No. of Recommendations: 10
[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 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.
Useing actual historical dividend yields.

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 11.5%
Initial to: $633,805
Final Val $639,431

S&P B&H *excluding* dividends
CAGR 8.3%
Initial to: $206,683
Final Val $208,021

Excluding 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 0.72
Initial to: $612,717
Final Val $1,115,940

CAGR 10.3%
StDev 12.1%
MaxDD -25%
Sortino 0.77
Initial to: $410,813
Final Val $859,269

IUL floor/cap
CAGR 6.9%
StDev 1.7%
MaxDD 0%
Sortino 11.49
Initial to: $123,904
Final Val $373,328

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 $88,164

Final Val $102,287

IUL floor/cap
Final Val $85,589

Equity curve: See chart 2

For comparison, the full period with no monthly deposits:

S&P B&H w/div
Initial to: $612,717
Final Val $618,111

Initial to: $410,813
Final Val $414,077

IUL floor/cap
Initial to: $123,904
Final Val $145,546

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 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 $858,200

Final Val $607,205

IUL floor/cap
Final Val $109,363

Equity curve: See chart 4

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.
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