[Rev 1, updated to use rolling 12-month returns, showing all anniversaries and the average. Using historical S&P500 dividend yields.All the charts links have changed.]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.Useing actual historical dividend yields.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 11.5%Initial to: $633,805Final Val $639,431S&P B&H *excluding* dividendsCAGR 8.3%Initial to: $206,683Final Val $208,021Excluding the dividends cuts the final value considerably.That's a large headwind for an index-only strategy to overcome.The statistics of the three strategies.CAGR 11.5%StDev 15.3%MaxDD -46%Sortino 0.72Initial to: $612,717Final Val $1,115,94010mSMA CAGR 10.3%StDev 12.1%MaxDD -25%Sortino 0.77Initial to: $410,813Final Val $859,269IUL floor/cap CAGR 6.9%StDev 1.7%MaxDD 0%Sortino 11.49Initial to: $123,904Final Val $373,328A 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_zpsfc...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_zps82...Second half -- Jul-1993 to Jan-2013S&P B&H w/div Final Val $88,16410mSMA Final Val $102,287IUL floor/cap Final Val $85,589Equity curve: See chart 2http://i1131.photobucket.com/albums/m543/rayvt/chart-2_zps96...For comparison, the full period with no monthly deposits:S&P B&H w/div Initial to: $612,717Final Val $618,11110mSMA Initial to: $410,813Final Val $414,077IUL floor/cap Initial to: $123,904Final Val $145,546Equity curve: See chart 3http://i1131.photobucket.com/albums/m543/rayvt/chart-3_zps3c...=================================================A 28 year accumulation, $10,000 initial + $100/mo from Jan-1975 to Jan-2003, then withdrawing $1,500/mo beginning on Jan-2003.This is an 10% annual withdrawal rate based on the IUL value on Jan-2003 ($181K), which is far higher the customary Safe Withdrawal Rate of 4%. However, see next section.S&P B&H w/div Final Val $858,20010mSMA Final Val $607,205IUL floor/cap Final Val $109,363Equity curve: See chart 4http://i1131.photobucket.com/albums/m543/rayvt/chart-4_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 Sept-2011. At which time the B&H strategy balance was $655,000 and the 10mSMA strategy balance was $472,000.=================================================Chart 6 shows the IUL-type equity curves.Every rolling point-to-point 12-month anniversary, the average of these, and the 1-month p-p. This clearly shows that a 12-month period is better than a one-month period.http://i1131.photobucket.com/albums/m543/rayvt/chart-6_zpsb4...
S&P B&H w/div CAGR 11.5%Initial to: $633,805Final Val $639,431S&P B&H *excluding* dividendsCAGR 8.3%Initial to: $206,683Final Val $208,021
CAGR 11.5%StDev 15.3%MaxDD -46%Sortino 0.72Initial to: $612,717Final Val $1,115,94010mSMA CAGR 10.3%StDev 12.1%MaxDD -25%Sortino 0.77Initial to: $410,813Final Val $859,269IUL floor/cap CAGR 6.9%StDev 1.7%MaxDD 0%Sortino 11.49Initial to: $123,904Final Val $373,328
S&P B&H w/div Final Val $88,16410mSMA Final Val $102,287IUL floor/cap Final Val $85,589
S&P B&H w/div Initial to: $612,717Final Val $618,11110mSMA Initial to: $410,813Final Val $414,077IUL floor/cap Initial to: $123,904Final Val $145,546
S&P B&H w/div Final Val $858,20010mSMA Final Val $607,205IUL floor/cap Final Val $109,363
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