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

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Thursday October 1, 2020.

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month. 

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.

Retirement Spending: Your Portfolio’s Volatility Matters

As the current bull market has lasted for a very long time (since 2009) and stocks have delivered some good returns with the strong backing of the Federal Reserve bank, many investors have developed complacency to stocks. They might think that as long as they can withstand the volatility (large fluctuation), buying and holding stocks is just fine. 

This attitude is generally valid if the following conditions are met:

  • You hold a broad base stock index fund such as S&P 500 (SPY, VFINX, for example) instead of holding individual stocks. S&P 500, for example, has never lost money in a rolling 20 year period (see, for example, April 17, 2017: Risk vs. Volatility: Long Term Stock Market Returns). Individual stocks, however, are subject to company specific risk and it’s much less certain to guarantee to have a good return even in a very long time. 
  • You hold these funds for a long time. From the study in the above newsletter, S&P 500 can even lose money in a 15-year period. Furthermore, to get a reasonable return that can beat inflation (say 5% over inflation), you’d have to hold stocks for an even longer period and/or just have a good entry point (i.e. buying them at a cheap valuation when markets are in distress). 

For many retirees or those close to retirement, they might have to tap their investment portfolios regularly.  It might not be possible to leave their stock portion untouched for so long. For them, the risk or the volatility of their portfolios matters. In fact, it matters a lot.

We have discussed retirement spending subjects many times. For examples, see the following newsletters: 

We would like to revisit this topic again by continuing to look at the utility sector timing portfolio mentioned in the previous newsletter, which can serve as a good example. 

The Floor and ceiling 4 percent withdrawal/spending rule

One of the most popular retirement spending rules is the so called Floor and ceiling rule: basically, investors can withdraw 4% annually with floor 3.6% and ceiling 5%, depending on how much your portfolio value fluctuates: in good time, you might withdraw as much as up to 5% annually; in bad time, you’ll reduce your annual spending down to 3.6%. The withdrawal amount is adjusted with CPI inflation rate annually. The rule says that if you have a relatively stable portfolio, doing so would very likely preserve your purchase power perpetually.

See Floor and Ceiling Retirement Strategy with 4 Percent Fixed Percentage for more detailed description on this retirement income safe withdrawal strategy. 

Of course, the key here is the word ‘relatively stable portfolio’. Is the portfolio, say, that consists of a single S&P 500 index fund, relatively stable? Let’s continue to find out. 

Retirement spending: S&P 500 index fund portfolio vs. risk managed utility portfolio

Suppose our investor started to adopt the above annual 4% withdrawal at the start of year 2001. At the end of every year, the investor would withdraw money from the portfolio for the next year’s spending based on the rule outlined in the above. We choose the utility portfolio P Composite Momentum Market Utility FSUTX mentioned in the previous newsletter as the representative because it  not only has risk reduction mechanism, it also invests only in a utility fund (Fidelity select utilities FSUTX) or an intermediate term Treasury bond fund (VFITX) when markets are in a downturn. So this portfolio has a good dividend that usually is around 4% most of time (well, in the coming years, if the portfolio doesn’t have high enough dividend yield, the investor will need to sell part of its holding, just like in the portfolio of S&P 500 index fund (Vanguard 500 index fund VFINX) to raise the money for spending). 

Here are some interesting results: 

Total portfolio amount left as of 9/25/2020: 

and the money spent/withdrawn so far: 

Portfolio spending comparison (as of 9/25/2020, assuming $1 million on 1/3/2001):
Ticker/Portfolio Name Total money withdrawn since 2001 Last withdrawn on 12/31/2019 Total money left Purchasing power inflation adjusted (assuming 3% annual inflation) Over purchase power AR without annual withdrawal
P Floor and Ceiling 4 Percent On Utility Sector Fund With Timing $1.29M $95k $5.47M $1.79M $3.68M 11.7%
P Floor and Ceiling 4 Percent On Vanguard 500 Equity VFINX $0.94M $68k $1.02M $1.79M $-0.67M 6.6%


  • The timing portfolio has increased its purchase power (over inflation) by $3.68M as of 9/25/2020. In contrast, the S&P 500 VFINX portfolio’s purchase power is now $-0.68M deficit, compared with the original $1M purchase power on the start date 1/3/2001. 
  • The timing portfolio has withdrawn more money since 2001 (or the investor has been able to live off a better life): $1.29M vs. $0.94M of VFINX portfolio. 
  • Furthermore, in the last withdrawal (for year 2020), the timing investor is enjoying $95K annual expense/withdrawal while the VFINX investor is living off $68K annual expense. 

Of course, the most devastating effect for the VFINX investor is that he/she will probably run out of money sometime in the future. The timing investor, on the other hand, is very likely to preserve and leave out much bigger estate in the end. 

A steady though boring investing strategy can win in the end, in fact, it can win big in the end. So it’s a good lesson to heed, especially in the current go-go time of the stock market. 

Market overview

Stocks ended the week with some strong recovery. At the moment, investors are holding their breadth on two major events: any possible (and how serious) the second wave of the pandemic and the US president election result. On the Covid19 pandemic front, though we have seen more infectious cases from Europe and mid west America, the hospitalization and death numbers have been stable and are even trending lower. It’s likely that what we have learned so far to cope with the disease might be effective enough to avoid the earlier catastrophe of high death rates and serious damage to a patient. On the other hand, to really understand and declare the effectiveness requires more time to process and confirm. At any rate, we are getting a bit more optimistic on the pandemic. But this of course can change quickly. 

Again, we shouldn’t rely on our subjective opinion and should follow our strategies instead:   

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation now reached another high. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

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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