "value" stocks is
simply choosing a different spot on the risk/reward spectrum.

OTOH, if you're thinking of this as an example of market inefficiency,
it's a fairly intuitive result. If I believe that markets in general
overreact to information about future profits for a combination of
psychological and business structure reasons, then a contrarian strategy
should outperform a straight index strategy. Picking securities whose
prices are depressed relative to underlying assets/earnings is a pure
contrarian strategy, you are always picking those stocks the market has
valued less, generally because there are problems with the stocks
(anti-trend industries, turnarounds, bankruptcies, etc.). If the market
has corrected for these problems fairly, you should see equivalent to
index returns (with a bonus for any increased risk). If the market has
overreacted, you should see better returns as new information comes in
to correct things.

Basically if the market on average overreacts to information (both good
and bad), "value" should win on a risk-adjusted basis, and if the market
underreacts, then "growth" should win on a risk-adjusted basis.

I think the balance of evidence is in favor of overreaction, since there
are occasionally huge bubbles and busts where prices rise and fall
dramatically in what hindsight sees as all out of proportion to
underlying values.

Given that, "value" looks like a good bet. If strong EMH is true, then
it really doesn't matter, except that you may be taking on more risk
(shouldn't be a problem if you belong in stocks at all and are allocated
appropriately). If strong EMT turns out false, I'm willing to put a lot
of money on "over" rather than "under" reaction to information.


Michael

"Tad Borek" <borekfm[at]pacbell.net> wrote in message
news:ZeDse.3604$Pa5.2691[at]newssvr21.news.prodigy.com...

- quote -

Well, I think your statement is materially different, in that you want to
look at "annual withdrawal need". The statement I was questioning stated
"annual earned income". I think these two numbers are probably substantially
different. It seems to me that your requirement is, in fact, expenses, not
income. Also, your number is more easily adjusted to reflect a pension,
which in our case will be something more than 50% of our anticipated
expenses, including health care. Such a pension significantly alters the 20x
annual earned income requirement. I guess this simply points out the
pitfalls of making that kind generality; financial forecasts should be
investor specific.

Elizabeth Richardson

Elizabeth Richardson wrote:
- quote -

Elizabeth,
It's not meant to be precise, but that's not a bad starting point - I
usually say 20X to 25X, and only look at accessible investments (not
home equity for example, unless a sale is in the plans).

It's just the flip side of the statement you've probably heard, that a
4% to 5% initial withdrawal rate from a balanced kind of portfolio has
in the past been sustainable for 20+ years, factoring in inflation,
investment volatility, etc. Another way to state a 4=5% withdrawal rate
is "once you have 20X to 25X your annual withdrawal need saved up..." In
real life it's more complicated of course, factoring in taxes, social
security, pensions, changes in spending, investing strategy, etc., but
as a rule of thumb it's not bad.

In an I-bond portfolio you might use annual income need multiplied by a
high estimate of your longevity, which might be more like 30X. Meaning
assume a 0% real return instead of the assumptions built into that 4-5%
rule of thumb. That's realistic for many people (or even high) given
that I-bond interest is taxable at ordinary income rates when you redeem
the bonds (or annually, if you elect to do so, which nobody seems to).
For a given level of annual withdrawal that will result in a higher
savings goal.

-Tad

jIM wrote:

- quote -

I am close to retirement and I try to be 100% in stocks. I think that I
can afford the risk because I will have a pension and eventually social
security. I assume that any big financial loss will be moderate.

--
Ron

I wouldn't assume you would invest the money, never add to it, and
leave it alone for 30 years. This is adding risk that you won't get
smarter in the next 30 years. I would invest money with "what you know
now", with intent on modifying strategy as needed over time. Meaning
there could be a 30 year goal which becomes a 36 year goal or a 30 year
goal which becomes a 10 year goal. The purpose of planning to to cover
many possibilities with a broad brush until goals become short term and
more specific.

For example, in the first 5-10 years you will invest this money, you
may gain or lose money, and you will also probably add to it. If it
were me, all investments would be 100% stocks (my 401k is 100% stocks
and I'm 32)

I have a goal for 36 years from now ($2,000,000). I have intermediate
goals which will allow me to reduce my stock exposure of this money and
I continue to add money to the account.

assumption 1: I will invest money continually into this account
assumption 2: I will modify how much exposure I have to stocks as I
reach my goals/measurement points along the way.
assumption 3: even if I don't hit my goal, I will still take
precautions to make sure I have other assets to my name, and other
investments.
assumption 4: if things for the next 36 years are SO BAD that I come
out behind, I will probably be dead anyway. I have life insurance for
my wife if that happens.

my goals:
goal #1: $31,250 saved in 401k by age 32. Reached that goal with EASE.
If money compunds at 12% annually two things happen, I hit my goal of
2,000,000 without investing another penny AND I hit goal #2 faster
which allows me to invest more conservatively.
goal #2: 62, 500 saved in 401k by age 35. Close to reaching this. If
money compounds at 11% two things happen, I hit my goal of 2,000,000
without investing another penny AND I hit goal #3 faster which allows
me to invest more conservatively.
goal #3: $125,000 saved in 401k by age 39. Don't know if I reach
this... money can compund at 10% without adding another penny to reach
my end goal. Hitting goal #3 is major, as even if I miss earlier
goals, 10% returns on 125,000 is a reasonable expectation. if I hit
this goal, two things happen, I hit my goal of 2,000,000 without
investing another penny AND I hit goal #4 faster which allows me to
invest more conservatively.
goal #4: $250,000 saved in 401k by age 44. This allows me to reduce
stock exposure "some" but still requires a 9% return to hit retirement
goal at age 68. If this goal happens, it allows two assumptions-I hit
my goal of 2,000,000 without investing another penny AND I hit goal #5
faster which allows me to invest more conservatively.
goal #5 $500,000 saved in 401k by age 50. This gives me 18 years to
double money TWICE and reduce stock exposure significantly.
goal #6 $1,000,00 saved in 401k by age 57. A modest 7% return on this
money doubles it in 10 years and gives me a 1 year cushion to reire at
age 68.

None of this even accounts for my Roth IRA, stock holdings, no debt,
second job(s), wife's savings (401k, IRA) my salary increases, life
insurance (permanent and 20 year term).

Most of financial planning is done with what you know today, a set of
assumptions and the concept that a plan can be modified over time. I
have done my best to set a goal, with measurement points along the way
which allow me to change some of my entry assumptions.

anoop <ghanwani[at]gmail.com> wrote:

- quote -

You can also save the same amount, and you will be bearing almost no
extra risk, but have a very good chance (like 80%+) of doing *much*
better than plan (so you could adjust down in later years). If you
invest in nothing but riskless investments, then absent a catastrophe,
you won't do worse than plan, but you won't ever do any better either.
The point is that over 30 years, if you use a reasonably prudent mix and
do not make panicky changes in allocation over the years to chase the
hot returns, most of what could make your portfolio turn out any smaller
than the "stable value" portfolio, would be enough of a catastrophe to
blow up *any asset* that is not hard and tangible (like land, metals or
food).


Michael

Elizabeth Richardson wrote:
- quote -

I assume that one can hope to earn enough on your equity at that point
to replace your income. Certainly, if your expenses exceed your income,
then you should have 20 times your expenses. As you near normal
retirement age, pensions and social security would reduce the amount of
equity that you need to have.

--
Ron

On 15 Jun 2005 23:10:15 GMT, Michael Siemon <mlsiemon[at]sonic.netwrote:


- quote -

DFA enjoys a good reputation. Whether they are appropriate for you
depends on you.

In general, for a do-it-yourself investor, I view DFA as being in the
same category as the American Funds group... good funds with good
expense ratios, but after considering the add-on for the advisor, I
probably would prefer a Vanguard, Fidelity, T Rowe Price, etc. Again,
I am speaking of a DIYer.

On the other hand, for the investor who wants the on-going services of
an advisor and who understands the associated costs, DFA would be an
attractive choice.

But in fairness, there would be other attractive choices as well.
Once you get beyond diversifying and watching costs, no mutual fund
offers magic. And least no magic that we can know in advance. <grin


-HW "Skip" Weldon
Columbia, SC

"Ron Peterson" <ron[at]shell.core.com> wrote in message
news:1118852323.307645.206240[at]g44g2000cwa.googlegroups.com...
- quote -

Why 20 times? Why income, not expenses? Do you look at any other sources of
income (pension, for instance)?

Elizabeth Richardson

"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote in message
news:m3mzpr1fow.fsf[at]animato.home.lan...
- quote -

They are available retail (sort of), via West Virginia's 529 plan.
http://www.smart529select.com

There are some papers analyzing the usefulness of 529 plans as tax shelters
for investments, regardless of whether they are used for college expenses.
See, e.g.
http://www.rmi.gsu.edu/FSR/abstracts/Vol_12/Terry.pdf

- quote -

It is at least debatable whether the way Dimensional invests is indexing.
Dimensional itself says "DFA's brand of passive investing is not quite
indexing ... it doesn't tie itself slavishly even to its own custom-produced
indices."
http://library.dfaus.com/reprints/cnbc_msn/

"90% [of assets under management] are invested in enhanced index funds ...
[whose] goal ... is to add 100-200 basis points a year over conventional
benchmarks."
http://library.dfaus.com/articles/index_enhanced_funds/

I'm not denigrating what they do - just differentiating what they do from
what people think of when one says "index fund". I think what you wrote
below supports this distinction:

- quote -

--
Mark Freeland
nBeOwXs[at]pacbell.net

"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote
- quote -

I toast index funds for all the usual reasons (supported by sound studies,
afaic), and I see DFA has the usual tiny expense ratios, but do you know
anything about the, I presume, added costs of the DFA funds being available
only through "registered investment advisors" and well-funded institutions?

For an individual investor, might these added costs defeat the usual
advantage of an index fund from, say, a place like Vanguard? Seems to me an
RIA could tout these funds to his/her clients, telling the clients about the
advantages of index funds, but then tacking the necessary fee on for his/her
service, which may very well eliminate a not insignificant part of the
advantage of using index funds.

Just asking your rough opinion on the subject...

In article <m3mzpr1fow.fsf[at]animato.home.lan> ,
Rich Carreiro <rlcarr[at]animato.arlington.ma.us> wrote:

- quote -

Thanks. I got a list of local advisers who use them, as well as
a Seattle firm with a Web presence, and am considering whether the
management fees would be (more than) covered by any advantages the
DFA funds might have over (say) Vanguard.

Michael Siemon <mlsiemon[at]sonic.net> writes:

- quote -

First and foremost, their funds are only available to institutional
investors or to the clients of registered investment advisors -- if
the RIA has gotten DFA to agree to let him use DFA funds. They aren't
available retail. So for the vast majority of us, DFA funds remain an
academic discussion (vaguely ironic, that :-).

I think it's fair to say they are held in pretty high regard in the
circles in which they operate (well, unless you're an active manager,
I guess :-).

DFA is an index house. Their raison d'etre is to identify asset
classes they believe would be useful to index. They then go out and
create an index fund for that asset class. So the odds are that if
there's some asset class you want a piece of, DFA will have an index
fund for it.

DFA is also a fair-sized market maker in many microcaps. In fact,
they do (or did) claim some of their microcap funds have a negative
expense ratio, due to the spreads DFA pockets on microcap stocks. In
those funds, DFA is willing to deviate a bit from the index in order
to work the market for the stocks it wants to buy or sell (rather than
just putting the stock on the market at once, regardless of what that
does to the price).

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Michael Sullivan wrote:

- quote -

With the TIPS/stable value approach, if one cannot meet ones goals
with a very, very high probability, then one is living beyond ones
means and is not saving enough. If one wants to save less and be more
aggressive with investments that is a risk that one must choose to
take.

The problem with all the literature out there is that it has
never spelled it out as clearly as Bodie's work. They just make
everyone feel that the only way to go is investing in stocks.
Not so.

Anoop

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

We might be simply having a miscommunication. Detailed online allocation
tools definitely remark on and include some value emphasis. If you're saying
to emphasize them even more, that's where I object, though mildly. People
should go with what they feel is the best bet. You have some reasoning
behind your plan. It's not irrational.

- quote -

If it was so clear-cut, wouldn't everyone be emphasizing this? You say _you_
emphasize value stocks more than conventional allocators (or maybe not;
please clarify), so evidently others do not feel as you do. Presumably these
others have a fair amount of expertise, too.

Also, if your claim were so certain, wouldn't the market factor in this
information, so it quickly became disadvantageous? (Though of course what's
"value" and what is not changes all the time, so that throws a wrench into
this.)

Regardless, I accept your opinon that your claim is far less of a hunch than
I seem to be asserting. And you seem to agree this is not an exact science
and there's an inevitable element of luck in allocating for optimum gain.

In article <15Zre.28962$J12.22744[at]newssvr14.news.prodigy.com> ,
Tad Borek <borekfm[at]pacbell.net> wrote:
....
- quote -

This is a second recent mention of DFA. I'd be interested in any
comments from the regulars about their funds, and general regard
in which the organization is held. Anybody want to venture an opinion?