Current Research O: An Active Management Example

Updated: June 10, 2009.

Current Research Index

Current Research O: An Active Management Example

The Morningstar Income & Dividend Investing discussion board recently included a listing of 60 years of FKINX total (nominal) return data. The managers were able to match the return of the S&P500 index over the years 1949-2009 with much lower volatility. You can see this in this comparison graphic. It shows Year 10 total NOMINAL returns.

Lowering volatility with a balanced fund while matching the S&P500 Year 10 total, nominal return is quite a feat. Simply combining the S&P500 with bonds and rebalancing reduces the overall return because the bonds. The so called REBALANCING BONUS means that this reduction is not quite as bad as might be expected. I addressed this issue in Shun Rebalancing.

Shun Rebalancing

FKINX Historical Surviving Withdrawal Rates

FKINX lifts the 30-Year Historical Surviving Withdrawal Rate. Today’s Safe Withdrawal Rate is 5.5% to 6.0% [P/E10=16] of the original balance. Adjust withdrawals to match inflation. You can use the Year 30 Retirement Risk Evaluator [Year 30 SWR button on the left] to make comparisons.

Here is a side by side comparison 30-year Historical Surviving Withdrawal Rates of FKINX and 50%-50% S&P500/TIPS portfolios. The TIPS interest rate is 2%. The start years are 1949 through 1980.

FKINX Constant Terminal Value Rates

Here is a side by side comparison 30-year Constant Terminal Value Rates of FKINX and 50%-50% S&P500/TIPS portfolios. The final balance equals the initial balance (plus inflation). The TIPS interest rate is 2%. The start years are 1949 through 1980.

A Helpful Theorem

To calculate withdrawal rates for various final balances, it is sufficient to know the withdrawal rates for final balances of zero and 100% of the initial balance. Rates for intermediate balances maintain the same proportions.

A Helpful Theorem

Statistical Approximations

I have copied this part of a write up from Professor Peter Ponzo’s Gummy Stuff web site. From 2005.

Statistical Approximations