When Price Drops Occur (Single Investment)

I looked at investing $10000 for 30 years while maintaining a fixed stock allocation. There were no deposits. There were no withdrawals.

Scenario Surfer Runs

I invested entirely in stocks and 2% TIPS. I started with a $10000 balance. I selected P/E10=26 Bear Market. I made no deposits. I made no withdrawals. Here are the Year 30 balances assuming fixed allocations. P/E10 values are in “Current Years” in the “Portfolio Allocation” box.

Run 1.
P/E10 below 20 in Year 3.
P/E10 below 15 in Year 7.
P/E10 below 10 in Year 8.
20% rebalanced: 24,014.
50% rebalanced: 33,944.
80% rebalanced: 43,996.
100% stocks: 49,945.

Run 2.
P/E10 below 20 in Year 2.
P/E10 below 15 in Year 16.
P/E10 below 10 in Year 21.
20% rebalanced: 21,630.
50% rebalanced: 26,016.
80% rebalanced: 28,349.
100% stocks: 28,347.

Run 3.
P/E10 below 20 in Year 6.
P/E10 below 15 never.
P/E10 below 10 never.
20% rebalanced: 24,823.
50% rebalanced: 36,501.
80% rebalanced: 48,507.
100% stocks: 55,431.

Run 4.
P/E10 below 20 in Year 2.
P/E10 below 15 in Year 11.
P/E10 below 10 in Year 13.
20% rebalanced: 23,832.
50% rebalanced: 32,539.
80% rebalanced: 39,672.
100% stocks: 42,597.

Run 5.
P/E10 below 20 in Year 2.
P/E10 below 15 in Year 7.
P/E10 below 10 in Year 9.
20% rebalanced: 22,830.
50% rebalanced: 29,517.
80% rebalanced: 34,202.
100% stocks: 35,428.

Run 6.
P/E10 below 20 in Year 6.
P/E10 below 15 in Year 8.
P/E10 below 10 in Year 11.
20% rebalanced: 21,954.
50% rebalanced: 26,926.
80% rebalanced: 30,139.
100% stocks: 30,979.

Run 7.
P/E10 below 20 in Year 3.
P/E10 below 15 in Year 5.
P/E10 below 10 never .
20% rebalanced: 23,805.
50% rebalanced: 32,612.
80% rebalanced: 40,055.
100% stocks: 43,223.

Data Summary

Here are the balances ordered in terms of when P/E10 first falls below 20:

P/E10 below 20 in Year 2: balances 28,347, 42,597, 35,428.
P/E10 below 20 in Year 3: balances 49,945, 43,223.
P/E10 below 20 in Year 6: balances 55,431, 30,979.

Here are the balances ordered in terms of when P/E10 first falls below 15:

P/E10 below 15 in Year 5: balance 43,223.
P/E10 below 15 in Year 7: balances 49,945, 35,428.
P/E10 below 15 in Year 8: balance 30,979.
P/E10 below 15 in Year 11: balance 42,597.
P/E10 below 15 in Year 16: balance 28,347.
P/E10 below 15 never: balance 55,431.

Here are the balances ordered in terms of when P/E10 first falls below 10:

P/E10 below 10 in Year 8: balance 49,945.
P/E10 below 10 in Year 9: balance 35,428.
P/E10 below 10 in Year 11: balance 30,979.
P/E10 below 10 in Year 13: balance 42,597.
P/E10 below 10 in Year 21: balance 28,347.
P/E10 below 10 never: balances 55,431, 43,223.

Here are the P/E10 thresholds versus the ordered Year 30 balances:
55,431 and years 6, never and never.
49,945 and years 3, 7 and 8.
43,223 and years 3, 5 and never.
42,597 and years 2, 11 and 13.
35,428 and years 2, 7 and 9.
30,979 and years 6, 8 and 11.
28,347 and years 2, 16 and 21.

Data Analysis

In most cases, but not all, the 100% stock allocation was the best fixed allocation.

Theory tells us that the order of returns is unimportant in when there are no deposits and no withdrawals. These results are consistent with that theory. No subtle effect emerged. Such an effect might have been that an early price drop signals a lower total return at Year 30.

Conclusions

If you maintain a fixed stock allocation for 30 years and make no deposits or withdrawals, choose 100% stocks.

The order of returns means little, if anything, when you make no deposits and no withdrawals.

Have fun.

John Walter Russell
May 16, 2008