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URL:  http://boards.fool.com/yes-wow-you-learn-something-new-every-day-for-30647945.aspx

Subject:  Re: Hi gang... wow!!! Date:  4/22/2013  7:04 PM
Author:  Rayvt Number:  72099 of 75793

Yes, wow. You learn something new every day. For example, I learned that TMF has cesspool boards like "Retire Early CampFIRE". Just can't understand why people would come to a finance site to engage in political brouhaha's -- isn't that what Yahoo boards are for? With threads like http://boards.fool.com/catherine-gone-30632910.aspx?sort=who... all I can do is thank the lord that these people mostly stay away from boards about Making Money.

What I also anticipate doing... is using a financial projection relational database to build out a model, from scratch, rather than initially conforming to Ray's model... and when I am done we can compare & contrast. Models are often built from an 'expectation skew' (not saying that Ray's necessarily is... but building fresh on an app designed for the purpose may allow us to cross-view for discrepancies.)
Two eyes are better than one -- and a fresh clean-slate look is a great way to uncover faulty assumptions.

But, well, my spreadsheet is just looking at actual historical data, no "financial projections" involved. 'course there may be a blind spot in the way I looked at it, so it'll be interesting to see what you come up with (since it appears that CC won't be showing us any of her data).

references to drawdowns were limited to just 2-3 years ... The S&P500 has quite a few 50% (70% including inflation) drawdown periods where highwater is not re-attained for 20-25 years. That is not insignificant, and in every one of these periods a zero-floor, capped hedge position will outperform, all else equal.

I don't recall saying anything specific about drawdown periods. Except, perhaps, a mention that I look at 12-month drawdowns (i.e., drop in value from the 12-month high) rather than the standard "drop from the most recent peak". That's because I can't figure out how to make Excel find the "most recent high value", since excel searches don't really like to look backwards, only forwards. And also because in my early investigations 12 month drawdown tells you everything that 24 month or 36 month tells you.

However, your remark prompted me to add yet another piece to the spreadsheet. Something that I've always kinda wanted to know but never actually investigated. To wit, the length of historical drawdowns.

So I added code to the spreadsheet to find the distance from each month to the next month which had a greater value. This is the number of months it takes to recover when the S&P gets hit for a loss. As you might expect, most were 1 -- the next month is higher. 81% were 3 or less months, which aren't really losses, just pullbacks. (Note that this method doesn't have anything in common with "12-month drawdown".)

"highwater is not re-attained for 20-25 years"
This statement is incorrect.

For the monthly data of S&P500 (buy-and-hold) from Jan 1950 to now, including dividends, the longest recovery time was 74 months (just over 6 years).
Excluding dividends, the longest was 91 months (7 1/2 years).
The deepest loss from peak was -52% (no dividends), or -51% (with dividends).

But as I discussed with CC, what matters is not so much the percentage loss but the absolute dollar amount of the account value. A 50% loss from $700K to $350K is one thing, but when the alternative zero-floor, capped hedge position stands pat at no loss from its $128K value ....
Well, no matter how you look at it, $350K is more than $128K. You may *feel* that loss, but you have more money to spend.

Another bit of code I put in was to show not only the S&P drawdowns, but also the IUL value at the same point in time. So you can see the difference in values at the low point, for both S&P and IUL.

The S&P is not always ahead. Sometimes indeed it drops below the IUL. For a 1/1/65 start with $10,000 -- the S&P value dropped from $18K on Dec-72 to $10K on Jun-76, a 43% loss. The IUL was $15K.
Going forward, the S&P dropped from $30K on Nov-80 to $25K on Oct-82. The IUL was $22K.

Moving to the end of the 30 year period, Jan-95, S&P was $167K and IUL was $52K.

A major major anchor that the IUL is burdened with is the exclusion of dividends. For example, S&P (buy-and-hold) of $10K on Jan-65 grows to $54K on Jan-2013 WITHOUT dividends, but $167K WITH dividends. Over a long term, the bulk of the gain is attributable to the reinvested dividends.

For a long-term investment, the no-loss-ever low volatility of the IUL comes at a very heavy price. The problem is that after about 20 years from the start, the S&P has pulled so far ahead of the IUL that even a huge drop is way far more than the IUL.

Anyway, I'm looking forward to what you come up with. And particularly interested in any errors you find in my spreadsheet.
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