Reference: https://pages.stern.nyu.edu/~adamodar/N ... retSP.html
I played around with the stock market historical records from 1928 to 2023, comparing 30 year rolling periods of investment of stocks to bonds ratios of 50%/50%, 60%/40%, and 70%/30%. I applied the year’s stock gains and bond yields to a starting amount then deducted a hypothetical withdrawal of 4% of the starting amount (inflated by 2% each year thereafter). Withdrawals were taken from the stock portion of the accounts whenever the stock market had a positive return. Withdrawals were taken from the bond portion of the account whenever the stock market had a negative return (regardless of the bond market’s performance). Then I rebalanced the account at the end of each year.
You could say that I was testing William Bengen’s 4% Rule. Except for the 70%/30% portfolio in 1929, each account remained solvent for any 30 year time frame. At 4.5% withdrawal rate, all three portfolios failed during the 1929 Stock Market Crash period, but held up otherwise.
Observations:
1. The average rate of return on the S&P 500 during this time period was 11.66%, which is the same as the current market over the most recent 30 year period. It’s not unreasonable to assume similar future returns (in the long run).
2. The average yield on the bond market during this time period was 6.95%. By comparison, bonds over the last 30 years have an average of 6.90%. (I was surprised by this figure. I had assumed that we were in a period of poor bond returns. We may be in a local low, but not when viewed from a 30-year horizon.) Again, it would not be unreasonable to assume that future returns will be similar.
3.During the “up” stock market cycles, it doesn’t matter what portfolio you choose ... all will do satisfactorily.
4.Sequence of returns risk. After the portfolio has been running for a while, down years in the stock market do not significantly affect the success rate. Down years during the first few years of startup are critical as to whether the portfolio gains traction. The timing of down years has a much greater affect on success rates than portfolio ratios. Indeed, the entire point of balanced portfolios should focus on bridging the first two or three bear market years.
5.Comment number 4 applies to 4% rate of withdrawal (inflation adjusted) only. At higher rates of withdrawal, it is possible to drawdown the account faster than it builds up, thereby favoring higher percentage stock portfolios.
6.I tried 8% withdrawal rate (a la Dave Ramsey). I didn’t test every year, but I’d estimate it failed a significant portion of the time (say 1/4 of the time). Disclaimer: Dave’s big on 100% stock folios, which I did not test.
Personal comments:
I was very disappointed in how my bonds fared during the last couple of bear markets. So, I switched to 100% stocks. My thoughts at the time were that my pension and S.S. were more than enough to cover my household expenses, so I could just rely on those fixed income sources during any down markets.
However, it has come to my attention that this strategy had a serious flaw ... namely, my age. I’m 70. I’ve got at most a dozen “good” years of retirement before settling into a more sedentary existence. Preserving wealth should not be a high priority for me. I can’t afford to save money at the expense of wasting time.
I started to look around for some financial vehicle to bridge bear market conditions or to at least reduce stocks’ volatility. Treasuries, TIPS, HYSA, CDs, MMs, structured notes, defined outcome/buffered EFT, MYGA, and others. Some had higher yields but were either required a fair amount of work to manage or were complex in nature (leaving some doubt as to what exactly I was investing in). Most of the simple solutions also bore low returns. After much research and teeth gnashing, I’m left with the conclusion that for my needs, bonds are the most convenient solution.
The Bengen exercise that I went through was enlightening. While history doesn’t guarantee future performance, it was reassuring to see that recent bond performance hasn’t been that different than historical performance. Hopefully, the problems with the current bond market are more of a blip on the radar screen, than a portender of things to come. The exercise also showed me the value of balancing portfolios.
I decided on a 70%/30% portfolio. While the exercise showed me that, on paper, I should be invested 50%/50%; that doesn’t take into account my personality. I don’t like the idea of “leaving money on the table.” Maybe after a year or two, I’ll be willing to adopt a more conservative strategy. And in my defense, I calculated that the 30% should provide sufficient funds to bridge five years worth of bear markets with no reduction in my personal spending levels. So, I don’t think my strategy is completely unconservative.
I played around with the stock market historical records from 1928 to 2023, comparing 30 year rolling periods of investment of stocks to bonds ratios of 50%/50%, 60%/40%, and 70%/30%. I applied the year’s stock gains and bond yields to a starting amount then deducted a hypothetical withdrawal of 4% of the starting amount (inflated by 2% each year thereafter). Withdrawals were taken from the stock portion of the accounts whenever the stock market had a positive return. Withdrawals were taken from the bond portion of the account whenever the stock market had a negative return (regardless of the bond market’s performance). Then I rebalanced the account at the end of each year.
You could say that I was testing William Bengen’s 4% Rule. Except for the 70%/30% portfolio in 1929, each account remained solvent for any 30 year time frame. At 4.5% withdrawal rate, all three portfolios failed during the 1929 Stock Market Crash period, but held up otherwise.
Observations:
1. The average rate of return on the S&P 500 during this time period was 11.66%, which is the same as the current market over the most recent 30 year period. It’s not unreasonable to assume similar future returns (in the long run).
2. The average yield on the bond market during this time period was 6.95%. By comparison, bonds over the last 30 years have an average of 6.90%. (I was surprised by this figure. I had assumed that we were in a period of poor bond returns. We may be in a local low, but not when viewed from a 30-year horizon.) Again, it would not be unreasonable to assume that future returns will be similar.
3.During the “up” stock market cycles, it doesn’t matter what portfolio you choose ... all will do satisfactorily.
4.Sequence of returns risk. After the portfolio has been running for a while, down years in the stock market do not significantly affect the success rate. Down years during the first few years of startup are critical as to whether the portfolio gains traction. The timing of down years has a much greater affect on success rates than portfolio ratios. Indeed, the entire point of balanced portfolios should focus on bridging the first two or three bear market years.
5.Comment number 4 applies to 4% rate of withdrawal (inflation adjusted) only. At higher rates of withdrawal, it is possible to drawdown the account faster than it builds up, thereby favoring higher percentage stock portfolios.
6.I tried 8% withdrawal rate (a la Dave Ramsey). I didn’t test every year, but I’d estimate it failed a significant portion of the time (say 1/4 of the time). Disclaimer: Dave’s big on 100% stock folios, which I did not test.
Personal comments:
I was very disappointed in how my bonds fared during the last couple of bear markets. So, I switched to 100% stocks. My thoughts at the time were that my pension and S.S. were more than enough to cover my household expenses, so I could just rely on those fixed income sources during any down markets.
However, it has come to my attention that this strategy had a serious flaw ... namely, my age. I’m 70. I’ve got at most a dozen “good” years of retirement before settling into a more sedentary existence. Preserving wealth should not be a high priority for me. I can’t afford to save money at the expense of wasting time.
I started to look around for some financial vehicle to bridge bear market conditions or to at least reduce stocks’ volatility. Treasuries, TIPS, HYSA, CDs, MMs, structured notes, defined outcome/buffered EFT, MYGA, and others. Some had higher yields but were either required a fair amount of work to manage or were complex in nature (leaving some doubt as to what exactly I was investing in). Most of the simple solutions also bore low returns. After much research and teeth gnashing, I’m left with the conclusion that for my needs, bonds are the most convenient solution.
The Bengen exercise that I went through was enlightening. While history doesn’t guarantee future performance, it was reassuring to see that recent bond performance hasn’t been that different than historical performance. Hopefully, the problems with the current bond market are more of a blip on the radar screen, than a portender of things to come. The exercise also showed me the value of balancing portfolios.
I decided on a 70%/30% portfolio. While the exercise showed me that, on paper, I should be invested 50%/50%; that doesn’t take into account my personality. I don’t like the idea of “leaving money on the table.” Maybe after a year or two, I’ll be willing to adopt a more conservative strategy. And in my defense, I calculated that the 30% should provide sufficient funds to bridge five years worth of bear markets with no reduction in my personal spending levels. So, I don’t think my strategy is completely unconservative.
Statistics: Posted by 1dash1 — Sun Dec 08, 2024 11:50 pm — Replies 7 — Views 424