Switching C

I optimized stock allocation switching for today’s valuations on the Investment Strategy Tester. I call this Switching C. 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 around 15 or 16.

Settings

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.

Graph

This picture shows the 30-year Historical Surviving Withdrawal Rates HSWR of Switching C starting from 1923-1980.

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

Observation

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.

Have fun.

John Walter Russell
June 23, 2009