Looking a Little Bit Harder

Recently, I reported that I made No New Discovery This Time. This time, I dug a little deeper. There is a story to tell after all.

No New Discovery This Time

Second Look

Previously, I looked at what happens when you withdraw at each portfolio’s 30-Year Historical Surviving Withdrawal Rate. I was hoping to find something useful, something to tell us when everything is going OK. I was hoping to find something new. I didn’t.

This time I looked more closely at the balances themselves.

Here is what happened when starting with $100000:

At year 5, the balances ranged from $52847 to $193178.
At year 10, the balances ranged from $39396 to $158657.
At year 15, the balances ranged from $33550 to $153829.
At year 20, the balances ranged from $25673 to $126631.
At year 25, the balances ranged from $16898 to $71006.
At year 30, the balances ranged from $98 to $12742.

Look at year 10. There was a sequence that had fallen all of the way to $39396, yet it lasted another 20 years. That turns out to have been the 1972 sequence at a withdrawal rate of 4.7%. The withdrawal amounts were $4700 plus inflation each year. That’s an amazing recovery.

The $158657 balance was from the 1921 sequence. The withdrawal rate was 9.3%. The fact that it lasted another 20 years comes as no surprise.

Now let’s look at year 20. Once again, we see a strong recovery. The low balance of $25673 was from the 1929 sequence at a withdrawal rate of 4.4%. The withdrawal amounts were $4400 plus inflation each year.

This time the surprise comes from the high balance. It was $126631 at year 20, yet it lasted only another 10 years. It was from the 1949 sequence. The withdrawal rate was exceedingly high. It was 10.2% or $10200 plus inflation annually. Yet, any cash equivalent that matched inflation would have done better.

Explanation

In all of these cases, I withdrew at each year’s 30-Year Historical Surviving Withdrawal Rate. The fact that all of the sequences lasted 30 years was already understood.

The reason that the 1972 sequence recovered from a Year 10 balance of $39396 is testimony to the longest and strongest bull market ever.

Similarly, but much less dramatically, the 1929 sequence lasted longer than might have been expected at Year 20 because of the 1950s bull market.

The shocker was the 1949 sequence at Year 20. The portfolio lost ground to inflation.

Bedtime Story

Risk tolerance is not simply a matter of one’s emotional make up. Quite often, what passes as risk tolerance is only a lack of awareness.

The stock market can be exceedingly generous. Your finances may have been headed toward disaster only for your fortunes to reverse.

The stock market can be dangerous. It can lull you to sleep. You can follow a portfolio strategy for 20 years and watch your holdings grow faster than inflation. Stay the course for another 10 years and you can end up bankrupt.

There is a notion that you should own as much stock as you can while still sleeping well. Sound sleep is not enough.

Have fun.

John Walter Russell
July 4, 2006