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Subject: Strategy comparison S&P500 vs. IUL [rev 1]  Date: 4/3/2013 10:57 PM  
Author: Rayvt  Number: 71688 of 82751  
[Rev 1, updated to use rolling 12month returns, showing all anniversaries and the average. Using historical S&P500 dividend yields. All the charts links have changed.] Executive Summary The time period under consideration had two bear market crashes, when the market had a 50% loss. The IULtype strategy avoided those crashes, but at the cost of delivering substantially less overall gain. One test was run where the last 10 years had a $1500 monthly withdrawal. By coincidence, the start date for the withdrawals was at the bottom of the first crash. Even so, the IULtype strategy had a lower return. An alternative strategy was also tested, which uses a simple timing signal to move in and out of the S&P500. This strategy has less volatility than the S&P, but higher volatility than the IUL strategy. It delivered a better overall return than the IUL strategy. The IULtype strategy is claimed to deliver marketlike performance without market risk. It does not. It does eliminate market risk, but it has nowhere near market performance  except perhaps in the shortterm. After a suitable time to allow for comments & discussion, I will upload the spreadsheet for public access.  Here are the assumptions: S&P500 index from 1/1/1975 to 1/1/2013. This is a period of 38 years, or 456 months. Useing actual historical dividend yields. Secondarily, the 2nd half of this period is also computed. 7/1/1993 to 1/1/2013 Initial deposit (purchase) of $10,000 Subsequent deposit (purchase) of $100 each month. ($1,000 per month is much too high.) That's a total of $55,600 over the 38 years. The IULlike rules are: Index only, without dividends. Floor of 0% annual return. Cap of 12% annual return. Annual fee: 0.00% (This is the most optimistic fee. A fee of 0.50% was distinctly worse.) For the markettimed strategy, cash earned 1.0% interest when out of the market. For the Sortino Ratio, the MAR is 3%. No taxes are considered. No trading fees are considered.  Three strategies were compared. 1) Buyandhold of the S&P500 index, including dividends. 2) Market timing overlay on the S&P500 index, including dividends. Each month, compute the 10month simple moving average (SMA) Buy when the S&P index is >= the SMA. Sell when the S&P index is <3% below the SMA. This turns out to be about 0.4 trades a year, with an average hold time of 715 days. 3) IULtype modified annual returns. If the S&P500 index return is < 0%, deliver 0% return. (0% floor) If the S&P500 index return is > 12%, deliver 12% return. (12% cap) Explantion of the below statistics. CAGR = compound annual growth rate. Higher is better. StDev = volatility of the returns. Lower is better. MaxDD = maximum drawdown. The worst dollar loss from the 12month high. Lower is better. Sortino Ratio = a figure of merit, measures shortfalls of returns below the target MAR. Higher is better. Initial to: The final value that the initial deposit (only) has grown to. Final value: Final value including initial and monthly deposits and withdrawals (if any). Higher is better. Note this: S&P500 B&H with and without dividends:
Excluding the dividends cuts the final value considerably. That's a large headwind for an indexonly strategy to overcome. The statistics of the three strategies.
A sortino ratio of 11 is excellent. That's the result of having a 0% "noloss" floor. The tradeoff is that the total return is substantially lower  only 1/2 or 1/3rd of the other strategies. Equity curve: See chart 1 http://i1131.photobucket.com/albums/m543/rayvt/chart1_zpsfc... Chart 5 is the same, except the scale is adjusted so that the period from Jan1975 to Jan1997 is more visible. The Oct87 Black Monday crash is quite apparent. That was a 30% loss in just 3 months time. http://i1131.photobucket.com/albums/m543/rayvt/chart5_zps82... Second half  Jul1993 to Jan2013
Equity curve: See chart 2 http://i1131.photobucket.com/albums/m543/rayvt/chart2_zps96... For comparison, the full period with no monthly deposits:
Equity curve: See chart 3 http://i1131.photobucket.com/albums/m543/rayvt/chart3_zps3c... ================================================= A 28 year accumulation, $10,000 initial + $100/mo from Jan1975 to Jan2003, then withdrawing $1,500/mo beginning on Jan2003. This is an 10% annual withdrawal rate based on the IUL value on Jan2003 ($181K), which is far higher the customary Safe Withdrawal Rate of 4%. However, see next section.
Equity curve: See chart 4 http://i1131.photobucket.com/albums/m543/rayvt/chart4_zps92... The customary Safe Withdrawal Rate of 4% is based on a 60/40 portfolio, and takes into account the volatility of the 60% stock allocation. An IUL has much lower volatility, so it should be able to sustain a higher withdrawal rate. With a withdrawal of $2,500/mo, the IUL balance hit $0 (zero) about Sept2011. At which time the B&H strategy balance was $655,000 and the 10mSMA strategy balance was $472,000. ================================================= Chart 6 shows the IULtype equity curves. Every rolling pointtopoint 12month anniversary, the average of these, and the 1month pp. This clearly shows that a 12month period is better than a onemonth period. http://i1131.photobucket.com/albums/m543/rayvt/chart6_zpsb4... 

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