Years to Double

This is a traditional survey.

I have examined historical sequences beginning in 1921-1984. I determined the number of years that it has taken for a portfolio to recover and to double while making withdrawals.

Portfolios

I examined traditional portfolios. They consisted of fixed allocations of stocks and commercial paper, rebalanced annually. Expenses were 0.20% of the portfolio’s current balance.

I used portfolio allocations of 50% stocks / 50% commercial paper and 80% stocks / 20% commercial paper.

I examined withdrawal rates of 3.0%, 3.5% and 4.0%.

Calculator

I used my Deluxe Calculator V1.1A08a. Its prices are current through May 2005. Dividends are current through June 2004. CPI and P/E10 values are current through January 2005. (The calculator uses only January CPI and P/E10 values.)

Withdrawal rates are percentages of the portfolio’s initial balance. Each year, I adjust the withdrawal amount to match inflation (as measured by the CPI). I report all amounts in terms of real dollars (that is, after adjusting for inflation).

Data

I made tables showing the number of years required for a portfolio to return to its initial balance, 1.5 times its initial balance and 2 times its initial balance at withdrawal rates of 3.0, 3.5 and 4.0% starting from year 10 (up to year 60).

I separated data into four groups, depending upon P/E10.

I have placed a copy of these tables into my Yahoo Briefcase.

Yahoo Briefcase

Withdrawal Rate = 3.0%

With 50% stocks and 50% commercial paper:

P/E10 from 18.3 to 27.1:
The portfolio never recovered: one time out of 16.
The portfolio never doubled: 13 times out of 16.

P/E10 from 13.2 to 18.0:
The portfolio always recovered.
The portfolio never doubled: 8 times out of 16.

P/E10 from 10.2 to 13.0:
The portfolio always recovered.
The portfolio never doubled: one time out of 16.

P/E10 from 5.1 to 10.1:
The portfolio always recovered.
The portfolio always doubled.

With 80% stocks and 20% commercial paper:

P/E10 from 18.3 to 27.1:
The portfolio always recovered.
The portfolio never doubled: 4 times out of 16.

P/E10 from 13.2 to 18.0:
The portfolio always recovered.
The portfolio always doubled.

P/E10 from 10.2 to 13.0:
The portfolio always recovered.
The portfolio always doubled.

P/E10 from 5.1 to 10.1:
The portfolio always recovered.
The portfolio always doubled.

Withdrawal Rate = 3.5%

With 50% stocks and 50% commercial paper:

P/E10 from 18.3 to 27.1:
The portfolio never recovered: 8 times out of 16.
The portfolio never doubled: 16 times out of 16.

P/E10 from 13.2 to 18.0:
The portfolio never recovered: 4 times out of 16.
The portfolio never doubled: 11 times out of 16.

P/E10 from 10.2 to 13.0:
The portfolio always recovered.
The portfolio never doubled: 2 times out of 16.

P/E10 from 5.1 to 10.1:
The portfolio always recovered.
The portfolio never doubled: 2 times out of 16.

With 80% stocks and 20% commercial paper:

P/E10 from 18.3 to 27.1:
The portfolio never recovered: 4 times out of 16.
The portfolio never doubled: 11 times out of 16.

P/E10 from 13.2 to 18.0:
The portfolio always recovered.
The portfolio never doubled: 3 times out of 16.

P/E10 from 10.2 to 13.0:
The portfolio always recovered.
The portfolio always doubled.

P/E10 from 5.1 to 10.1:
The portfolio always recovered.
The portfolio always doubled.

Withdrawal Rate = 4.0%

With 50% stocks and 50% commercial paper:

P/E10 from 18.3 to 27.1:
The portfolio never recovered: 10 times out of 16.
The portfolio never doubled: 16 times out of 16.

P/E10 from 13.2 to 18.0:
The portfolio never recovered: 9 times out of 16.
The portfolio never doubled: 15 times out of 16.

P/E10 from 10.2 to 13.0:
The portfolio never recovered: 2 times out of 16.
The portfolio never doubled: 6 times out of 16.

P/E10 from 5.1 to 10.1:
The portfolio never recovered: one time out of 16.
The portfolio never doubled: 2 times out of 16.

With 80% stocks and 20% commercial paper:

P/E10 from 18.3 to 27.1:
The portfolio never recovered: 10 times out of 16.
The portfolio never doubled: 14 times out of 16.

P/E10 from 13.2 to 18.0:
The portfolio always recovered.
The portfolio never doubled: 5 times out of 16.

P/E10 from 10.2 to 13.0:
The portfolio always recovered.
The portfolio always doubled.

P/E10 from 5.1 to 10.1:
The portfolio always recovered.
The portfolio always doubled.

Analysis

Cutting back on withdrawal amounts is one way to reduce the risk of running out of money. This increases your odds of doing spectacularly well.

The attractiveness of high stock allocations is their upside potential. We see this in the data.

Balance

Now let us introduce balance and perspective.

Stocks provide growth. You need to own stocks to take advantage of their upside.

Retirement portfolios with high stock allocations fluctuate considerably. They run the risk of running out of money early. If a retirement portfolio remains healthy throughout the first ten to fifteen years, it is likely to do very well.

Today’s valuations are higher than the levels in these charts. Today’s P/E10 levels are higher than those of 1966 (P/E10 = 24) and 1929 (P/E10 = 27). Staying solvent is a concern.

There are limits as to how much you can cut back. There is reason for compromise.

Retirement portfolios with low stock allocations fluctuate only a little. They are likely to run out of money, eventually. They can provide a large-enough, reliable income stream for a long-enough period of time.

Our baseline portfolios provide reasonable levels of income for extended amounts of time. You do not have to accept anything less.

To the extent that P/E10 has any predictive value whatsoever, you can benefit by purchasing at good stock prices. What is more, you can expect to see good stock prices once again.

Benjamin Graham’s recommendation to keep stock and bond allocations between 25% and 75% still makes sense. Historically, it has minimized regret. It keeps you from making the really bad blunders.

Our research favors owning zero stocks at this time. But how would you feel if stocks were to double over the next two or three years and you owned no stocks at all? Such events do happen, even in times of serious overvaluation. Would you throw in the towel and load up on stocks? If so, you would probably end up buying at the top. Benjamin Graham’s recommendation deserves respect.

Have fun.

John Walter Russell
December 24, 2005