Switching C Variants

I optimized stock allocation switching for today’s valuations on the Investment Strategy Tester. I call this Switching C. I have added variants SwC15 and SwC10. I have now generated 30-year Historical Surviving Withdrawal Rates for sequences starting in 1923-1980.

Historical Surviving Withdrawal Rates are the maximum withdrawal amount that would have survived a full period (in this case, 30 years). I adjust withdrawal amounts to match inflation.

I used 2% TIPS and the S&P500 index. I placed expenses at 0.20% of the current balance.

I used P/E10=14 Bear Market to determine these settings. Today, we are in a long lasting (secular) Bear Market with P/E10 at 17.

Settings

I built a calculator to test the advantage of staying out of stocks whenever P/E10=20 and above. I kept the investor out of stocks until P/E10 fell below 15 for SwC15 and 10 for SwC10. That is, I froze the allocation during long lasting (secular) Bear Markets. I did this by modifying the P/E10 data in the Deluxe V1.1A08a calculator.

I used the unmodified Deluxe V1.1A08a calculator for Switching C.

My non-stock investment was 2% TIPS. The P/E10 thresholds for Switching C are 10-18-30. The stock allocations are 100-80-20-0% respectively. That is, the stock allocation is 100% when P/E10 is below 10. It is 80% when P/E10 is between 10 and 18. And so forth.

Graphs

These pictures show the 30-year Historical Surviving Withdrawal Rates HSWR of Switching C, variant SwC15 and variant SwC10 starting from 1923-1980.

Notice that Switching C and its variants do well when the percentage earnings yield 100E10/P is above 6.5%. That is, when P/E10 is 15 or below.

Observations

The Investment Strategy Tester has expanded our ability to optimize Valuation Informed Indexing settings. It allows us to look at mid-range and favorable valuations. Previous procedures were limited to starting at high valuations.

The variants lift the Safe Withdrawal Rates when 100E/P is above 6.5% and P/E10 is 15 or below.

Have fun.

John Walter Russell
July 28, 2009