Another Story for Accumulators

I have collected more data on the Scenario Surfer. It improves our understanding.

The Data

I dollar cost averaged for 20 years. I started with $1000 and added $1000 each year thereafter. I invested entirely in stocks when P/E10 fell below 20 and entirely in 2% (real interest) TIPS when P/E10 rose above 20.

[Explanatory note: when P/E10=20, the odds of a loss ten years into the future is around 20%. The upside potential is a 20% chance of exceeding 6% (plus inflation).]

I looked at a P/E10=26 bear market. I took 5 runs.

Balances are at Years 5, 10, 15 and 20. I include fixed stock-TIPS allocations for purposes of comparison.

Year 5. P/E10=26 Bear Market

Run: 1
Varying allocations: 4.0K
20% stocks: 5.9K
50% stocks: 5.1K
80% stocks: 4.3K

Run: 2
Varying allocations: 6.4K
20% stocks: 6.7K
50% stocks: 7.1K
80% stocks: 7.5K

Run: 3
Varying allocations: 6.4K
20% stocks: 6.2K
50% stocks: 5.9K
80% stocks: 5.6K

Run: 4
Varying allocations: 6.4K
20% stocks: 6.7K
50% stocks: 7.1K
80% stocks: 7.5K

Run: 5
Varying allocations: 7.9K
20% stocks: 6.7K
50% stocks: 7.1K
80% stocks: 7.5K

Year 10. P/E10=26 Bear Market

Run: 1
Varying allocations: 14.7K
20% stocks: 13.0K
50% stocks: 13.7K
80% stocks: 14.1K

Run: 2
Varying allocations: 10.6K
20% stocks: 11.8K
50% stocks: 10.8K
80% stocks: 9.7K

Run: 3
Varying allocations: 12.6K
20% stocks: 12.2K
50% stocks: 12.0K
80% stocks: 11.7K

Run: 4
Varying allocations: 11.6K
20% stocks: 10.4K
50% stocks: 9.2K
80% stocks: 9.7K

Run: 5
Varying allocations: 21.7K
20% stocks: 13.2K
50% stocks: 14.3K
80% stocks: 15.0K

Year 15. P/E10=26 Bear Market

Run: 1
Varying allocations: 29.9K
20% stocks: 23.6K
50% stocks: 31.6K
80% stocks: 40.9K

Run: 2
Varying allocations: 26.1K
20% stocks: 20.1K
50% stocks: 21.6K
80% stocks: 22.6K

Run: 3
Varying allocations: 18.9K
20% stocks: 18.9K
50% stocks: 18.6K
80% stocks: 18.0K

Run: 4
Varying allocations: 33.4K
20% stocks: 21.3K
50% stocks: 24.9K
80% stocks: 28.4K

Run: 5
Varying allocations: 23.1K
20% stocks: 19.2K
50% stocks: 19.2K
80% stocks: 18.5K

Year 20. P/E10=26 Bear Market

Run: 1
Varying allocations: 31.8K
20% stocks: 29.10K
50% stocks: 32.9K
80% stocks: 35.9K

Run: 2
Varying allocations: 47.4K
20% stocks: 28.3K
50% stocks: 30.9K
80% stocks: 32.5K

Run: 3
Varying allocations: 35.0K
20% stocks: 28.0K
50% stocks: 30.2K
80% stocks: 32.1K

Run: 4
Varying allocations: 45.2K
20% stocks: 28.5K
50% stocks: 31.4K
80% stocks: 33.9K

Run: 5
Varying allocations: 33.0K
20% stocks: 27.0K
50% stocks: 27.5K
80% stocks: 27.2K

Analysis by Relative Order

Here is the relative order of the data. The balances range from 1 (lowest) through 4 (highest).

Year 5.
Varying Allocations-20% stocks-50% stocks-80% stocks
Run 1. 1-4-3-2
Run 2. 1-2-3-4
Run 3. 4-3-2-1
Run 4. 1-2-3-4
Run 5. 4-1-2-3

Year 10.
Varying Allocations-20% stocks-50% stocks-80% stocks
Run 1. 4-1-2-3
Run 2. 2-4-3-1
Run 3. 4-3-2-1
Run 4. 4-3-1-2
Run 5. 4-1-2-3

Year 15.
Varying Allocations-20% stocks-50% stocks-80% stocks
Run 1. 2-1-3-4
Run 2. 4-1-2-3
Run 3. 3-3-2-1
Run 4. 4-1-2-3
Run 5. 4-2-2-1

Year 20.
Varying Allocations-20% stocks-50% stocks-80% stocks
Run 1. 2-1-3-4
Run 2. 4-1-2-3
Run 3. 4-1-2-3
Run 4. 4-1-2-3
Run 5. 4-1-3-2

The Year 5 results are mixed.
The Year 10 results favor varying allocations.
The Year 15 results favor varying allocations.
The Year 20 results favor varying allocations and 100% stocks.

Minimal Balances

Year 5.
Varying Allocations: 4.0K.
20% stocks: 5.9K.
50% stocks: 5.1K.
80% stocks: 4.3K.

Year 10.
Varying Allocations: 10.6K.
20% stocks: 10.4K.
50% stocks: 9.2K.
80% stocks: 9.7K.

Year 15.
Varying Allocations: 18.9K.
20% stocks: 18.9K.
50% stocks: 18.6K.
80% stocks: 18.0K.

Year 20.
Varying Allocations: 31.8K.
20% stocks: 27.0K.
50% stocks: 27.5K.
80% stocks: 27.2K.

The Year 5 results favor 20% stocks.
The Year 10 results favor varying allocations.
The Year 15 results favor varying allocations and 20% stocks.
The Year 20 results favor varying allocations.

Observations

It takes about ten years to see a strong trend to emerge. It favors varying allocations.

The starting valuation is important: P/E10=26 (Bear Market). There is a big price drop, but the exact time is uncertain. It can take a decade.

Have fun.

John Walter Russell
October 21, 2007