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Author: galtsgulch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76080  
Subject: _Die Broke_ by Stephen M. Pollan Date: 12/4/1997 2:35 PM
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Hi All,

I heard Mr. Pollan on the radio this weekend and
he said something that absolutely blew my mind!
It sounds to good to be true so I would like to
run it by a few fools before I actually go out and
act on it.

My investing background:

I have been following Bob Brinker's advice (that's
where I heard about fool last weekend) for about
5 years. Aside from Bob's emphasis on mutual funds
over individual stock, I think that the fool's
strategy and Bob's both fall under the category of
conventional wisdom (CW) on retirement. Let me define
what I consider the CW.

Assumption: You are a person who relies on 401(k)'s
and IRA's to prepare for retirement.

While you are young, say under 45, your retirement
money is 100% in equities. As you approach 65, you
gradually shift to a 50/50 mix of equities and fixed
income investments. You then try to live off a
combination of the interest from the fixed and begin
to draw down on the equity.

The major problem with the CW is that you run the
risk of outliving your money if you draw down the
equity portion too quickly. Since we all have deep
seeded images of eating cat food we decided to error
on the conservative side and only use a small portion
of the money and rationalize that we can pass our
nest egg along to our heirs.

The RADICAL WISDOM (RW) offered by Pollan is that we
should take the money we have when we turn 70 and
buy annuities instead. The advantage is that we no
longer run the risk of out living our money!! At
this moment a 70 year old can buy an annuity that
will pay 12% !!!! for the remainder of his life. At
this high rate we also don't need nearly as much
money to generate the same amount of retirement income
as does someone who follows the CW. This means
you can spend more now while you are alive, rather
than passing it along to your heirs and uncle same
when you are dead.

In summary:

1)there is no risk of out living your money!
2)you don't need as much money!


Well, there is more to his theory than what I presented
here, but this is the most exciting part. I wondered
what my fellow fool's think of his idea.

----John Power

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 709 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/4/1997 5:40 PM
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Greetings, John Power, and welcome.

<<I think that the fool's strategy and Bob's both fall under the category of
conventional wisdom (CW) on retirement. Let me define what I consider the CW.

Assumption: You are a person who relies on 401(k)'s and IRA's to prepare for retirement.While you are young, say under 45, your retirement money is 100% in equities. As you approach 65, you gradually shift to a 50/50 mix of equities and fixed income investments. You then try to live off a combination of the interest from the fixed and begin to draw down on the equity.

The major problem with the CW is that you run the risk of outliving your money if you draw down the equity portion too quickly. Since we all have deep seeded images of eating cat food we decided to error on the conservative side and only use a small portion of the money and rationalize that we can pass our nest egg along to our heirs.>>

It's obvious to me you have little understanding of the Foolish Filosophy for retirement investing. Where or how you obtained the idea that we subscribe to a theory that in retirement we should keep a 50/50 mix is beyond me. Look under the thread "Retiree Portfolios" in this folder and you'll find a whole grouping of messages on this topic where we outline a number of theories. Further, we specifically highlight the problems you outline. Analyses have been run using different portfolio mixes to show the impact of historical returns under all conditions and the ravaging effects of inflation. Indeed if anything, those analyses indicate a 100% equities position would be better equipped to last a lifetime while concurrently meeting an inflationary bugaboo than anything else.

<<At this moment a 70 year old can buy an annuity that
will pay 12% !!!! for the remainder of his life. At
this high rate we also don't need nearly as much
money to generate the same amount of retirement income
as does someone who follows the CW. This means
you can spend more now while you are alive, rather
than passing it along to your heirs and uncle same
when you are dead.

In summary:

1)there is no risk of out living your money!
2)you don't need as much money!>>

Perhaps a 70-year-old can buy an annuity today that will enable a 12% withdrawal of the investment per year over his lifetime. I really can't say. If so and that's what the person wants to do, I say have at it. But that will more than likely be a fixed annuity. Live another 20 years, and at 3.5% inflation it will buy half of what it does today. That, friend, is a steep price to pay for "security." The only way to protect against declining purchasing power is through equities. And unless it's a joint and survivor annuity, it's more than probable this vehicle will leave nothing for heirs, unlike a portfolio sitting at investment.

How one arranges for income in retirement is a personal matter. Many like the "security" of an annuity. Me? I don't. I think they have more danger to a long-lived person than an investment portfolio loaded with equities.

And annuities definitely don't fit into the Foolish Filosophy.

Regards....Pixy

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Author: Trini209 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 711 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/5/1997 3:50 AM
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TMFPixy wrote:<Look under the thread "Retiree Portfolios" in this folder and you'll find a whole grouping of messages on this topic where we outline a number of theories.>

This is a subject dear to my heart and I just searched the boards for "Retiree Portfolios" and came up emptyhanded. The Fools have gotten so big that it's gotten awfully hard to find my way around in here! Can you give me a little further help finding any messages on this topic?

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Author: leonpaul Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 712 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/5/1997 4:25 AM
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TMFPixy wrote:<Look under the thread "Retiree Portfolios" in this folder and you'll find a whole grouping of messages on this topic where we outline a number of theories.>

This is a subject dear to my heart and I just searched the boards for "Retiree Portfolios" and came up emptyhanded. The Fools have gotten so big that it's gotten awfully hard to find my way around in here! Can you give me a little further help finding any messages on this topic?

Just do a search on "Retiree Portfolios" and it will
bring up a list of the messages posted with this
subject.

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Author: Trini209 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 713 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/5/1997 5:01 AM
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I did a search on "Retiree Portfolios" and came up with exactly 3 messages - Stephen M. Pollan's, TMFPixy's, and mine - all dated yesterday and today. Now what?

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 714 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/5/1997 7:26 AM
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Trini209,

<<I did a search on "Retiree Portfolios" and came up with exactly 3 messages - Stephen M. Pollan's, TMFPixy's, and mine - all dated yesterday and today. Now what?>>

Plus your previous:

<<TMFPixy wrote:<Look under the thread "Retiree Portfolios" in this folder and you'll find a whole grouping of messages on this topic where we outline a number of theories.>

This is a subject dear to my heart and I just searched the boards for "Retiree Portfolios" and came up emptyhanded. The Fools have gotten so big that it's gotten awfully hard to find my way around in here! Can you give me a little further help finding any messages on this topic?>>

My apologies. It's actually a series of 23 separate posts dated 8/28/97 under the subject "Retiree Portfolio." Note there is no "s" and they are separate messages. I found the easiest way for me to get there was to use the "Skip" window and the "<<" button to go backwards in the folder until I got to 8/28 and the topic I wanted. There might be an easier way by changing the customized settings as to how message listings are displayed, but due to computer/software illiteracy I couldn't figure it out.

Regards……Pixy



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Author: cltdan Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 718 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/6/1997 12:58 AM
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<<The RADICAL WISDOM (RW) offered by Pollan is that we
should take the money we have when we turn 70 and
buy annuities instead. The advantage is that we no
longer run the risk of out living our money!! At
this moment a 70 year old can buy an annuity that
will pay 12% !!!! for the remainder of his life. At
this high rate we also don't need nearly as much
money to generate the same amount of retirement income
as does someone who follows the CW. This means
you can spend more now while you are alive, rather
than passing it along to your heirs and uncle same
when you are dead.>>

Is the full text of Mr Pollan's ideas available somewhere?
I have thoughts along the same lines, not converting totally to a fixed annunity at age 70 but say 10% and another 15% at age 75 etc. The fixed annunity in a way adds to pension that is not inflation protected. I know of no other way to spend most of my money and yet not be short before I pass away, except with fixed annuity. Welcome comments.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 720 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/6/1997 9:01 AM
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Yo, Cltdan.

<<Is the full text of Mr Pollan's ideas available somewhere? >>


It's available in his book. Just point your browser to http://www.amazon.com and conduct a search on "Die Broke." The title will pop up so you can order it.

Regards....Pixy

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Author: omahafool Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 721 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/6/1997 2:08 PM
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TMF Pixy: In one of your replies you wrote:

<Indeed if anything, those analyses indicate a 100% equities position would be better equipped to
last a lifetime while concurrently meeting an inflationary bugaboo than anything else.>

I have just returned bleary eyed from the 23 posts. Am I missing something or isn't your last conclusion that the Brazen1 approach involving bonds and equities and a complex set of equities including REITS which I believe I have not seen on the site as Foolish investments, worked out the "best" if the goal was not to die broke, ie not to run out of money. I will admit that I did scan a lot of the data being mathmatically challenged but I thought I had the conclusions right. After much time on the site with much help from people on the Boards and even TMFSheard and TGardner (the responsiveness of the MF and friends is very encouraging and impressive) I changed my own portfolio (I am retired) from a highly diversified portfolio with bonds, stocks, REITs, etc to a 50/50 portfolio of UV5/6+/Keystone. I say my mantra of "c and t" (compounding and time) assigned to me by Montanafool, but your recent post and the series caused me a slight discomfort (so I increased my mantra repeating time).
Fortunately I have a fixed income in addition to my investments so I am really not in the exact situation as the original question but will need to make significant withdrawals to keep up with inflation so I was concerned by the post and reference to the 23 series. Where does Rayvt series on this board (of regular withdrawals from Dow portfolios) fall into this discussion?

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 722 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/6/1997 5:11 PM
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Omahafool,

<<Am I missing something or isn't your last conclusion that the Brazen1 approach involving bonds and equities and a complex set of equities including REITS which I believe I have not seen on the site as Foolish investments, worked out the "best" if the goal was not to die broke, ie not to run out of money.>>

No, you did miss something. Remember that the FF allowed a constantly increasing withdrawal to keep pace with inflation starting with a $6K income in 1966 and a portfolio of $100K. By 1995 the income need (still keeping pace with inflation) was $28,208. After taking that, the portfolio was $1,346,057. It never went broke and it provided inflation-protected spending power for 30 years.

The Brazen1 theory, an original pet of mine, started with keeping one year's income in a money market fund, four year's in intermediate bonds, and all the rest in a portfolio with 50% in the BTD4, 25% in small caps, 15% in international stocks, and 10% in equity REITs. The theory was to replenish income each year by drawing down equities except when the market was down, when the year's income came from bonds. That method went bust at the start of year 29 when it ran out of money. In fact, the only way I could force it to work was to not keep the income in line with inflation. Remember at one point I didn't increase income for seven consecutive years and spent 18 out of 30 losing to inflation. But I didn't die broke.

The results were that keeping 100% in the FF not only kept income even with inflation but "grew" the portfolio as well.

<<Where does Rayvt series on this board (of regular withdrawals from Dow portfolios) fall into this discussion?>>

Ray did an intriguing study on UV2. Although IMO the UV2 strategy is more volatile than the FF, if anything Ray's analysis simply reinforces my statement that a 100% position in equities provides for inflation protection of income as well as growth in the portfolio.

Keep in mind, though, that these portfolios are subject to market conditions. In some years, they take heavy hits. Those can be very upsetting to retirees. Therefore, they aren't for the faint of heart or those of little faith. Look at the Brazen1 theory as the conservative approach. Maybe the FF could be a high-end moderate or low-end high risk, and the UV2 high risk for portfolio fluctuation when that portfolio is used for income production.

Regards.....Pixy

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Author: galtsgulch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 730 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/8/1997 2:56 PM
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TMFPixy,

Thanks for your thoughful response!

<<Look under the thread "Retiree Portfolios" in this folder... Analyses have been run using different portfolio mixes to show the impact of historical returns under all conditions ... those analyse indicate a 100% equities position would be better equipped to last a lifetime while concurrently meeting an inflationary bugaboo than anything else.>>

I just finished reading all 23 post and I would like to compliment you on the enormously thorough job you did -- it's the best analysis I've ever seen. However, I do have a few points I'd like to discuss further.

In my mind, the $64,000 retirement question is: "How should one allocate his assets?" Roughly speaking we can say there are only a few viable alternatives (leaving out investing in vintage French wines and the like :-). The options are _essentially_ CASH, FIXED INCOME, EQUITIES and ANNUITIES. Please add more MAJOR categories if you like.

What I find most troubling in your analysis is that you are looking back and asking, "Hmmm....What strategy (BTD4, BTD5, FF, HY10, etc.) would've done best over the last 30 years. But that strikes me as no more fair than the market timers telling you how well their model would've have worked in the past. It seems to much like retro-fitting. If one is going to compare a 100% equities portfolio then one MUST use a benchmark like the DOW30 or the S&P 500 since anything else is not even remotely predictive. And as your analysis points out these benchmarks performed woefully in the 1966 - 1995 time period. In both cases you outlived your money which is exactly what the authors of _Die Broke_ were trying to avoid.

I plan to do an analysis where I use the same time period as you did with a portfolio I will call GG (galtsgulch). The portfolio will start out with 100,000 and use a 2/3 equities and 1/3 annuities split
where the annuities are purchased on 5 year (or maybe 10 year) intervals. It may be that I am all wet and it goes bust even sooner than the S&P 500, but we shall see! I think your idea of testing the models in the past is the best one can do.

cheers,
John Power

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 731 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/8/1997 3:28 PM
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John,

<<I plan to do an analysis where I use the same time period as you did with a portfolio I will call GG (galtsgulch). The portfolio will start out with 100,000 and use a 2/3 equities and 1/3 annuities split
where the annuities are purchased on 5 year (or maybe 10 year) intervals. It may be that I am all wet and it goes bust even sooner than the S&P 500, but we shall see! I think your idea of testing the models in the past is the best one can do.>>

When you do, please post your assumptions and the results. Many of us are interested and would appreciate the info.

Regards....Pixy

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Author: galtsgulch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 732 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/9/1997 2:07 PM
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TMFPixy,


This post will compare two strategies on how to best draw down on your retirement money.

1)GG Model 70% equities/30% annuities purchased in 5 year increments.
2)100% in equities and draw off the income you need


I'm strictly an amateur and had to do this all by hand although I think the math is right. Starting assumptions:

1)Start with $100,000 to invest
2)Need to generate $6000 of income in the first year
3)Income needs to keep pace with inflation
4)Used TABLE B from one of the 23 post from MF Pixy (Subject: Retired Ralph Redux -6) for salary needs
5)Used TABLE B from one of the 23 post from MF Pixy (Subject: Retired Ralph Redux -9) for S&P500 returns


GG model
--------

*Use 30% of principle to buy an annuity every 5 years
*Invest 70% of principle in the S&P500

*A 70 year old retiree can buy a 12% annuity
*A 75 year old retiree can buy a 13% annuity
*A 80 year old retiree can buy a 14% annuity
*A 85 year old retiree can buy a 15% annuity


For example, in the first year I start with $100,000 and use $30,000 to buy an annuity at 12%. The annuity will pay me $3,600 a year so I need to cash out an additional $2,400 from the principle. This leaves me $67,600 to put into the S&P 500. As the S&P tanked that year -10.06% my principle shrunk over the next year to $60,840. Since I now need 2790 from the principle to generate the 6201 in salary I only have $58,239 in principle to start the year 1967.


In table A I put GG to the test.

--------------TABLE A------------------------

Price of Income
Year Income Prin Annuity Annuity

66* 6000 67600 30000 3600
67 6201 58239 3600
68 6390 69414 3600
69 6692 73999 3600
70 7101 64208 3600
71* 7491 45505 20052 6207
72 7743 50481 6207
73 8007 58262 6207
74 8711 47211 6207
75 9774 31148 6207
76* 10460 27457 12820 8002
77 10693 31042 8002
78 11705 25110 8002
79 12762 21997 8002
80 14460 19595 8002
81* 16253 11081 7784 9170
82 17706 2001 9170
83 18392 0 9170
84 19090 0 9170
85 19845 0 9170
86* 20593 0 9170

Ouch! I'm bankrupt in 1983 so this strategy is certainly no cure-all, but at least I have an income of $9,170 for life. Let's see how it compares to a 100% equities strategy.


Table B data is from one of the MF Pixy post in the "Retiree Portfolio" thread. This model assume you are 100% invested in equities and will draw on the principle to generate the income in column 2.



--------------TABLE B------------------------
Yr Income Principle S&P 500
66 6,000 100,000 - 10.06
67 6,201 83,736 23.98
68 6,390 97,422 11.06
69 6,692 101,506 - 8.50
70 7,101 85,772 4.01
71 7,491 81,718 14.31
72 7,743 85,671 18.98
73 8,007 93,921 - 14.66
74 8,711 71,440 - 26.47
75 9,774 42,757 37.20
76 10,460 48,204 23.84
77 10,963 48,734 - 7.18
78 11,705 33,528 6.56
79 12,762 22,965 18.44
80 14,460 12,740 32.42
81 16,253 0 - 4.91
82 17,706 0 21.41
83 18,392 0 22.51
84 19,090 0 6.27
85 19,845 0 32.16
86 20,593 0 18.47


In this case, we see that the 100% equities position went bankrupt (1981) BEFORE the GG (1983) portfolio. More importantly you still have $9170/year for the rest of your life. It is not much better than the 100% equities position, but I'll take what I can get.


Any comments??

cheers,
John Power

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Author: galtsgulch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 733 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/9/1997 2:17 PM
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I don't have the hang of this formatting yet, I'm reposting this in the hopes that the tables easier to read.



TMFPixy,


This post will compare two strategies on how to best draw down on your retirement money.

1)GG Model 70% equities/30% annuities purchased in 5 year increments.
2)100% in equities and draw off the income you need


I'm strictly an amateur and had to do this all by hand although I think the math is right. Starting assumptions:

1)Start with $100,000 to invest
2)Need to generate $6000 of income in the first year
3)Income needs to keep pace with inflation
4)Used TABLE B from one of the 23 post from MF Pixy (Subject: Retired Ralph Redux -6) for salary needs
5)Used TABLE B from one of the 23 post from MF Pixy (Subject: Retired Ralph Redux -9) for S&P500 returns


GG model
--------

*Use 30% of principle to buy an annuity every 5 years
*Invest 70% of principle in the S&P500

*A 70 year old retiree can buy a 12% annuity
*A 75 year old retiree can buy a 13% annuity
*A 80 year old retiree can buy a 14% annuity
*A 85 year old retiree can buy a 15% annuity


For example, in the first year I start with $100,000 and use $30,000 to buy an annuity at 12%. The annuity will pay me $3,600 a year so I need to cash out an additional $2,400 from the principle. This leaves me $67,600 to put into the S&P 500. As the S&P tanked that year -10.06% my principle shrunk over the next year to $60,840. Since I now need 2790 from the principle to generate the 6201 in salary I only have $58,239 in principle to start the year 1967.


In table A I put GG to the test.

--------------TABLE A------------------------

Price of Income
Year--Income--Prin----Annuity----Annuity

66*---6000----67600---30000------3600
67----6201----58239--------------3600
68----6390----69414--------------3600
69----6692----73999--------------3600
70----7101----64208--------------3600
71*---7491----45505---20052------6207
72----7743----50481--------------6207
73----8007----58262--------------6207
74----8711----47211--------------6207
75----9774----31148--------------6207
76*---10460---27457---12820------8002
77----10693---31042--------------8002
78----11705---25110--------------8002
79----12762---21997--------------8002
80----14460---19595--------------8002
81*---16253---11081---7784-------9170
82----17706---2001---------------9170
83----18392---0------------------9170
84----19090---0------------------9170
85----19845---0------------------9170
86*---20593---0------------------9170

Ouch! I'm bankrupt in 1983 so this strategy is certainly no cure-all, but at least I have an income of $9,170 for life. Let's see how it compares to a 100% equities strategy.


Table B data is from one of the MF Pixy post in the "Retiree Portfolio" thread. This model assume you are 100% invested in equities and will draw on the principle to generate the income in column 2.



--------------TABLE B------------------------
Yr Income Prin...... S&P 500
66 6,000;; 100,000 - 10.06
67 6,201;; 3,736 23.98
68 6,390;; 97,422 11.06
69 6,692;; 101,506 - 8.50
70 7,101;; 85,772 4.01
71 7,491;; 81,718 14.31
72 7,743;; 85,671 18.98
73 8,007;; 93,921 - 14.66
74 8,711;; 71,440 - 26.47
75 9,774;; 42,757 37.20
76 10,460; 48,204 23.84
77 10,963; 48,734 - 7.18
78 11,705; 33,528 6.56
79 12,762; 22,965 18.44
80 14,460; 12,740 32.42
81 16,253; 0 - 4.91
82 17,706; 0 21.41
83 18,392; 0 22.51
84 19,090; 0 6.27
85 19,845; 0 32.16
86 20,593; 0 18.47


In this case, we see that the 100% equities position went bankrupt (1981) BEFORE the GG (1983) portfolio. More importantly you still have $9170/year for the rest of your life. It is not much better than the 100% equities position, but I'll take what I can get.


Any comments??

cheers,
John Power

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Author: galtsgulch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 734 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/9/1997 2:18 PM
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One last try!

I don't have the hang of this formatting yet, I'm reposting this in the hopes that the tables easier to read.



TMFPixy,


This post will compare two strategies on how to best draw down on your retirement money.

1)GG Model 70% equities/30% annuities purchased in 5 year increments.
2)100% in equities and draw off the income you need


I'm strictly an amateur and had to do this all by hand although I think the math is right. Starting assumptions:

1)Start with $100,000 to invest
2)Need to generate $6000 of income in the first year
3)Income needs to keep pace with inflation
4)Used TABLE B from one of the 23 post from MF Pixy (Subject: Retired Ralph Redux -6) for salary needs
5)Used TABLE B from one of the 23 post from MF Pixy (Subject: Retired Ralph Redux -9) for S&P500 returns


GG model
--------

*Use 30% of principle to buy an annuity every 5 years
*Invest 70% of principle in the S&P500

*A 70 year old retiree can buy a 12% annuity
*A 75 year old retiree can buy a 13% annuity
*A 80 year old retiree can buy a 14% annuity
*A 85 year old retiree can buy a 15% annuity


For example, in the first year I start with $100,000 and use $30,000 to buy an annuity at 12%. The annuity will pay me $3,600 a year so I need to cash out an additional $2,400 from the principle. This leaves me $67,600 to put into the S&P 500. As the S&P tanked that year -10.06% my principle shrunk over the next year to $60,840. Since I now need 2790 from the principle to generate the 6201 in salary I only have $58,239 in principle to start the year 1967.


In table A I put GG to the test.

--------------TABLE A------------------------

----------------------Price of---Income from
Year--Income--Prin----Annuity----Annuity

66*---6000----67600---30000------3600
67----6201----58239--------------3600
68----6390----69414--------------3600
69----6692----73999--------------3600
70----7101----64208--------------3600
71*---7491----45505---20052------6207
72----7743----50481--------------6207
73----8007----58262--------------6207
74----8711----47211--------------6207
75----9774----31148--------------6207
76*---10460---27457---12820------8002
77----10693---31042--------------8002
78----11705---25110--------------8002
79----12762---21997--------------8002
80----14460---19595--------------8002
81*---16253---11081---7784-------9170
82----17706---2001---------------9170
83----18392---0------------------9170
84----19090---0------------------9170
85----19845---0------------------9170
86*---20593---0------------------9170

Ouch! I'm bankrupt in 1983 so this strategy is certainly no cure-all, but at least I have an income of $9,170 for life. Let's see how it compares to a 100% equities strategy.


Table B data is from one of the MF Pixy post in the "Retiree Portfolio" thread. This model assume you are 100% invested in equities and will draw on the principle to generate the income in column 2.



--------------TABLE B------------------------
Yr Income Prin...... S&P 500
66 6,000;; 100,000 - 10.06
67 6,201;; 3,736 23.98
68 6,390;; 97,422 11.06
69 6,692;; 101,506 - 8.50
70 7,101;; 85,772 4.01
71 7,491;; 81,718 14.31
72 7,743;; 85,671 18.98
73 8,007;; 93,921 - 14.66
74 8,711;; 71,440 - 26.47
75 9,774;; 42,757 37.20
76 10,460; 48,204 23.84
77 10,963; 48,734 - 7.18
78 11,705; 33,528 6.56
79 12,762; 22,965 18.44
80 14,460; 12,740 32.42
81 16,253; 0 - 4.91
82 17,706; 0 21.41
83 18,392; 0 22.51
84 19,090; 0 6.27
85 19,845; 0 32.16
86 20,593; 0 18.47


In this case, we see that the 100% equities position went bankrupt (1981) BEFORE the GG (1983) portfolio. More importantly you still have $9170/year for the rest of your life. It is not much better than the 100% equities position, but I'll take what I can get.


Any comments??

cheers,
John Power

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Author: galtsgulch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 735 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/9/1997 2:19 PM
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One last try!

I don't have the hang of this formatting yet, I'm reposting this in the hopes that the tables easier to read.



TMFPixy,


This post will compare two strategies on how to best draw down on your retirement money.

1)GG Model 70% equities/30% annuities purchased in 5 year increments.
2)100% in equities and draw off the income you need


I'm strictly an amateur and had to do this all by hand although I think the math is right. Starting assumptions:

1)Start with $100,000 to invest
2)Need to generate $6000 of income in the first year
3)Income needs to keep pace with inflation
4)Used TABLE B from one of the 23 post from MF Pixy (Subject: Retired Ralph Redux -6) for salary needs
5)Used TABLE B from one of the 23 post from MF Pixy (Subject: Retired Ralph Redux -9) for S&P500 returns


GG model
--------

*Use 30% of principle to buy an annuity every 5 years
*Invest 70% of principle in the S&P500

*A 70 year old retiree can buy a 12% annuity
*A 75 year old retiree can buy a 13% annuity
*A 80 year old retiree can buy a 14% annuity
*A 85 year old retiree can buy a 15% annuity


For example, in the first year I start with $100,000 and use $30,000 to buy an annuity at 12%. The annuity will pay me $3,600 a year so I need to cash out an additional $2,400 from the principle. This leaves me $67,600 to put into the S&P 500. As the S&P tanked that year -10.06% my principle shrunk over the next year to $60,840. Since I now need 2790 from the principle to generate the 6201 in salary I only have $58,239 in principle to start the year 1967.


In table A I put GG to the test.

--------------TABLE A------------------------

----------------------Price of---Income from
Year--Income--Prin----Annuity----Annuity

66*---6000----67600---30000------3600
67----6201----58239--------------3600
68----6390----69414--------------3600
69----6692----73999--------------3600
70----7101----64208--------------3600
71*---7491----45505---20052------6207
72----7743----50481--------------6207
73----8007----58262--------------6207
74----8711----47211--------------6207
75----9774----31148--------------6207
76*---10460---27457---12820------8002
77----10693---31042--------------8002
78----11705---25110--------------8002
79----12762---21997--------------8002
80----14460---19595--------------8002
81*---16253---11081---7784-------9170
82----17706---2001---------------9170
83----18392---0------------------9170
84----19090---0------------------9170
85----19845---0------------------9170
86*---20593---0------------------9170

Ouch! I'm bankrupt in 1983 so this strategy is certainly no cure-all, but at least I have an income of $9,170 for life. Let's see how it compares to a 100% equities strategy.


Table B data is from one of the MF Pixy post in the "Retiree Portfolio" thread. This model assume you are 100% invested in equities and will draw on the principle to generate the income in column 2.



--------------TABLE B------------------------
Yr Income Prin...... S&P 500
66 6,000;; 100,000 - 10.06
67 6,201;; 3,736 23.98
68 6,390;; 97,422 11.06
69 6,692;; 101,506 - 8.50
70 7,101;; 85,772 4.01
71 7,491;; 81,718 14.31
72 7,743;; 85,671 18.98
73 8,007;; 93,921 - 14.66
74 8,711;; 71,440 - 26.47
75 9,774;; 42,757 37.20
76 10,460; 48,204 23.84
77 10,963; 48,734 - 7.18
78 11,705; 33,528 6.56
79 12,762; 22,965 18.44
80 14,460; 12,740 32.42
81 16,253; 0 - 4.91
82 17,706; 0 21.41
83 18,392; 0 22.51
84 19,090; 0 6.27
85 19,845; 0 32.16
86 20,593; 0 18.47


In this case, we see that the 100% equities position went bankrupt (1981) BEFORE the GG (1983) portfolio. More importantly you still have $9170/year for the rest of your life. It is not much better than the 100% equities position, but I'll take what I can get.


Any comments??

cheers,
John Power

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Author: galtsgulch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 736 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/9/1997 2:28 PM
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<<Is the full text of Mr Pollan's ideas available somewhere?>>

Yes, it's in his new book _Die Broke_ as indicated in the subject. The book is very new but I did find a copy in the local Barnes and Nobel.

<<I have thoughts along the same lines, not converting totally to a fixed annunity at age 70 but say 10% and another 15% at age 75 etc. The fixed annunity in a way adds to pension that is not inflation protected. I know of no other way to spend most of my money and yet not be short before I pass away, except with fixed annuity. Welcome comments.>>

This is exactly what he is recommending. He also claims that you should never retire and that you should only use annuties in addition to an income.

cheers,
John Power



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Author: RecoveringFool Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 737 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/9/1997 3:43 PM
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I saw him on Oprah discussing the book and paid almost no attention to the parts discussed on this board. The part that struck me was to forget about leaving an estate(if that was important to you) and give the gifts to your heirs when you could see them enjoy it. I plan to do some of this(if we are still surviving after 10 years straight of college- 3 kids 3 years apart in school). Our money will do nothing for our kids in their 50's so I hope to help them with extras sooner than that.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 738 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/9/1997 5:55 PM
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John,

<<In this case, we see that the 100% equities position went bankrupt (1981) BEFORE the GG (1983) portfolio. More importantly you still have $9170/year for the rest of your life. It is not much better than the 100% equities position, but I'll take what I can get.


Any comments??>>

Good post. Without checking your math, I agree as far as the comparison with the S&P 500 index. In fairness, though, we should point out that investing 100% in the Dogs of the Dow (or the Highest Yielding 10) would have increased your income with inflation through 1989 before busting in 1990. And the Beat the Dow Four and the Foolish Four did so through the end of 1995, where they ended up with a remaining portfolio of about $300K and $1.3M, respectively. In short, 100% invested in either over that 30-year span through four significant bear markets would let your 70-year-old live right comfortably until 95 and still leave money left over. Any of the three would have far outlasted the annuity approach.

Bottom line: Ya makes your choices and ya lives with the results. :-)

Regards.....Pixy

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Author: galtsgulch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 743 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/10/1997 9:10 AM
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TMFPixy,

<< I agree as far as the comparison with the S&P 500 index. In fairness, though, we should point out that investing 100% in the Dogs of the Dow (or the Highest Yielding 10) would have increased your income with inflation through 1989 before busting in 1990. And the Beat the Dow Four and the Foolish Four did so through the end of 1995, where they ended up with a remaining portfolio of about $300K and $1.3M, respectively. >>

Let me explain again why I did not use any of the schemes above for the 100% equities portfolio. I would be interested in your opinion since you are a believer in the future predictive powers of those portfolios.

I am very new to the Foolish philosophy (FP) but I have familiarized myself with its basic tenants. My first reaction to this part of the FP is that I don't see any reason to believe that BTD4, FF, or HY10 should be trusted to beat the averages over the NEXT 25 years. As I said in an earlier post in this thread, choosing a portfolio that optimizes past performance seems to be a cheat in the same way that market timers tell you that their model has made all the right predictions in the ****PAST****.

What I see being done here is someone tweaking a theory until it maximizes past performance and then claiming it will continue to work in the future. The various Dogs of the DOW theories have only received massive attention in the last few years. Even if the theory were valid, I wonder what popularization would do to a contrarian theory? I bet it would produce over-valued, high yielding stocks! An oxymoron if I ever heard one. Does anyone know how these theories (HY10, BTD4, BTD5, FF) have held up against the S&P 500 in 1995, 1996, and 1997 (1st eleven months)? The time period after the Dogs strategies have hit center stage.

cheers,
John Power

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 745 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/10/1997 10:33 AM
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John,

<<. My first reaction to this part of the FP is that I don't see any reason to believe that BTD4, FF, or HY10 should be trusted to beat the averages over the NEXT 25 years. As I said in an earlier post in this thread, choosing a portfolio that optimizes past performance seems to be a cheat in the same way that market timers tell you that their model has made all the right predictions in the ****PAST****.

What I see being done here is someone tweaking a theory until it maximizes past performance and then claiming it will continue to work in the future. The various Dogs of the DOW theories have only received massive attention in the last few years. Even if the theory were valid, I wonder what popularization would do to a contrarian theory? I bet it would produce over-valued, high yielding stocks! An oxymoron if I ever heard one. Does anyone know how these theories (HY10, BTD4, BTD5, FF) have held up against the S&P 500 in 1995, 1996, and 1997 (1st eleven months)? The time period after the Dogs strategies have hit center stage.>>

History of stock performance is NEVER a predictor of future performance. But it's the best guide we have, so in the absence of anything better I'm willing to accept it as an indicator. You're content to use the S&P 500 Index as a measure. I'd submit that index is just as invalid as a predictor. I'm content to use the HY10, BTD5, BTD4, etc. Why? Because sound statistical data going back to 1961 (36 years) show them to be long-term winners. No, I won't say that will continue in the future, but I see no indicators to see they won't, either. As to the numbers for 1995, 1996 and 1997 (YTD), you can find those over in the Dow area of The Motley Fool. If you're seeking some anomaly in them to show they are artificially "tweaked" strategies devised to optimize performance, I'm afraid you'll be in for a deep disappointment.

You speak of "over-popularization" of the Dogs strategies and cite that as a reason to be fearful of using them. You say this popularity would produce "over-valued, high-yielding stocks." That puzzles me quite frankly. If they are over-valued, then how the heck can they by high-yielding? It's a total contradiction in terms. The Dow strategies work simply because they concentrate on under-valued stocks, which makes them high-yielding in the first place. Additionally, we talking about a universe of 30 of the largest companies in the world - sound businesses worth billions individually and with market capitalizations of multi-billions. For these strategies to become diluted because too many folks used them, nearly every investor in the marketplace would have to practice such a strategy. I for one cannot fathom that ever happening. And at existing market caps, the popularity of BTD portfolios today is but a drop in the bucket.

IMHO, the Dow stocks will be around for many years. Yes, the market will dip. But it always recovers. If it doesn't, the whole world economy fails and all of us will lose anyway. And even in down markets, the Dow strategies work well. Why? Because their prices have already been driven down in the marketplace, so they won't fall as far in the dips. And all Dogs have their day. The gains are spectacular when they do.

I'm sure BTD strategies are too much of a leap of faith for you at this point. That's fine. Investing is intensely personal, as it should be. But I do think you should investigate them further before you write them off. To that end, I urge you to browse around the Dow area for awhile. Who knows? You may see some merit to the theories after all.

Regards,…..Pixy


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Author: galtsgulch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 747 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/10/1997 5:25 PM
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TMFPixy,

<< I'm sure BTD strategies are too much of a leap of faith for you at this point. That's fine. But I do think you should investigate them further before you write them off.>>

I agree. What would really convince me is to see some of the *recent* performance since, as I've said, it seems to me to be a retro-fitted theory. I would also like to know when the various theories began to be publicly advocated. I think Dogs of the DOW (HY10) has been around for the longest, maybe 10 years. Then comes BTD5 which has been around 5 years or so. Any time after the "public birth" of the theory I consider to be evidence of its predictive merit.


<<History of stock performance is NEVER a predictor of future performance. But it's the best guide we have, so in the absence of anything better I'm willing to accept it as an indicator. You're content to use the S&P 500 Index as a measure. I'd submit that index is just as invalid as a predictor.>>

I think that the S&P 500 is different than the Dogs in one important way. I agree that the past performance of the S&P 500 does not guarantee its future performance. But *if* the market does rise I want to at least be guaranteed an average performance. But the various Dogs theories try to do more than that, they try to rise above the average. So although neither approach is guaranteed to rise, the S&P 500 approach is not trying to out smart the market. Something 75% of the gurus can't do.

<<I'm content to use the HY10, BTD5, BTD4, etc. Why? Because sound statistical data going back to 1961 (36 years) show them to be long-term winners.>>

Yes, one can always find some trends from the past, but why should we trust it to continue? I would guess that you could look at many sectors that out performed the market since 1961 (High Tech maybe?), but I for one am not willing to bet that they will do it again.

<<As to the numbers for 1995, 1996 and 1997 (YTD), you can find those over in the Dow area of The Motley Fool. >>

I just checked and didn't have any luck turning up the numbers. I really like the table you had in the last of your 23 posts. It compared BTD4, FF, HY10, S&P 500 and DOW30 from 1966 to 1995. Could you help me find the data to extend the table for 1996 & 1997? A URL maybe?

<<If you're seeking some anomaly in them to show they are artificially "tweaked" strategies devised to optimize performance, I'm afraid you'll be in for a deep disappointment.>>

It's just the opposite -- I'm looking for some evidence that these theories have predictive power. Since I know that HY10 was advocated before 1995 (I'm not so sure about BTD4 or FF) I would consider a comparison with the S&P 500 after 1995 to be meaningful.

<<You speak of "over-popularization" of the Dogs strategies and cite that as a reason to be fearful of using them. You say this popularity would produce "over-valued, high-yielding stocks." That puzzles me quite frankly. If they are over-valued, then how the heck can they by high-yielding? It's a total contradiction in terms.>>

I wrote previously:

"Even if the theory were valid, I wonder what
popularization would do to a contrarian theory? I bet it would produce over-valued, high yielding
stocks! An oxymoron if I ever heard one."

Obviously I understand the contradiction, that why I wrote what I did! My meaning was that if too many people bought in to the Dogs strategy the yield curve among the 30 DOW stocks would probably flatten. The difference between High and low yielders would be small and none of the 30 would be out of favor.

<<Additionally, we talking about a universe
of 30 of the largest companies in the world - sound businesses worth billions individually and with
market capitalizations of multi-billions. For these strategies to become diluted because too many
folks used them, nearly every investor in the marketplace would have to practice such a strategy.>>

This is definitely the strong point of your argument. If the popularization of this strategy will have only a weak impact on its performance I would then think more highly about buying in.


cheers,
John

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Author: pool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 749 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/10/1997 10:30 PM
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John . In the Daily Dow section under Dow Statistics Center you can find the statistics of the various strategies for l996, l997 YTD and much more. I happened to have just been browsing there before coming to this message board and reading your post. Hope this helps . Pool fool.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 750 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/11/1997 11:09 AM
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John,

<<I would also like to know when the various theories began to be publicly advocated. I think Dogs of the DOW (HY10) has been around for the longest, maybe 10 years. Then comes BTD5 which has been around 5 years or so. Any time after the "public birth" of the theory I consider to be evidence of its predictive merit.>>

Seems to me they've both been around much longer than that. I loaned my copies of "the Dividend Investor" (Petty & Knowles) and "Beating the Dow" (O'Higgins) to my son-in-law who hasn't returned them, so I can't check the copyright dates. O'Higgins is considered the "father" of the Dogs and BTD5 theories, so the date of his book is probably the best. If you've not read either, I commend them to you. Copies are available inexpensively in the Fool Mart or at your local library.

<<But the various Dogs theories try to do more than that, they try to rise above the average. So although neither approach is guaranteed to rise, the S&P 500 approach is not trying to out smart the market. Something 75% of the gurus can't do.>>

The theories aren't trying to outsmart the market at all. They recognize results will generally follow the markets ups and downs. Instead, they seek to take advantage of a market peculiarity as regards some beaten down stocks that compose a part of one of the indices used to measure that market. And they do so in a purely mechanical fashion that takes at best one-half hour per year. No one is actively trying to select stocks like the gurus do. The systems themselves determine the selection.

<<Yes, one can always find some trends from the past, but why should we trust it to continue? I would guess that you could look at many sectors that out performed the market since 1961 (High Tech maybe?), but I for one am not willing to bet that they will do it again.>>

As we said before, there are no guarantees. Trust is a personal issue. If you don't believe it, don't use it.

<<I just checked and didn't have any luck turning up the numbers. I really like the table you had in the last of your 23 posts. It compared BTD4, FF, HY10, S&P 500 and DOW30 from 1966 to 1995. Could you help me find the data to extend the table for 1996 & 1997? A URL maybe?>>

Click here for your reading pleasure: http://www.fool.com/DDow/DowStatisticsCenter.htm

Regards…..Pixy


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Author: galtsgulch One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 767 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/12/1997 11:58 AM
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TMFPixy,


I asked for the performance of the various Dogs strategies and you steered me to:

<< Click here for your reading pleasure: http://www.fool.com/DDow/DowStatisticsCenter.htm>>

While it is true this does have the data there in its raw form I was hoping that there was a table somewhere that summarized the results for HY10, BTD4, BTD5, etc.

Any hope?

cheers,
John

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 771 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/12/1997 1:22 PM
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John,

<<I asked for the performance of the various Dogs strategies and you steered me to:
" Click here for your reading pleasure: http://www.fool.com/DDow/DowStatisticsCenter.htm"

While it is true this does have the data there in its raw form I was hoping that there was a table somewhere that summarized the results for HY10, BTD4, BTD5, etc.>>

Well, I guess you could buy the Dow spreadsheet from the Fool Mart. It gets updated every year, so along about the latter part of Jan you can get the history from 1961 through 1997.

Regards...Pixy

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Author: rayvt Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 772 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/12/1997 1:33 PM
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See my next post, repeated from several months ago.
Ray

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Author: BillStanley Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 806 of 76080
Subject: Re: _Die Broke_ by Stephen M. Pollan Date: 12/15/1997 10:51 AM
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<< Does anyone know how these theories (HY10, BTD4, BTD5, FF) have held up

against the S&P 500 in 1995, 1996, and 1997 (1st eleven months)? The

time period after the Dogs strategies have hit center stage. >>

Probably not as good as the S&P.

S&P returns.

1984 6.27

1985 31.59

1986 18.64

1987 5.28

1988 18.64

1989 31.49

1990 -3.17

1991 30.55

1992 7.63

1993 9.99

1994 1.31

1995 37.43

1996 22.96

1987 23.47 through 10/31

However I do not believe in annuities. The equity market has gone up 10.5% over the last 70 years. I would have used your original 100 k and 10.5% as an minimal return with no draw downs and never run out of money.

Bill Stanley



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