Maintenance Stage Update

Varying allocations makes a lot of sense during retirement when you withdraw funds. But what about the maintenance stage, when you neither add nor withdraw funds?

The traditional advice is to maintain a 100% stock allocation. Is that always the best choice? The previous answer was YES until you get close to retirement.

Here is an update at today’s valuations, after the market meltdown.

Initial Survey

I set the Scenario Surfer to P/E10=14 Bear Market. I started with an initial balance of $10000. I made no additions or withdrawals. I determined balances at Years 10 and 20.

Here are the 100% TIPS baselines for comparisons:

2% TIPS
Year 10 Balance: 12,189
Year 20 Balance: 14,860

3% TIPS
Year 10 Balance: 13,439
Year 20 Balance: 18,061

Here are the Valuation Informed Indexing results using 100% stocks whenever P/E10 was below 20.0 and 0% stocks otherwise.

Run 1. Always 100% stocks.
Year 10 Balance: 8,660
Year 20 Balance: 17,323

Run 2. Year 2 without stocks.
Year 10 Balance: 26,407
Year 20 Balance: 62,354

Run 3. Always 100% stocks.
Year 10 Balance: 12,786
Year 20 Balance: 38,201

Run 4. Always 100% stocks.
Year 10 Balance: 9,595
Year 20 Balance: 24,181

Run 5. Year 8 without stocks.
Year 10 Balance: 23,553
Year 20 Balance: 41,832

Run 6. Always 100% stocks.
Year 10 Balance: 17,270
Year 20 Balance: 28,705

Run 7. Always 100% stocks.
Year 10 Balance: 11,686
Year 20 Balance: 20,946

Run 8. Always 100% stocks.
Year 10 Balance: 13,136
Year 20 Balance: 27,142

Run 9. Always 100% stocks.
Year 10 Balance: 17,398
Year 20 Balance: 50,121

Run 10. Always 100% stocks.
Year 10 Balance: 17,675
Year 20 Balance: 41,739

Run 11. Years 3, 4 and 5 without stocks.
Year 10 Balance: 11,700
Year 20 Balance: 38,045

Run 12. Always 100% stocks.
Year 10 Balance: 9,170
Year 20 Balance: 19,733

Run 13. Years 3, 6 and 7 without stocks.
Year 10 Balance: 16,390
Year 20 Balance: 22,041

Run 14. Always 100% stocks.
Year 10 Balance: 10,334
Year 20 Balance: 22,844

Run 15. Always 100% stocks.
Year 10 Balance: 16,374
Year 20 Balance: 23,046

Run 16. Always 100% stocks.
Year 10 Balance: 12,779
Year 20 Balance: 30,831

Run 17. Always 100% stocks.
Year 10 Balance: 16,307
Year 20 Balance: 20,268

Run 18. Always 100% stocks.
Year 10 Balance: 21,250
Year 20 Balance: 24,614

Run 19. Years 4, 5, 6 and 7 without stocks.
Year 10 Balance: 16,132
Year 20 Balance: 25,601

Run 20. Always 100% stocks.
Year 10 Balance: 12,582
Year 20 Balance: 23,859

Here is the Year 10 summary. I have highlighted those runs where P/E10 exceeded 20 at some point:

Year 10 balances below $10000: 8,660; 9,595; 9,170.
Year 10 balances from $10000 to $11999: 11,686; 11,700; 10,334.
Year 10 balances from $12000 to $13999: 12,786; 13,136; 12,779; 12,582.
Year 10 balances from $14000 to $15999: none.
Year 10 balances from $16000 to $17999: 17,270; 17,398; 17,675; 16,390; 16,374; 16,307; 16,132.
Year 10 balances from $18000 to $19999: none.
Year 10 balances from $20000 and above: 26,407; 23,553; 21,250.

Here is the Year 20 summary. I have highlighted those runs where P/E10 exceeded 20 at some point:

Year 20 balances below $15000: none.
Year 20 balances from $15000 to $19999: 17,323; 19,733.
Year 20 balances from $20000 to $24999: 24,181; 20,946; 22,041; 22,844; 23,046; 20,268; 24,614; 25,601; 23,859.
Year 20 balances from $25000 to $29999: 28,705; 27,142.
Year 20 balances from $30000 to $34999: 30,831.
Year 20 balances from $35000 to $39999: 38,201; 38,045.
Year 20 balances from $40000 and above: 62,354; 41,832; 50,121; 41,739.

Second Survey

I took a second survey in which I maintained a 100% stock allocation throughout.

Run 1. Always 100% stocks.
Run 2. Always 100% stocks.
Run 3. Always 100% stocks.
Run 4. Always 100% stocks.
Run 5. Years 3 and 5 above 20.0.
Run 6. Always 100% stocks.
Run 7. Years 2, 6 and 7 above 20.0.
Run 8. Always 100% stocks.
Run 9. Always 100% stocks.
Run 10. Always 100% stocks.
Run 11. Years 5, 6 and 7 above 20.0.
Run 12. Always 100% stocks.
Run 13. Always 100% stocks.
Run 14. Always 100% stocks.
Run 15. Years 5 and 6 above 20.0.
Run 16. Always 100% stocks.
Run 17. Always 100% stocks.
Run 18. Always 100% stocks.
Run 19. Always 100% stocks.
Run 20. Always 100% stocks.

Here are the balances when P/E10 exceeded 20.0.

Run 5. Years 3 and 5 above 20.0.
Year 10 Balance: 25,136
Year 20 Balance: 38,078

Run 7. Years 2, 6 and 7 above 20.0.
Year 10 Balance: 14,638
Year 20 Balance: 36,965

Run 11. Years 5, 6 and 7 above 20.0.
Year 10 Balance: 17,748
Year 20 Balance: 27,010

Run 15. Years 5 and 6 above 20.0.
Year 10 Balance: 16,020
Year 20 Balance: 26,934

Here is the comparison of balances at Year 10 when P/E10 exceeded 20.0 at some point.

With Valuation Informed Indexing:
Year 10 Balance: 26,407
Year 10 Balance: 23,553
Year 10 Balance: 11,700
Year 10 Balance: 16,390
Year 10 Balance: 16,132

Median=16,390

Without Valuation Informed Indexing:
Year 10 Balance: 25,136
Year 10 Balance: 14,638
Year 10 Balance: 17,748
Year 10 Balance: 16,020

Median=(16,020+17,748)/2=16884

Here is the comparison of balances at Year 20 when P/E10 exceeded 20.0 at some point.

With Valuation Informed Indexing:
Year 20 Balance: 62,354
Year 20 Balance: 41,832
Year 20 Balance: 38,045
Year 20 Balance: 22,041
Year 20 Balance: 25,601

Median=38,045

Without Valuation Informed Indexing:
Year 20 Balance: 38,078
Year 20 Balance: 36,965
Year 20 Balance: 27,010
Year 20 Balance: 26,934

Median=(27,010+36,965)/2=31988

Data Analysis

In 3 out of 20 instances, stocks lost money during the first ten years. They gained money by Year 20.

The 3% TIPS have a Year 10 balance equal to the median balance of owning stocks. It is higher in 10 out of 20 instances. Even the 2% TIPS beats stocks 6 out of 20 times at Year 10.

The reason that TIPS show so well is that stocks are in a long lasting (secular) Bear Market.

By Year 20, stocks do better than 3% TIPS in all but 1 out of 20 instances. Stocks do better than 2% TIPS in all 20 instances.

In today’s P/E10=14 Bear Market, there is no obvious difference between using Valuation Informed Indexing and 100% stocks throughout in the maintenance stage.

Conclusions

Those who own 2% TIPS should consider whether the upside potential justifies replacing them with stocks over the next ten years.

Many who bought 3% TIPS recently during the brief opportunity will want to hang onto them for the next ten years. Others will look at the upside potential, which is significant, and choose stocks.

Those approaching retirement should feel comfortable in taking their money out of stocks when P/E10 rises to 20.0 and above. They do not lose money. They gain security.

Have fun.

John Walter Russell
December 22, 2008