Edited: Maintenance Stage Survey

The maintenance stage occurs after you have accumulated enough funds but before you make withdrawals.

I conducted a brief survey using three approaches: switching allocations in accordance with P/E10, maintaining a fixed 50%-50% allocation of stocks and TIPS and keeping everything in stocks. I made an excursion by introducing Latch and Hold.

Careful analysis shows that varying allocations is best. Latching onto bargains and holding them for several years is better than mindlessly cutting back as soon as prices rise.

Overview

I used a very simple switching algorithm.

I set the P/E10 thresholds to 10-15-20-25 and the allocations to 100%-75%-50%-25%-0%. I used 2% TIPS. I set expenses equal to 0.00%. I set the initial balance equal to $10000.

I determined the real (inflation adjusted) dollar balances at Years 5, 10, 15, 20, 25 and 30.

I collected a set of data with a fixed 50%-50% allocation of stocks and 2% TIPS. I collected another set of data for a 100% stock portfolio.

I collect another complete set of data using my Latch-Hold Threshold Calculator LH02.

I have placed spreadsheets into my Yahoo Briefcase in the “Maintenance Stage” Folder.

Yahoo Briefcase

Data Analysis

In all cases, the fixed 50%-50% portfolio had the narrowest confidence limits. If you focus on minimum balances and higher valuations and use the standard formulas “as is,” you would choose this portfolio.

Doing so would be a serious mistake.

On sheet 5 of my spreadsheets, I show side by side comparisons of the actual dollar amounts. I include the Year, P/E10, 100E10/P as references.

By Year 10, the story is clear: switching allocations is vastly superior to a fixed 50%-50% portfolio. We can see this in the Year 5 data as well, just not so dramatically. If we include Latch and Hold, the story is obvious even by Year 5.

The comparison of Switching with 100% stocks requires a little bit more effort, but not much. Looking at the bottom table in Sheet 5, it looks like a toss up initially. Looking more carefully, however, we notice that the 100% stock portfolio is best only when the final balances are high. The Switching (or LH Switching) portfolio is better whenever the final balance is low. [This advantage diminishes at years 25 and 30. All final balances are high.]

As might be expected, the final balances are low when valuations are high.

Interpretation

Varying allocations according to P/E10 is best during portfolio maintenance when there are no deposits or withdrawals. Latch and Hold is a good idea as well.

Based on previous experience, it is highly likely that individuals can learn to do even better. Just practice on one of my Retirement Trainers. Keep the “Total Withdrawn” always equal to zero. Any amount withdrawn from stocks is automatically added to TIPS. Any amount deposited into stocks (a negative withdrawal) is automatically taken from TIPS.

Have fun.

John Walter Russell
December 7, 2006