Gyroscopic Investing

... differently than average-yielding stocks?

I remember reading somewhere that high-yielding stocks have a risk profile that resemble a stock/bond mix.

Does this idea have any basis in historical data?

Would a dividend-heavy PP require more than 25% in stocks to compensate for this difference?

atrchi wrote: ... differently than average-yielding stocks?

I remember reading somewhere that high-yielding stocks have a risk profile that resemble a stock/bond mix.

Does this idea have any basis in historical data?

Would a dividend-heavy PP require more than 25% in stocks to compensate for this difference?

All of the high dividend funds I have seen pretty much do exactly what the market does. Certain high dividend stocks (like utilities or food companies) might be lower risk, but those are offset by risky banks that offer high yields. As a group they pretty much follow the market.

All things considered, from a tax perspective, you want to hold the lowest dividend stocks. It is much more efficient to capture returns from capital gains vs. dividends.

This may not be a concern for you, but the difference in the tax bill can be quite large depending on how your portfolio is setup.

As for high dividend stock funds, I think they are a bit of a fad that took off during the Bush year tax rates. Now that rates are going up I suspect we'll see the popularity wane. Also, companies can cut dividends for a multitude of reasons so even hand picking high dividend stocks is not a panacea. Finally, a company paying high dividends may be consuming capital so it could actually be trouble in some cases.

In terms of risk, I think stocks are stocks. They will still have stock like risks regardless of high dividend or not.

Harry's original position on stocks in the PP was to use high-volatility stocks/funds. 

I agree with craigr that stocks are stocks, but dividend-paying stocks tend to have relatively low betas.

There is actually some growing evidence that dividend-paying stocks tend to outperform non-dividend paying stocks:

http://www.thornburginvestments.com/lit ... erform.pdf

http://westwoodgroup.com/wp-content/upl ... Stocks.pdf

http://beginnersinvest.about.com/od/blu ... Stocks.htm

There is also some evidence that low-volatility funds outperform high volatility funds over time, due to the excessive draw-downs that high volatility funds have to compensate for. 

It may be advantageous to gradually shift towards a lower-volatility strategy in the PP during retirement.  You won't capture as much on the upside, but you can also avoid the painful draw-downs that you don't have time to ride out, especially when we experience a recession where 2 or more of our investments start moving in lock-step. 

I have no evidence if this will work or not, but it's worth thinking about.  Maybe somebody would like to take it upon themselves to do some backtesting with various proportions of a low-volatility fund mixed into the equity portion of a PP to see what happens?

rocketdog wrote: There is also some evidence that low-volatility funds outperform high volatility funds over time, due to the excessive draw-downs that high volatility funds have to compensate for. 

It may be advantageous to gradually shift towards a lower-volatility strategy in the PP during retirement.  You won't capture as much on the upside, but you can also avoid the painful draw-downs that you don't have time to ride out, especially when we experience a recession where 2 or more of our investments start moving in lock-step. 

I have no evidence if this will work or not, but it's worth thinking about.  Maybe somebody would like to take it upon themselves to do some backtesting with various proportions of a low-volatility fund mixed into the equity portion of a PP to see what happens?

That is an interesting idea. One thing to keep in mind with those tests about low vol is that they look at the returns in isolation. A high volatility fund can be poor in isolation but do great in a diversified portfolio because of volatility capture effect of rebalancing. You can capture that volatility through rebalancing or by selling call options.

I found this paper absolutely fascinating and you might like it as well:
http://www.scribd.com/doc/73200528/ReTh ... esting-GMO

Anyone who is slightly nerdy about finance needs to check this paper out!

melveyr wrote:That is an interesting idea. One thing to keep in mind with those tests about low vol is that they look at the returns in isolation. A high volatility fund can be poor in isolation but do great in a diversified portfolio because of volatility capture effect of rebalancing.

Exactly, and that was Harry's point.  High beta stocks are volatile, long term bonds are volatile, gold is volatile, the HBPP not so much.

WildAboutHarry wrote: Exactly, and that was Harry's point.  High beta stocks are volatile, long term bonds are volatile, gold is volatile, the HBPP not so much.

If that really is the case, then it is an argument for weighting highly volatile assets by volatility not value.  Surely back in HB's day, it was not hard to do 1 / volatility???  I question his motives for resorting to inferior equal weighting.

1/4 is more simple than 1/volatility   Where is the volatility button on the calculator?