No. of Recommendations: 7
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
Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.