November 17, 2014: Retirement Spending Portfolios Update

Nov 18, 2014 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on next Monday, November 24, 2014. You can also find the re-balance calendar for 2014 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Retirement Spending Portfolio Update

Many of our users are retirees or close to retirement. For them, maintaining a steady income from investments is paramount. We have addressed this topic several times. For example, in July 8, 2013: When To Retire And Bear Market Impact On Retirement Income And Spending newsletter, we looked at how several portfolios have behaved under a retirement withdrawal strategy called  Floor and Ceiling Retirement Strategy with 4 Percent Fixed Percentage. To recap, the withdrawal strategy basically withdraws 4% (adjusted with inflation) annually. But  it sets a floor and ceiling how much it can withdraw every year. For more details, please refer to the original newsletter. 

In the newsletter, we compared how such a spending strategy affects 5 different portfolios: 60% US stocks/40% US bonds, S&P 500 total return,  SAA optimal moderate, SAA equal weight modrate and TAA moderate.

Since then, markets have advanced dramatically (at least US stocks) and it is a good time to review how these portfolios have done.

Let’s first look at how these portfolios did on 7/8/2013 (all portfolios started on 1/3/2001 with $1,000,000 capital, withdraw at the end of a year):

Portfolio Performance Comparison (as of 7/8/2013)

Ticker/Portfolio Name Current Value Last Withdraw Total Spent 1Yr IRR 3Yr IRR 5Yr IRR 10Yr IRR
P Floor and Ceiling 4 Percent On VBINX Moderate Portfolio $1,052,010 
 $52,307
 
$540,213
 6.9% 10.1% 5.5% 6.1%
P Floor and Ceiling 4 Percent On Six Core Asset SAA Optimal Moderate Portfolio $1,325,790  $55,433 $583,868 2.3% 6.8% 3.8% 7.9%
P Floor and Ceiling 4 Percent On Vanguard 500 Equity VFINX $706,020  $52,307 $539,695 13.2% 14.5% 4.3% 6.0%
P Floor and Ceiling 4 Percent On Six Core Asset TAA Moderate Portfolio $2,210,000  $72,649 $716,827 1.7% 5.4% 5.5% 11.4%
P Floor and Ceiling 4 Percent On Six Core Asset SAA Equal Weight Moderate Portfolio $1,454,000  $61,479 $634,433 -0.0% 5.9% 1.8% 8.3%

The key finding in the above is that the principles of the S&P 500 (VFINX) portfolio have been depleted, mainly because of the timing of retirement (it was on 1/03/2001 during the 2001-2002 bear market). This finding is consistent with many academic research result that indicates the worst time to retire is at the last peak of a bull market or the beginning of a bear market. Even for the US stock/bond balanced portfolio VBINX, by 7/8/2013, the portfolio barely maintained its principle. 

Now that more than a year has passed, let’s review how these portfolios have done: 

Portfolio Performance Comparison (as of 11/17/2014)

Ticker/Portfolio Name Current Value Last Withdraw
P Floor and Ceiling 4 Percent On VBINX Moderate Portfolio $1,175,722 
 $53,442
P Floor and Ceiling 4 Percent On Six Core Asset SAA Optimal Moderate Portfolio $1,496,000  $57,265
P Floor and Ceiling 4 Percent On Vanguard 500 Equity VFINX $819,325  $53,442
P Floor and Ceiling 4 Percent On Six Core Asset TAA Moderate Portfolio $2,434,300  $74,226
P Floor and Ceiling 4 Percent On Six Core Asset SAA Equal Weight Moderate Portfolio $1,511,600  $61,218

It is surprising to see that the S&P 500 stock portfolio is still catching up: its principle (original $1,000,0000) is still depleted and hasn’t been fully recovered, even after a strong stock market rally. In the meantime, the TAA moderate portfolio continues to outperform and gives the retiree much more to spend. 

How about withdrawing from an aggressive tactical portfolio?

Very often, we received inquires on whether it is appropriate to use a risk profile 0 (aggressive) Tactical Asset Allocation(TAA) portfolio for retirement purpose. Although we are a firm believer on using bonds to diversify a portfolio, especially as an insurance for a 1987 type stock market crash, we nevertheless think it is interesting to do such a study: 

Portfolio Performance Comparison (as of 11/17/2014)

Ticker/Portfolio Name Current Value Last Withdraw
P Floor and Ceiling 4 Percent On Six Core Asset TAA Most Aggressive Portfolio $4,435,400 
 $74,226
P Floor and Ceiling 4 Percent On Goldman Sachs Global Tactical Portfolio $7,910,300  $79,499

NOTE: 

The TAA portfolios have done their jobs well. It is tempting to advocate using these most aggressive portfolios. However, as what we mentioned in the above, retirees can not afford to have their portfolios damaged by a sudden stock market crash. Unless other income sources exist in such an emergency situation, we still don’t recommend using most aggressive TAA portfolios, even though the above testing result is favorable. 

Finally, we need to caution that even though the back testing periods of the above portfolios are more than 10 years, it is still a very small amount of time in statistics. We remind readers that these results can not be used alone to decide your retirement needs. 

Portfolio Review

Global asset allocation portfolios or funds have not done so well, compared with the US centric funds. We monitor many well known asset allocation and total return bond funds on SmartMoneyIQ Managers page. Here are how some of the funds are compared: 

Performance Comparison (as of 11/17/2014): 

Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
EAXFX (Wells Fargo Advantage Asset Alloc R) 1.1% 1.8% 7.2% 6.1% 5.4% 0.44
MALOX (BlackRock Global Allocation Instl) 2.6% 4.6% 8.3% 6.9% 8.0% 0.62
SGIIX (First Eagle Global I) 3.8% 5.9% 10.2% 10.1% 9.5% 0.66
PASDX (PIMCO All Asset D) 3.1% 3.4% 5.7% 6.6% 5.6% 0.56
GBMFX (GMO Benchmark-Free Allocation III) 1.5% 2.5% 7.6% 6.4% 8.3% 0.96
VBINX (Vanguard Balanced Index Inv) 8.6% 10.4% 12.8% 11.2% 7.1% 0.51

One should not read too much on the short term under performance. Longer term, these funds have done well, especially for GBMFX and MALOX or SGIIX, all of them are excellent. 

Market Overview

Even though US stocks are again stuck at record high levels, we are still very cautious. A particular noticeable divergence is on the high yield bonds. So far, high yield bonds have been considerably weaker than stocks since the recovery from the mini correction. In the meantime, we see long term bonds are still strong. All of these indicate bond investors’ caution. 

For more detailed asset trend scores, please refer to 360° Market Overview.

We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now.  However, recognizing our deficiency to predict the markets, we will stay on course. 

We again copy our position statements (from previous newsletters): 

Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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