Executive SummaryThe time period under consideration had two bear market crashes, when the market had a 50% loss.The IUL-type 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 IUL-type 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 IUL-type strategy is claimed to deliver market-like performance without market risk. It does not. It does eliminate market risk, but it has nowhere near market performance -- except perhaps in the short-term.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.Assumed dividend yield: constant 2.25%Secondarily, the 2nd half of this period is also computed. 7/1/1993 to 1/1/2013Initial deposit (purchase) of $10,000Subsequent 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 IUL-like 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 market-timed 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) Buy-and-hold of the S&P500 index, including dividends.2) Market timing overlay on the S&P500 index, including dividends.Each month, compute the 10-month 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) IUL-type 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 12-month 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:S&P B&H w/div CAGR 10.7%Initial to: $478,263Final Val $932,426S&P B&H EXCLUDING dividendsCAGR 8.3%Initial to: $206,683Final Val $444,769Excluding the dividends cuts the final value in half.That's a large headwind for an index-only strategy.The statistics of the three strategies.S&P B&H w/div CAGR 10.7%StDev 15.3%MaxDD -46%Sortino 0.66Initial to: $478,263Final Val $932,42610mSMA CAGR 9.8%StDev 12.1%MaxDD -25%Sortino 0.72Initial to: $348,844Final Val $773,118IUL floor/cap CAGR 6.9%StDev 1.7%MaxDD 0%Sortino 11.49Initial to: $123,904Final Val $337,235A sortino ratio of 11 is excellent. That's the result of having a 0% "no-loss" 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 1http://i1131.photobucket.com/albums/m543/rayvt/chart-1_zps8f...Chart 5 is the same, except the scale is adjusted so that the period from Jan-1975 to Jan-1997 is more visible. The Oct-87 Black Monday crash is quite apparent. That was a -30% loss in just 3 months time.http://i1131.photobucket.com/albums/m543/rayvt/chart-5_zps8e...Second half -- Jul-1993 to Jan-2013S&P B&H w/div Final Val $94,20210mSMA Final Val $108,312IUL floor/cap Final Val $85,487Equity curve: See chart 2http://i1131.photobucket.com/albums/m543/rayvt/chart-2_zps3a...For comparison, the full period with no monthly deposits:S&P B&H w/div Initial to: $478,263Final Val $482,21910mSMA Initial to: $348,844Final Val $351,493IUL floor/cap Initial to: $123,904Final Val $124,570Equity curve: See chart 3http://i1131.photobucket.com/albums/m543/rayvt/chart-3_zps9e...=================================================A 28 year accumulation, $10,000 initial + $100/mo from Jan-1975 to Jan-2003, then withdrawing $1,500/mo from Jan-2003 to Jan-2013.This is an 11% annual withdrawal rate based on the IUL value on Jan-2003 ($162K), which is far higher the customary Safe Withdrawal Rate of 4%.S&P B&H w/div Final Val $671,38010mSMA Final Val $516,945IUL floor/cap Final Val $65,453Equity curve: See chart 4http://i1131.photobucket.com/albums/m543/rayvt/chart-4_zpsbf...
S&P B&H w/div CAGR 10.7%Initial to: $478,263Final Val $932,426S&P B&H EXCLUDING dividendsCAGR 8.3%Initial to: $206,683Final Val $444,769
S&P B&H w/div CAGR 10.7%StDev 15.3%MaxDD -46%Sortino 0.66Initial to: $478,263Final Val $932,42610mSMA CAGR 9.8%StDev 12.1%MaxDD -25%Sortino 0.72Initial to: $348,844Final Val $773,118IUL floor/cap CAGR 6.9%StDev 1.7%MaxDD 0%Sortino 11.49Initial to: $123,904Final Val $337,235
S&P B&H w/div Final Val $94,20210mSMA Final Val $108,312IUL floor/cap Final Val $85,487
S&P B&H w/div Initial to: $478,263Final Val $482,21910mSMA Initial to: $348,844Final Val $351,493IUL floor/cap Initial to: $123,904Final Val $124,570
S&P B&H w/div Final Val $671,38010mSMA Final Val $516,945IUL floor/cap Final Val $65,453
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