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Monday, January 17, 2005


Total Return is Relevant in Accumulation Phase Only

When one is accumulating funds in IRA, 401-K, 403-B, 457, 529, ...or private accounts, total return is relevant. All distributions (dividends, capital gains) are reinvested. Periodic contributions take advantage of time and price diversification through dollar cost averaging (DCA).

People then confuse total returns with what happens during systematic withdrawal plans (SWP). If an account is withdrawn at historical total return rate, the account WILL BE DEPLETED in fairly short time span. Safe withdrawal rates are not some simple fraction of total return, nor some fixed discount from the total return.

However, one observation is that for conservative balanced accounts (60% stocks, 40% bonds), very long term total returns are ~ 10%, and safe withdrawal rates for life span are ~ 5%.

But, this does not hold at all for aggressive all stock accounts.

Financial press does not provide helpful data for withdrawal phases.

One reason is that safe withdrawal rates are not easily related to any typical performance statistics. Monte Carlo simulations are needed to determine safe withdrawal rates for a particular set of investment allocation.

I wish that all published total return performance data came with a federally mandated disclaimer that if you are a retiree, or a person living on periodic investment withdrawals, relying on total returns can be harmful to your financial health.



Total Return Components

Total Return is yield %, plus price return %.

Price P is E.(P/E) or D.(P/D) or B.(P/B). Thus, the price % return itself can be broken down into two components:

* growth % + (P/*) ratio growth %.

While return components are simply added as first approximation, only logarithmic returns [log (1+return %/100] should be added.

Total Return can then be broken down into three components:

yield % + Earning Growth % + (P/E) Ratio growth %
yield % + Dividend Growth % + (P/D) Ratio growth %
yield% + Book Value Growth % + (P/B) Ratio Growth %

For stocks, indices and funds, one of these may be more appropriate.

Dividends are most reliable for established/mature companies and stock indices.

Earnings are readily available for indices and growth stocks.

Book values may be available for indices, mature companies and those undergoing restructuring.

Earnings and dividends can be for training 12 months, or for projections, estimated for future 12 months.

Over very long periods, (P/*) ratio growth % becomes small. Thus, very long term returns tend to be stable, and are simply,

yield % + Earning growth %
yield % + Dividend growth %
yield % + Book value growth %

Over intermediate term, changes in (P/*) ratios contribute significantly to total return.

Over short term, changes in * and in (P/*) ratios contribute heavily to total return.

This is why time-diversification is important and why dollar-cost-averaging usually works.


Sunday, January 02, 2005



This blog is on personal finance matters for individuals who handle (or try to handle) these matters on their own. Many posts are of general informational nature by yogibearbull.

Comments and questions are of course most welcome.

yogibearbull has many years of personal investing experience and he is not associated with any financial/brokerage company.

yogibearbull's investing theme is about managing risk levels to individual comfort levels and not about maximizing profits.


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