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Subject:  Strategy comparison S&P500 vs. IUL Date:  4/1/2013  3:23 PM
Author:  Rayvt Number:  71633 of 90112

Executive Summary
The 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 1/1/2013

Initial deposit (purchase) of $10,000
Subsequent 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: $478,263
Final Val $932,426

S&P B&H EXCLUDING dividends
CAGR 8.3%
Initial to: $206,683
Final Val $444,769

Excluding 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 0.66
Initial to: $478,263
Final Val $932,426

CAGR 9.8%
StDev 12.1%
MaxDD -25%
Sortino 0.72
Initial to: $348,844
Final Val $773,118

IUL floor/cap
CAGR 6.9%
StDev 1.7%
MaxDD 0%
Sortino 11.49
Initial to: $123,904
Final Val $337,235

A 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 1

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.

Second half -- Jul-1993 to Jan-2013

S&P B&H w/div
Final Val $94,202

Final Val $108,312

IUL floor/cap
Final Val $85,487

Equity curve: See chart 2

For comparison, the full period with no monthly deposits:

S&P B&H w/div
Initial to: $478,263
Final Val $482,219

Initial to: $348,844
Final Val $351,493

IUL floor/cap
Initial to: $123,904
Final Val $124,570

Equity curve: See chart 3

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 $671,380

Final Val $516,945

IUL floor/cap
Final Val $65,453

Equity curve: See chart 4
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