Switching Allocations with Large Cap Value

Research on Safe Withdrawal Rates

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JWR1945
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Switching Allocations with Large Cap Value

Post by JWR1945 »

I copied the 1928-2000 Large Cap Value data from the Gummy's database.
http://www.gummy-stuff.org/returns.htm

I made a copy of an existing calculator. (I used my latest, my Gummy 02 version of the Deluxe Calculator 1.1A08.) I froze the S&P500 prices at the 1927 level of 13.40. That is, I pasted 13.40 into all of the cells from BF184 through EK184. I made a set of artificial entries for the dividends in cells BG185 through EA185. I multiplied all of the LV data from Gummy's database by 13.40 and divided by 100. I pasted that into cells BG185 through EA185. These cells are listed as the dividend amounts in 1928-2000. I took the value in cell EA185, which is for the year 2000, and pasted it into cells EB185-EK185.

The net effects are that all price changes are zero and all dividend yields equal total returns for Large Cap Value stocks for the years 1928-2000.

I call my new calculator the Gummy 02B version of the Deluxe Calculator V1.1A08 revised on January 24, 2005.

Conditions

I set the starting balance at $100000. I set expenses to 0.20%. I varied the withdrawal rate. I used the CPI for inflation. I examined 30-year sequences starting in 1928-1980. There are 53 sequences. Stock allocations consisted of Large Cap Value. The non-stock allocation consisted of commercial paper.

I started by collecting a baseline with fixed stock allocations of 0%, 30%, 50%, 70% and 100%.

Later, I took a brief survey. I varied the stock allocation depending upon P/E10. When P/E10 was below the lower threshold (which varied), the stock allocation was 100%. When P/E10 was between the two thresholds, I used an intermediate allocation of 30% or 50% or 70% as indicated. When P/E10 exceeded the upper threshold, which I set at 21, the stock allocation was 0%.

The best intermediate stock allocation (when there was only one intermediate allocation) from a previous survey using commercial paper was 30%. The best P/E10 thresholds were 12 and 21.

Procedure

I increased the withdrawal rate in increments of 0.1%. I recorded the highest rate at which all portfolios from 30-year sequences beginning in 1928-1980 survived. I have listed those rates as HSWR.

I continued increasing withdrawal rates in increments of 0.1%. I recorded the lowest withdrawal rate at which 1 or more, 5 or more and 10 or more portfolios failed.

This method allows me to survey a large number of conditions rapidly. By including data with 5 and 10 failures, I am able to spot difficulties associated with probability distributions.

Results

This was a brief survey. This was not a full optimization. This did not include a full sensitivity study.

Baselines

Calculator data: 1928-2000.
30-year sequences from 1928-1980.
$100000, 0.20% expenses.
[Calculator settings:
Fixed allocations. No switching, but with annual rebalancing.
Stock Allocations: 0%, 30%, 50%, 70%, 100%.]

Stock Allocation = 0%. That is, 100% commercial paper.
30-year Failures in 1928-1980:
HSWR: 2.3
First failure: 2.4
Five failures: 2.6
Ten failures: 2.7

Stock Allocation = 30%
30-year Failures in 1928-1980:
HSWR: 4.0
First failure: 4.1 in year 1936
Five failures: 4.8 in years 1933, 1935-1939
Ten failures: 5.0

Stock Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 4.9
First failure: 5.0 in year 1928
Five failures: 5.6 in years 1928, 1929, 1936, 1965, 1968
Ten failures: 6.1

Stock Allocation = 70%
30-year Failures in 1928-1980:
HSWR: 4.3
First failure: 4.4 in year 1928
Five failures: 5.9 in years 1928, 1929, 1936, 1965, 1968
Ten failures: 6.8

Stock Allocation = 100%
30-year Failures in 1928-1980:
HSWR: 2.9
First failure: 3.0 in year 1928
Five failures: 6.0 in years 1928-1930, 1936, 1968
Ten failures: 7.5

The Survey of Thresholds and Allocations

Calculator data: 1928-2000.
30-year sequences from 1928-1980.
$100000, 0.20% expenses.
[Calculator settings:
P/E10 thresholds: 4-varies-21-80.
Allocations: 100-100-varies-0-0.]

P/E10 threshold = 9 and [Intermediate stock] Allocation = 30%
30-year Failures in 1928-1980:
HSWR: 3.5
First failure: 3.6 in year 1933
Five failures: 4.5
Ten failures: 4.9

P/E10 threshold = 9 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 4.4
First failure: 4.5 in year 1936
Five failures: 5.9 in years 1933, 1935-1937, 1959
Ten failures: 6.2

P/E10 threshold = 9 and Allocation = 70%
30-year Failures in 1928-1980:
HSWR: 4.8
First failure: 4.9
Five failures: 6.2
Ten failures: 6.7

P/E10 threshold = 12 and Allocation =30%
30-year Failures in 1928-1980:
HSWR: 5.5
First failure: 5.6 in year 1955
Five failures: 5.9
Ten failures: 6.3

P/E10 threshold = 12 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 5.9
First failure: 6.0
Five failures: 6.3
Ten failures: 6.6

P/E10 threshold = 12 and Allocation = 70%
30-year Failures in 1928-1980:
HSWR: 5.7
First failure: 5.8
Five failures: 6.7
Ten failures: 7.0

P/E10 threshold = 15 and Allocation = 30%
30-year Failures in 1928-1980:
HSWR: 6.0
First failure: 6.1
Five failures: 6.5
Ten failures: 7.2

P/E10 threshold = 15 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 6.2
First failure: 6.3
Five failures: 6.7
Ten failures: 7.2

P/E10 threshold = 15 and Allocation = 70%
30-year Failures in 1928-1980:
HSWR: 5.8
First failure: 5.9
Five failures: 6.9
Ten failures: 7.3

Summary of results with the best intermediate stock allocation, which was 50%.

P/E10 threshold = 9 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 4.4
First failure: 4.5 in year 1936
Five failures: 5.9 in years 1933, 1935-1937, 1959
Ten failures: 6.2

P/E10 threshold = 12 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 5.9
First failure: 6.0
Five failures: 6.3
Ten failures: 6.6

P/E10 threshold = 15 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 6.2
First failure: 6.3
Five failures: 6.7
Ten failures: 7.2

Additional conditions with an intermediate stock allocation of 50%.

P/E10 threshold = 13 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 5.9
First failure: 6.0
Five failures: 6.3
Ten failures: 6.6

P/E10 threshold = 14 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 6.2
First failure: 6.3
Five failures: 6.7
Ten failures: 7.1

P/E10 threshold = 16 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 6.2
First failure: 6.3
Five failures: 6.7
Ten failures: 7.2

P/E10 threshold = 17 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 6.3
First failure: 6.4
Five failures: 7.0
Ten failures: 7.8

P/E10 threshold = 18 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 4.9
First failure: 5.0 in year 1936
Five failures: 6.7
Ten failures: 7.4

Comparisons

These are the best results with a fixed allocation.

Stock Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 4.9
First failure: 5.0 in year 1928
Five failures: 5.6 in years 1928, 1929, 1936, 1965, 1968
Ten failures: 6.1

These are the best results with switching.

P/E10 threshold = 17 and Allocation = 50%
30-year Failures in 1928-1980:
HSWR: 6.3
First failure: 6.4
Five failures: 7.0
Ten failures: 7.8

Summary

A 6.0% withdrawal rate produced zero failures when the lower P/E10 threshold was 14, 15, 16 or 17.

Large Cap Value stocks have had much higher Historical Survival Withdrawal Rates than the S&P500 index.

P/E10 is a useful indicator for portfolios with Large Cap Value as well as for those that have the S&P500 index.

Switching stock allocations in accordance with the P/E10 of the S&P500 index benefits Large Cap Value portfolios.

Caution: I have not made any adjustments for today's valuations. Actual improvements starting with today's valuations are likely to be less. You can still estimate performance relative to the S&P500 index.

Have fun.

John R.
Mike
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Posts: 278
Joined: Sun Jul 06, 2003 4:00 am

Post by Mike »

I have not made any adjustments for today's valuations.
An important point since value is very popular today. There are not a lot of under valued assets around.
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