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More response on Ray's post;

2) "buy & hold" -- I don't do buy & hold. Of *anything*. Every investment strategy I use is subject to some form of a market-timing overlay/gate for shifting my equity allocation to short-term or intermediate term bonds/T-bills. It's not perfect, and it's not ultra-technical, or genius-level, or requires a massive or superhuman effort as CC likes to taunt. It just moves to cash when the general market is in a downtrend, and back to equities when in an uptrend. It takes approximately 2 minutes once a month. Maybe 4 minutes if you have to boot up your computer first.
3) "S&P" -- I don't actually invest in the S&P500. I invest in various ETFs and individual stocks. But still, saying S&P is a valid synonym for "equities".

Is this the strategy you would recommend to our OP, instead of an IUL?

If you would *not* recommend a long-term naked S&P500 strategy, and you've already admitted it doesn't match the performance of an IUL when safety is considered, why are you trying to push it as superior?

You don't seem to recommend an apple, you prefer bananas, yet you want to try to compare apples to orangutans.

I'm trying to find reasons why I wouldn't want to do this, but it seems like it's not really all bad.

4) "backward-looking wisdom [of S&P]" -- All anyone has to do is pull up a long-term chart on the S&P. Here's one:
Now look for a time when you can say, "If I put money in here and didn't touch it for several decades, that would suck." Can't find one, can you?

That's irrelevant for retirement strategies, which (by definition) is money that has to be there regardless of the timing (surprise) of retirement. There are plenty of places in the historical chart you can see you might enter, and be completely S.O.L. if you subsequently had no choice but to stop contributing and begin liquidating.

5) "& awareness of typical S&P drawdowns" -- Yup. Drawdowns happen. That's life. Sometimes you hit a golfball and it lands in the lake. Hell, I saw Tiger Woods nail one right into a pond at Cog Hill. Arrange your affairs so that a large drawdown doesn't wipe you out.
Personally, I diversify not only between asset classes but also between strategies.

'Diversification' is just another word for hedging/covering. It reduces your direct growth potential (and often also loss potential.)

If drawdowns *didn't* happen, then investing would be risk-free. And therefore return-free. Like a bank account or CD. No volatility and also very low return.

*THIS* is the religious faithful voice... the fallacy that you cannot take market gains unless you also allow the market the opportunity to hand you losses. Its a fallacy.

A simply bull call debit spread (which is guaranteed to mature with a value between 'worthless' and 350%-ish up,) using 5% of your liquid account, financed by the safe yield from 95% of your account held in guaranteed/insured yield assets, does exactly this. A 340% gain on 5% of your account equals a 17% gain over the entire account, with zero chance of losing any of principal back to the markets.

The object is to have lots of digits in your net worth, not to have good feelings about a low-digit balance.

ABSOLUTELY AGREED!!! And the key to accumulating lots of net worth is to keep the gains, methodically.

The worst case is when you started just before a crash, so it hasn't had time to grow before it gets whacked -- and then you have to take money out and eat the loss. This is called bad luck. "Sometimes you eat the b'ar, sometimes the b'ar eats you." This happens sometimes, just as getting squashed by a runaway gravel truck sometimes happens.

ABSOLUTELY AGREED... for a full risk speculation account... not a lifestyle-guaranteeing retirement account.

$10,000 that is free from drawdown risk is $10,000 that is not earning anything. We don't want no lazy money around here! Get to work!

ABSOLUTELY AGREED... just put at risk of drawdown/loss *ONLY* the money you can actually afford to lose. Until you can afford the losses, grow it hedged (just like insuring a home you cannot yet afford to rebuild out of lunch money cash.)


I have the historical "total S&P500" data (with the shifting dividends,) back to inception now. I will get that added into the mix, and correct the missing spend-downs, sooner or later (likely later, after I am back from the tropics ;~)

Once the model is solid, we can run it for successive rolling periods to see the difference, and how much the risks cost, versus how much safety costs.


Hi KB,

I believe a reasonable and conservative approach is to hold 5 years worth of cash or cash equivalents. In this case it would be 5 years worth of the proposed withdrawls. I believe you are calculating a withdrawl rate of $1500/month or $18,000/year. So I would suggest that the year withdrawls begin, $90,000 be taken out of the S&P index and placed in CDs. This would represent "risk free" money that could be used to avoid having to sell securities during a severe market correction.

An interesting approach... not sure if Ray's willing to do that (in fact, based on the above, it appears he'd be quite unwilling to do that.)

In the IUL it wouldn't be necessary, since there is no risk of a drawdown and distribution via policy loans is at a positive arbitrage to the overall account (meaning the cost to borrow against the cash value is less than the avg returns of the cash value, so withdrawing costs more than borrowing,) so it makes sense to peel out funds on an as-needed basis.

Dave Donhoff
Leverage Planner
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