tomgoodman

If the Snider method consistently yields a better long-term return than the "buy and hold" method, I would conclude that stock options are slightly overpriced compared to their true "expectation value". This is certainly possible. It would give a small "house advantage" to sellers over buyers. I'm not sure why the market itself would not automatically keep forcing the option price toward the expectation value, but some aspects of investing are not completely rational.
My uneducated guess is that over a very long period of bull and bear markets, the Snider method would provide a lower but more consistent total return, due to the hedging features.

globalexpress

To answer your question, Fred, it worked for a lot of people. Could I give you a list of names? No, except for my parents. It's working for me, too- so far. And all I own is a diversified portfolio of index funds that reflect my personal (low-moderate) tolerance for risk. I don't trade. I don't time. I don't do anything. I just put what I can into my investments every month and that's it except rebalancing once a year.

However, let's look at the date ranges you guys are talking about. Let's say some guy started investing in the S&P 500 in 1980 and retired in May 2010. Let's say back in 1980 he dropped $1500 into a tax deferred account (IRAs were introduced in the mid 70s) and reinvested all dividends and never put another dime in except for those reinvested dividends. He now has over $17,000 as of May 31, 2010. He also went through some rough times and a few crashes. I bet he had some reservations about keeping his money in the market more than once during that time period...but he made money by staying the course.

I guess the bottom line is that we, as investors, have to decide whether or not we think equities (for example) are going to return in the long term what they have returned in the past. There's no right answer, and I certainly haven't a clue as to what they will return in the future, either. However, if you think the future return of an asset class, like equities, will be somewhat indicative of the past for that particular asset class, then you also have to accept that the ride along the way will be likely choppy, as it has been in the past as well. I think looking at the past several years, seeing flat returns, and then wondering if putting XXX.XX amount of dollars in a retirement account every month will ever work just ignores the very history one hopes to base their future earnings on.

I also think any method that tries to time the market, buy and sell stock, bonds, options, commodities, (i.e. active management) in an attempt to capture peaks and troughs is a losing battle. Of course, there will be a small percentage of people (professional and amateur) who "beat the market" and make huge returns. That's the nature of the game. When you have millions of people out there playing the market, just by luck alone a certain percentage of them will be big winners. Put a few million monkeys on typewriters and one of them will type a coherent sentence once in a while. And those aforementioned winners- they're vocal! The problem is that as investors, we don't know if it's luck or skill that caused those outsized returns.

Regardless, the longer the time period, the greater "active" management tends to underperform its appropriate benchmark. For example, let's take the S&P 500. That's an index everyone knows. It's big companies, and there's lots of information out there about the companies that constitute this benchmark. There are no shortage of professional money managers running active mutual funds in an attempt to beat that benchmark using a variety of different strategies (long/short, margin, buy and hold, timing, etc.). The S&P 500 Index, over the past 5 years, has outperformed 61% of active professional managers. How about other indexes......77.2% of MidCap managers were beaten by the S&P 400. 67% of SmallCap managers were beaten by the S&P 600. And these are smart managers. Think quants, ivy league MBA's, guys with years of experience, banks of computers and CFA researchers, and lots of initials after their name. And more than half can't even beat their benchmark! Take that time line out to 20, 30, 40 years, and the percentages drop to the very low double digits to single digits, depending upon who you read. Something else to think about when one plops down their money.

Cargo Man

Wow! Looks like I need to go back to college.

Maybe its time to invest in the Four G's.
That is God, Gold, Guns, and Groceries.

DAL 88 Driver

That's one of the key reasons why I like the method. It is designed to provide a consistent 12% annual yield over the long run throughout bull and bear markets. Does it do that perfectly? No. But it does it better than anything else I have seen. And you are right, that yield can sometimes be much lower than the market in a bull market. For example, I'm sure that most folks did way better in 2009 than I did with the Snider Method. But I'm not just looking at 2009. My objective is to invest long term for retirement, not be able to brag about some huge percentage return when the market has a really good year (because I know it will have really bad years too).

Here's an old article from Kim Snider's blog that does a good job of illustrating the difference consistency of return can make to a portfolio over time: The Fred Fiasco

Also, here's an article (also from Kim's blog) about "risk adjusted return" that makes some interesting points along the lines of what you are saying: Risk Adjusted Return

globalexpress

DAL88-

Just for a point of discussion (not picking on you or Kim), but I think Kim contradicts herself in those two articles. In one article she talks about risk adjusted return and the Sharpe Ratio and makes a valid point. But I feel she makes a mistake talking about Fred's portfolio and makes an excellent case for index investing.

First of all, she talks about Fred's return vs. the S&P 500 and laments over his underperformance. First of all, how can she say Fred's performance was worse than the S&P's performance without adjusting each portfolio for risk?? Where is that all important Sharpe Ratio for the two portfolios she is comparing? Further, is the S&P 500 the appropriate benchmark comparison? What if Fred's portfolio was 50% bonds? Then the S&P 500 would not be the appropriate benchmark to compare Fred's performance to by itself. Of course a portfolio consisting of bonds and S&P 500 stock will underperform (over a long period of time) the S&P 500 alone, assuming historical returns for both asset classes.

Further, had Fred simply purchased a S&P 500 index fund over the same period, it appears he would have beaten both the Merill Lynch guy and her method.

Her point about brokerages like Merill Lynch and their "financial advisors" is well taken. They often charge large fees and use loaded mutual funds to enhance their pay check, which means less return for you. Her point about "superstar advisors" is also taken. Only a small percentage of money managers will beat their benchmarks over long periods of time, whether through luck or skill. As investors, of course, we want to pick the skillful ones. Unfortunately, there is no way for us to know who those skillful ones will be except in hindsight. I saw an interesting presentation by Rick Ferri that illustrated the point. Even if you pick the best money management performers of the past 10 years, only a small percentage of those performers will go on to beat their benchmarks the following 10 years, leaving us in the "choosing predicament" described above.

DAL 88 Driver

globalexpress,

I understand what you're saying, but you might want to go back and read the "Fred Fiasco" article again. The consistent 7.21% return she is using as an illustration is not the Snider Method returns during that time period. (The Snider Method wasn't even invented during the first part of that time period.) She is just showing the difference between getting the average return of "Fred's" portfolio consistently versus the up and down results he actually got. I think this makes a very eye-opening point about the importance of consistency of return.

The Snider Method's published inception to date yield percentage (2002 through March, 2010) is 13.7%, which has definitely beaten the S&P 500 over that time period and would beat it over most long term time periods. If you look at the consistency of the Snider Method versus the S&P 500 and apply the Sharpe Ratio for comparison, the case for the Snider Method becomes even stronger.

globalexpress

What are the returns of the Snider Method vs. its appropriate benchmark....and the respective Sharpes? I'm not even sure the S&P 500 is an appropriate benchmark, either. Does she only trade stock that exist in the S&P 500.....i.e. does she only trade "large blend" type stock? If she doesn't, then the comparison benchmark is not appropriate and needs to be adjusted.

Again, I don't think that Fred article makes a good point for consistency of returns at all. I think it makes a good point for indexing, however. If I'm an equity investor, and I choose to take the risks associated with investing in that asset class, I don't care about consistency of returns. I already know that, using history as my guide, that they most definitely will not be consistent. If I did care about consistency, I'd invest in MLP's, dividend paying stock, utilities, bonds, etc and perhaps a lesser portion of my portfolio in equities. What I care about is long term appreciation and the small amount of dividends the S&P throws off when investing in equities, not consistency.

It seems like the Snider Method is more concerned about dampening oscillations in returns then it is about total return over long period of times. Granted, if for the next 40 years her appropriate benchmark stays flat or goes down, no doubt a strategy using covered calls (for example) will "beat the market." However if the benchmark, for example the S&P 500, makes something resembling historical returns, I would bet money (and I do!) that a simple S&P 500 index fund would beat the Snider Method especially after taking trading costs and taxes into consideration.

It's one of those things, I guess, where it is "to each his own." Unfortunately, I must leave for a 4 day trip. Good luck to you DAL 88 driver! I hope we both are successful

DAL 88 Driver

It's not about a competition with any particular "benchmark". It's about meeting your objectives for retirement. And those objectives are something for each of us to determine for ourselves and on our own. Personally, I'm happy with an average 12% growth in my retirement accounts for the remaining 15 years of my career. And then I'm happy with a 12% cash flow yield to produce sufficient income on which I can live in retirement.

Well, it would be a pretty boring world if we all liked the same things and we all had the same objectives. If consistency is not important to you, that is something you are certainly free to determine for yourself. But I think the article makes a pretty good case for why it is important to your bottom line results over time. Here's an excerpt from the article:

"Let's assume that Fred started with $1 million in his portfolio and his account grew consistently by the average instead of through an average consisting of ups and downs. How much more money would Fred have had? Let's compare an average of 7.2% to a consistent 7.2%."

Here's a link to the chart that shows the comparison: http://kimsnider.blogs.com/photos/un.../fred_fig3.jpg

"That is a 30% difference in just nine years - $435,000 additional real dollars in your account. Imagine how much more pronounced this effect would be over longer periods of time - say the forty years it takes someone to save for retirement? To quote Warren Buffett on how to be a successful investor, "Rule No.1: Never lose money. Rule No.2: Never forget rule No.1." "


Now I don't know about you, but a $435,000 difference in my portfolio over a nine year period would be pretty significant to me!

Not really. Again, we're not comparing benchmarks. We (or at least I) are simply looking to meet our objectives. I think netting 12% annually... especially if you get this consistently over long periods of time... is pretty darn good and allows me to meet my objectives for retirement. Especially when you look at the way this method has performed over the past decade and what the market has been doing during that time, I think it's pretty impressive. What else do you know of that has done any better than that?

Again, I don't really care about bragging rights. I only care about meeting my objectives. Of course, I would love to make more than 12% annually over time. Show me something else that has consistently outperformed 12% over the past decade and is likely to continue doing the same, and I'm all ears!

Thank you. I too hope we are both successful. I'm not trying to convince you to change your mind. If what you are doing is working for you, then I think you should stick with it. All I've been trying to do here is to add some perspective to the discussion. I don't like to see people get hurt, and I think the suggestion to put everything into the money market has the potential to really hurt some folks. I hope I have at least added some additional things to consider.

Have a good trip!

globalexpress

I did have a good trip, thanks!

A couple of points, and a large error that I see on Ms. Snider's website page that you linked.

The reason why I bring up benchmarks is because if one is going to invest using a particular method, it's impossible to measure whether or not a method is working if you don't have a baseline to compare it to.

For example, let's say Acme Investing says they have a sure fire method to beat the S&P 500 and they claim that in one fictitious year, they made 30%! Well, 30% in any year is pretty excellent at first blush. But if in that same year the S&P 500 (it's benchmark) made a 40% return, then I would say Acme had a pretty bad year! Granted, one year's returns doesn't mean squat, but I'm just trying to explain why I personally think benchmarks are important. Regardless, your method seems to be beating what you're comparing it to and that's what is important to you and I understand that.

Snider quote from link above:
"Let's assume that Fred started with $1 million in his portfolio and his account grew consistently by the average instead of through an average consisting of ups and downs. How much more money would Fred have had? Let's compare an average of 7.2% to a consistent 7.2%....."

Now the huge error. Correct me if I'm wrong, but both you and Ms. Snider seem to believe that providing "consistent returns" is better than providing "variable returns" because those "variable returns" act as a drag on your investment over time. The web page you linked me seems to imply (second table) that Fred got screwed because his "average return" (7.21% according to Ms. Snider) obtained through variable returns year over year was worse than had he just earned 7.21% consistently over the 9 year period shown in the table. If you agree with the above, then keep reading.

Crap, what do they say about doing math in public? I'll give it a shot anyway.........

First of all, Fred did not earn a 7.21% return! Ms. Snider simply took the 9 ML returns in that column, added them together and divided by 9. That is NOT how one computes average returns and I have no idea why she would think that's how you do it. If it was that easy, we could all throw away our Excel spreadsheets and financial calculators!

Fred made a average, annualized return of approximately 4.1%, not 7.21%. He went from $1,000,000 to $1,436,096 over a 9 year period. So that's his real average, not the 7.21% Snider claims.

So now, of course in that same table, the Balance w/ML Returns balance at the end of 2003 is going to look better than the Consistent Returns? balance at the end of 2003 when you make the comparison. She's comparing a 4.11% average annualized return to a 7.21% average annualized return. The Consistent Returns? column wins because of its higher return, not because it is a consistent return.

The point of the lengthy explanation is that it matters not one bit whether one earns an average annualized return that is variable or consistent as far as the ending balance is concerned. If two accounts both have an average annualized return of 7.21% (for example), and one account earned EXACTLY 7.21% every year, and the other zig-zagged around but had a computed average annualized return of 7.21%, they will both have the same amount of money at the end of examined time period. In fact, as you probably already know, if you go to a financial website and look at a mutual fund's returns it will likely show an annualized average return, even though that fund likely zigged and zagged. They can do that because they are both the same. They simply express returns as annualized average returns to make for ready comparisons and to make it easier for humans to wrap their brains around the value of those zigs and zags.

Anyway, I have to go fly again!

Cargo Man

I've missed out on my 401k this season. I can't afford Gold, or Guns... think I will invest in God and Groceries.

Great advice here...Thanks.