Dividend Aristocrat Stocks – 8 July 2011

Below is the screen I use to create a list of "Dividend Aristocrat" stocks using data as of July 8, 2011.

[Read more...]

SORDEX Ratio: Will I Run Out of Money?

Stress Testing the 12-ETF Portfolio

What in the world is the Moshe Milevsky SORDEX Ratio? SORDEX is an acronym for Sequence-of-Returns Downside Exposure. Translated for T. C. PITS or The Common Person In The Street, it is a way to run several Monte Carlo calculations and see if you are likely to run out of money in retirement.

If that is confusing, let me try to explain in great detail what is going on. In the last ten to eleven years most equity investors, including me, got caught in two "Black Swan" events.  In other words, these were three to four Sigma events that were not to happen but once every 100 to 300 years.  But we had two such events within a ten year period.  What is going on and how does one prepare to avoid such events in the future? 

First, what is a Sigma event?  If a portfolio has a risk percentage of 15%, a one Sigma event is a 15% drop in portfolio value, a two Sigma event cuts the portfolio by 30%, and a three Sigma event gives the portfolio a "haircut" of 45%.  We had a three Sigma event in 2008 and early 2009.

Now let's get into the mechanics of the SORDEX Ratio or the equation which looks like the following.

Sordex = (P1/P2) – 1 where P1 equals probability of success of not running out of money in retirement.  P2 is a worst case scenario calculation of running out of money in retirement.  The three Sigma event is one such scenario.

The software I use for my retirement Monte Carlo calculation is the Quantext Portfolio Planner (QPP), a program developed by Geoff Considine.  I am going to use the 12-ETF Portfolio, one that was introduced here at ITA Wealth Management in August of 2012.  We begin with a basic asset allocation portfolio as shown below.  This portfolio is owned by a 50 year-old and has a value of $500,000.  This investor saves $500 each month and plans to retire at age 67 and live on a $40,000 income from this portfolio and $30,000 from SS.  The spouse or partner is assumed to contribute something to the SS income.  Inflation is assumed to be 3.5%.  As you see in the portfolio below, 25% is held in bonds and 75% in equities that includes international, emerging markets, REITs, and commodities.  It is a basic portfolio.

In the screen shot below, one sees that this investor has only a 45% probability of running out of money around age 100.  Therefore we have a 55% success rate of reaching our goal.  P1 is 55% or 0.55 in this example.  Now we need to determine the value of P2.

The investor experienced a "Black Swan" event or the portfolio dipped in value by 45%.  The original $500,000 portfolio is now worth $275,000 three years later.  Assuming the investor hangs on to the same assets and three years passed, what is the probability of reaching 100 before running out of money?  Check the screen shot below.

Now we see there is a 50% chance of running out of money by age 83.  Not good.  If we extrapolate a bit, we can assume this investor has at least an 80% chance of running out of money by age 100.  If this assumption is correct, then P2 equals 20% as we only have a 20% chance of success of having money at age 100.

Now we apply the SORDEX calculation.  Sordex = (P1/P2) – 1 = (0.55/0.20) – 1 = 1.75

Anything over 1 is a warning and anything over 2 is a screaming warning.  We are very close to an ear shattering signal.

Questions about these calculations are most welcome.  A reasonable question might be, what if the portfolio is skewed toward bonds and income?  Can we reduce the SORDEX value? 

Reviewing The Portfolio

Kepler Portfolio Review

Monday's calendar tells me it is time for another review of the Kepler Portfolio.  Below is the Dashboard for this portfolio and readers will note nearly all the asset classes are within the target limits.  Those limits are +/- 20% as set by the Threshold inside the TLH Spreadsheet.  Only emerging markets is slightly below target.  If new cash comes into this portfolio and as we collect dividends, those dollars will be put to use building up the emerging markets asset class.  Otherwise, we will hold tight and hope congress comes to a reasonable agreement on the debt limit.

Overall, this portfolio is in excellent shape.  Scroll down to see the performance data.

Platinum membership is available for $5.00 per month.


[Read more...]

Four ETFs Plus Two Stocks Create a Winning Combination

Instead of calling this the "Holy Cow" portfolio, I'll refer to it as the "Basic Four" from now on. Below is the first iteration of the four ETFs using in last Friday's QPP analysis.  This is one of ITA Wealth Management's top projected portfolios so far, and we are not finished looking for winning combinations.

The following material is reserved for Platinum members only.  Seeking Alpha does not have access to this information.  This portfolio is still under development.

[Read more...]