Monthly Archives: November 2010

Can I Retire? Mike Piper, the Oblivious Investor, Tries to Help You Find the Answer

Mike Piper, creator of the popular Oblivious Investor blog, has just published his latest book — his 7th — called Can I Retire? It is a compact 99 pages, but focuses on two big issues. First, how much we’ll really need in retirement. Second, the complexities of managing our retirement savings once we actually stop working. That second challenge  turns out to be a much more elaborate job than saving the money in the first place.

Part of a series of books in which Piper tries to boil down the most important elements of a topic to 100 pages or less, Can I Retire? manages to avoid being overly general by picking a few critical issues to really zone in on. Numerous examples help bring his discussions down to earth.

I found quite sobering the totals people need to save even for modest levels of spending in retirement, but I suspect that’s part of the point.

The book left me curious about Piper, a young author, and his interest in tackling a topic 40 years into the future for him. He recently took time out to answer a series of  Portfolioist questions in an email interview. Here are edited excerpts: Continue reading

Are fund ratings biased against index funds?

I just read a very important study by Vanguard called Mutual Fund Ratings and Future Performance. The title would seems to suggest that this study is going to look at whether mutual fund ratings such as Morningstar’s star ratings are a reasonable prediction of future performance.  The study does tackle this issue, but it also addresses an issue that is, I believe, even more important and that most investors are totally unaware of:

empirical evidence has supported the notion that a low-cost index fund is difficult to beat consistently over time. Yet, despite both the theory and the evidence, most mutual fund performance ratings have given index funds an “average” rating.

Continue reading

Retirement Savings Up, Some Worry Not Enough Stock Investing by Younger Workers

The Employee Benefit Research Institute (EBRI) is out with its annual review of the nation’s 401(k)s and gives us something to be thankful for: a number of positive trends in the nation’s greatest trove of personal savings. (Social Security, that’s another story.) Continue reading

How Much Money Do You Need to Retire?

I came across a very highly commented article on SeekingAlpha today called With The Right Dividend Stocks, How Much Do You Really Need to Retire?

The focus of this article is to ask whether you can get away with a smaller portfolio value and still retire comfortably if you invest in stocks that have high dividends.

This is an interesting question, and one that I examined in a recent article for Advisor Perspectives.

A rule of thumb for retirement income is that you can expect to draw an annual income equal to 4% of the value of your portfolio at retirement. If you retire with $1 Million, you can plan to draw an inflation-adjusted $40,000 per year.  So, you will draw $40,000 the first year, and escalate this with inflation in each year thereafter.  The typical assumption is that the portfolio is invested in a simple mix of stocks and bonds–say 60% stocks and 40% bonds.  This type of portfolio typically is projected to have a total return of about 7% per year.

Why can you only draw 4% when your portfolio is expected to grow at 7%?  Two reasons.  The first is inflation–part of the return on the portfolio goes to make sure you keep up.  The second reason is investment risk.  You may average 7%, but the ups and downs mean that you can count on drawing only 4% or so if you want to be confident that you will not run out of money. Continue reading

Burton Malkiel Says Buy and Hold is Alive and Well, and it Works

Prof. Burton Gordon Malkiel. Photo by J.D. Levine/Yale (photo courtesy of Princeton University)

Burton G. Malkiel, the Princeton professor who brought Efficient Market Theory to the mass market in his classic A Random Walk Down Wall Street has taken up the defense of buy and hold investing, and the idea of diversification more broadly.

Ever since the trauma of 2008 when so many global asset classes moved down in tandem,  there’s been ample discussion of the merits of diversified portfolio building. Many assets classes have continued to be highly correlated.

None of it’s convinced Malkiel. In a strongly worded defense on the Wall Street Journal’s opinion page, adapted from his introduction to the upcoming 10th edition of Random Walk, he remains as convinced as ever that the average investor should own a diversified portfolio made up of cost-effective index funds and contribute to it regularly and rebalance periodically to take advantage of the benefits of dollar cost averaging. Continue reading

The Case for Dividends

I am a fan of stocks that consistently pay dividends, but even I was surprised by a chart (below) that I just ran across from iShares / BlackRock.  In an article on dividend-paying stocks in October 2010, there is a chart showing that the average dividend-paying stock in the S&P500 has massively out-performed the average S&P500 stock, going back to the early 1970′s.  It is also striking that this out-performance is a long-term phenomenon.  Even during the go-go 1990′s bull market for growth stocks and tech stocks, the cumulative out-performance of the dividend stocks held up. Continue reading