Automatic Rebalancing Examples
If you have ever doubted the folly of automatic rebalancing, look at these retirement portfolio examples.
Conditions
I ran the following conditions on the “Simp Ret Tr w Rebalancing E” conceptual prototype of the future Scenario Surfer. It is available as a free download from my Yahoo Briefcase. It is in the “Retirement Trainers” folder.
Yahoo Briefcase
In all cases I started with an initial balance of $1000000. I withdrew $45000 (inflation adjusted dollars) each year. I assigned an interest rate of 2.20% to the TIPS portion of each portfolio. The calculator automatically generated the results when rebalancing to maintain stock percentages of 20%, 50% and 80%. Stock returns were generated based on S&P500 data. I used the same calculations as in my earlier Simplified Retirement Trainers.
My conceptual prototype failed to generate conditions a2, a6 and a7. This will not be a limitation of the Scenario Surfer.
For additional background material, see these notes:
Notes starting September 16, 2006
Results
Initial Balance: $1000000 Withdrawal Amount: $45000
Condition: a1 20% Stocks and Rebalancing: $100481 50% Stocks and Rebalancing: $211980 80% Stocks and Rebalancing: $171804 Manual inputs: $775880
Condition: a2 Not Available.
Condition: a3 20% Stocks and Rebalancing: $116835 50% Stocks and Rebalancing: $209665 80% Stocks and Rebalancing: $33240 Manual inputs: $1584537 (earlier), $1489519 (latest)
Condition: a4 20% Stocks and Rebalancing: $(5108) 50% Stocks and Rebalancing: $(105402) 80% Stocks and Rebalancing: $(378903) Manual inputs: $1237655
Condition: a5 20% Stocks and Rebalancing: $132605 50% Stocks and Rebalancing: $264718 80% Stocks and Rebalancing: $192008 Manual inputs: $1014236
Condition: a6 Not Available.
Condition: a7 Not Available.
Condition: a8 20% Stocks and Rebalancing: $64098 50% Stocks and Rebalancing: $116516 80% Stocks and Rebalancing: $70502 Manual inputs: $1301688
Conclusions
Training leaves automatic rebalancing in the dust. The best that automatic rebalancing could do was $264718 at Year 30 (condition a5). It went bankrupt in condition a4.
In contrast, the worst result using manual inputs was $775880 in Year 30. All of the other balances were greater than $1.0 million.
Automatic rebalancing is folly. A retiree does much better with training. He needs to keep valuations in mind.
Have fun.
John Walter Russell May 10, 2007
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