No. of Recommendations: 24
One of the tactics used to beat up hocus has been to repeatedly bash him over the head with his 0% stock portfolio. It is loudly stated 'The historical SWR for a 100% fixed income portfolio is only 2.1%. But you are taking 4%! Can't you see 4% is greater than 2%? You are mental, dude! GTFOOH! Why should we listen to you!'

Hocus just defended himself from such an attack. Here is his reponse: . In it he reveals that, the REHP study notwithstanding, his financial choices have paid off quite well. Yep, it turns out that maybe he recognized a good deal in 7% CDs, 3.75% real return TIPS, and real estate ownership in a time of historically high stock market valuations.

But that is just anecdotal. There is good evidence that his strategy will provide a historical SWR far greater than the 2% his attackers smash him with. The evidence is two-fold.

First we should establish the benchmark against which hocus is competing: what is the HSWR and 'optimal' allocation for a non-switching strategy with 50 year withdrawal period and Sept. start 3.31% at 64/36. (this uses 50/50 front-end/back-end and commercial paper)

The evidence that hocus's strategy will yield more than 2%:

1) Heavy use of TIPs is a relatively new option, but it undeniably will provide better withdrawal rates than the CD/bond options of the past. This is especially true when you consider the ones that Hocus locked in with a 3.75% return above inflation. A 100% TIPS portfolio with a 3.75% coupon provides a SWR of 3.55% Even with a 2% coupon you optain a 2.53% SWR.

2) A valuation based switching strategy may or may not actually increase withdrawal rates, but it certainly doesn't drop them to 2%. As a very rough model of hocus's plan I used intercst's spreadsheet to find the HSWR for a stock switching strategy in which the stock allocation is 0% above PE-(10) of 18 and is 50% below that.

I calculated the results using a September start date to include the effects of overvaluation as much as possible. I used a 50 year withdrawal period since hocus is in his mid 40s (I think). Front-end back-end withdrawals at 50/50.

Prepare yourselves. 3.4% That is the historical SWR for such a strategy.
Other data points are:
14 3.44
15 3.42
16 3.36
17 3.50
18 3.40
19 3.32
20 3.37
21 3.38

The average of these is a WR of 3.4% versus the fixed strategy SWR of 3.3%.

This is shock to me that the comparison is this good. Can someone else check these findings? I will repeat again that I am not advocating a switching strategy and I don't consider it close to being proven. Much more work is needed.

Combine the diversification, stabilization, and return benefits of TIPS and real estate ownership into the switching strategy outlined above, and it is feasible that hocus has in fact been following a strategy that will yield a sustained 4% withdrawal rate over 50 years.

Mental? I don't think so. Good work hocus!

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
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.