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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75339  
Subject: The 30 year portfolio performance Date: 1/8/2011 6:49 PM
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So, it is January 2011. If you retired 30 years ago, and planned a Safe Withdrawal Rate (SWR), how did your 30 year portfolio end up - are you broke?

Our quick look will be for someone retiring January 1981. Took out X% for 1981 which funded expenses. Then adjusted the expenses (withdrawal in dollars terms) by the CPI to account for inflation. And then the last withdrawal (taken out over 2010) was taken out - what is the value of the portfolio now.

2 ASSET CLASSES (debt/equity)
X = 4% withdraw.
100% S&P             - $4,102,000
75% S&P/25% 10yr UST - $4,134,000
50% S&P/50% 10yr UST - $3,833,000

X = 5% withdraw.
100% S&P - $2,623,000
75% S&P/25% 10yr UST - $2,596,000
50% S&P/50% 10yr UST - $2,304,000

X = 6% withdraw.
100% S&P - $1,145,000
75% S&P/25% 10yr UST - $1,058,000
50% S&P/50% 10yr UST - $776,000




Things look good! The portfolio survived

Infact the SWR rates for these allocations are:
6.78% - 100% S&P
6.69% - 75% S&P/25% 10yr UST
6.51% - 50% S&P/50% 10yr UST



The doctor always prescribes including commodities and real estate in a portfolio. This has a very pleasing effect on SWR's. While it decreases the rate in the good years (those above ~4.5%), it increases the rate for the bad (those below ~4.5%). Sometimes as much as a 100 basis points!

For this precious metals and house price index are used to proxy the other classes.

50.0% S&P
16.3% 10 yr UST
16.3% Precious metals
16.3% Real Estate

Because this was a good year the diversification of the 50% from bonds into bonds/commodities/RE dropped the SWR down from a 50/50 portfolio of 6.51% down to under 5%. A significant decrease but when rates are low the rate usually increases and this still remained above a common consesus of 4% guide.

With only a 4% withdraw the end value was $512,000. Which will last a couple of more years (as the current withdrawal is ~$112,000 this year.
So - If you followed the SWR of 4%, your portfolio lasted the 30 years with a good ending value.

THINGS TO CONSIDER - GOING FORWARD

Here is a rather facsinating point. With the current investment selections including leveraged ETF's (SSO for the S&P) some of the Doc's modeling on a portfolio with 100% in SSO, the initial safe withdrawl rate was -- 13.5%. That is correct, a portfolio of $1,000,000 dollars in 1981 would have survived with the first year withdrawal of $135,400 - yes even adjusted every year for inflation.....

The last time that the leverage would have reduced the SWR rate was from a retire date in the 30's!!! huh!!!!


d(leverage)/dT
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Author: FCorelli Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68161 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/8/2011 6:59 PM
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Nice job. Lots of -good to know- stuff


What is "SSO" and UST?

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68163 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/8/2011 8:16 PM
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DrTarr I do not understand what you posted.

How much money did you start with? I am taking this line:
100% S&P - $4,102,000
to mean if the portfolio was 100% in the S&P500, the 30 year residual was $4,102,000 -- but I am not sure of that.

Next question are these funds in a tax sheltered account? If not, did you take account for taxes?

Gordon
Atlanta

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Author: stockmover Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68164 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/8/2011 8:41 PM
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What is "SSO" and UST?

Not Doc here ... but these are ETF's [ie Electronically Traded Funds] as follows:

ProShares Ultra S&P500 (SSO)

ProShares Ultra 7-10 Year Treasury (UST)

These Ultra ETF's double or even triple the the price movements of the S&P500 & 7-10 Year Treasury Bond.

However,I don't see where these ETF's are even relevant in Docs calculations because these ETF's have only been in existence for the past 5~8 years unless the OP is projecting for the next 30 years? (shrugs)

Best Regards,

Rich

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68165 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/8/2011 8:43 PM
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Hey Gordon,

Scenarios are no tax, no transaction cost, rebalanced annually, lump sum withdrawn at first of the year.

Started w/$1,000,000 in 1981 with 100% in the S&P or as otherwise specified. Took out X% annually (adjusted for inflation.) So for the $4,102,000, this was the residual that would be in there today if the retiree withdrew at the 4% rate.

FC -
UST = United States Treasuries,

SSO = is a leveraged ETF Ultra S&P
The Ultra S&P500 seeks investment results generally equivalent to twice (200%) the performance of the S&P 500 Index.

Using derivatives...

d(SSO)/dT

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68166 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/8/2011 8:53 PM
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Hi stockmover,

The modeling was using the data from Proshares SSO vs S&P (as well as Rydex and Barclays) and then recreating what would have happened from 1981 through today. Have actually recreated from 1900 through 2010.

Have been looking at if these ETF's should be considered by the retiree or if they are better utilized in the "growth" years.

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Author: FCorelli Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68167 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/8/2011 9:02 PM
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AHHH, Ok thanks I was thinking they were like FI for "fixed income" or something

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68169 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/8/2011 11:30 PM
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Thirty years in 1981 you could get almost 15% on a ten years treasury not, and the 30 years it has taken to fall to the current levels has been a historic bull market for bonds. While the results are interesting they are likely pretty unique.

Greg

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68170 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/9/2011 12:34 AM
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Greg,

A very interesting time. When I first started out this year, I had thought that the portfolio with 50% S&P / 50% bonds might have actually outperformed the 100% S&P. While this test the last two year was just over 6% for the equity portfolio the bonds having high interest rates in the first years was really starting to show. The numbers are "interestingly" close for the all equity compared to the 75/25. Pretty unique for the bond (especially 10 yr UST) portion to have held up so nicely and actually taken the lead in end value.

A SWR rate this high (>6%) has been about a 10% occurrence in the last hundred years (highly correlated in time with occurrences through the 79-82 bubble and a group back in the early 50's when that decade saw half a dozen market returns in the 20%-30%) Obviously this year the debt portfolio's stregth due to the extremely high interest rates. The equity portfiolo's strength attributted to the 90's bull market.

We have a five year trend up! Curious to see next year.

d(6%)/dT

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Author: temsike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68171 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/9/2011 6:42 AM
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Again, this is why gauging one's risk tolerance accurately and holding an asset allocation that will allow the retiree to stay the course and not panic is so important.

Yes. An asset allocation of 80/20 (stocks/fixed income) is far more likely to have a higher terminal value after 30 years of inflation adjusted withdrawals than one with an AA of 60/40.

But when the markets go absolutely batguano and your stock portfolio loses half its value, it's far less scary with 60% stocks vs 80%.

I have a far higher financial risk tolerance than does my spouse. We've watched our stock portfolio melt by 50% twice in this decade. On both occasions my spouse wanted to sell it all and run for the hills. Risk tolerance and asset allocation need to be comfortable for both.

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Author: drippinfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68179 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/9/2011 1:03 PM
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Rich said:

"...these are ETF's [ie Electronically Traded Funds]"

Actually the term is Exchange Traded Funds, meaning the shares of these funds are traded (and, therefore, priced) on an exchange throughout the day as opposed to open end mutual funds that are priced once a day at the close of the market.

-drip

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Author: stockmover Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68183 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/9/2011 8:06 PM
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My bad ...you are absolutely correct drip. I sometimes make that mistake because nowadays almost everything is traded "electronically".

Best Regards,

Rich

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Author: SirTas Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68184 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/9/2011 9:13 PM
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... this is why gauging one's risk tolerance accurately and holding an asset allocation that will allow the retiree to stay the course and not panic is so important.

Yes. An asset allocation of 80/20 (stocks/fixed income) is far more likely to have a higher terminal value after 30 years of inflation adjusted withdrawals than one with an AA of 60/40.

But when the markets go absolutely batguano and your stock portfolio loses half its value, it's far less scary with 60% stocks vs 80%.


Yes. But doesn't volatility matter in another way too. Given a specific portfolio value, the greater volatility there is in your portfolio (which is more or less the same as the percentage of stocks), the greater chance the portfolio has of hitting $0 at some specific time in the future.

It's possible to recover from 50% drops, but it's pretty much impossible to recover from $0.

--SirTas

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Author: codger41 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68196 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/10/2011 3:51 PM
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Those are some impressive numbers for 1980-2010. I wish they could be duplicated. But the S&P 500 was up an average of 17.68% in the 1980's with only one down year (-5.33%). Likewise the S&P 500 was up an average of 18.30% in the 1990s with again only one down year (-3.42%).
But the return for the 2000-2009 decade was a negative one per cent, with 4 losing years of -9.11%, -11.98%, -22.27%, and -37.22%. What will 2010-2020 look like?

I expect a 5% or 6% return and hope that the last decade's return will not be repeated.

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Author: codger41 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68197 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/10/2011 4:10 PM
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Sir Tas

You are right about asset allocation. What if our S&P 500 retiree retired on January 1, 2000 and commenced taking distributions at a 4% rate? Since he is 100% in S&P 500 and that market gauge was essentially flat for the decade, wouldn't our retiree have lost much of his original account balance, and continuing his original withdrawal rate in dollars, be looking toward zero?

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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68200 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/10/2011 6:18 PM
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What if our S&P 500 retiree retired on January 1, 2000 and commenced taking distributions at a 4% rate? Since he is 100% in S&P 500 and that market gauge was essentially flat for the decade, wouldn't our retiree have lost much of his original account balance, and continuing his original withdrawal rate in dollars, be looking toward zero?

Yup!
That's why it is so important to be smarter about withdrawals and account balance changes. I like the Guyton/Klinger rules which place "guardrails" around your withdrawals.

The rule that would have kicked in here would have reduced the withdrawal amount when the account balance dropped so low that the withdrawal percentage hit 4.8% (20% higher than the 4% SWR). That would probably have been triggered several times on the way down.

The flipside rule would increase the withdrawal amount when the account balance grows such that the withdrawal percentage hit 3.2% (20% below the 4% SWR).

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68203 of 75339
Subject: Re: The 30 year portfolio performance Date: 1/10/2011 11:39 PM
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What if our S&P 500 retiree retired on January 1, 2000 and commenced taking distributions at a 4% rate?

Then she has about $407,000 in the portfolio and is taking out $53,600 this year (13.2%). With 20 years to go ?????


"guardrails"
I like the idea behind some of G/K's rules and work, however, I find a little disturbing that using some of their rules you can't tell the retiree upfront what the "minimum" really is. Thus for risk adverse folks (and those with withdrawal amounts very near their LWYM expenses) selectively chosing the rules is as important as selecting the limit parameters.

I favor a "progressive" rule but not just based on the increased portfolio amount but would include re-evaluating the retiree longevity among other changes.

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