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Old 08-16-2014, 11:26 PM   #41
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clifp's Avatar
Join Date: Oct 2006
Posts: 7,455
Originally Posted by pb4uski View Post
Good info. Thanks.

So if one had a $1 million 60/40 portfolio, then the cost of the hedge would be ~$20k a year ($76,500/2.375 years from mid Aug 2014 to Dec 2016*60%) or about 200 bps.

Let's say the 2% reasonable reflects the cost of the option on the 60% equity value. The question then becomes whether it is worth giving up 2% a year for the first 5-10 years of retirement to "insure" against sequence of returns risk. I suspect that some conservative members would make that trade-off. While I'm comfortable with the risk, it might be better than going all fixed income like some who are more conservative seem to prefer.
I think under normal circumstance I'd like ERD simply lower your AA. However, it today environment with bond prices arguably even more over valued than equities, it seems like a reasonable strategy. Certainly one that at macro level makes sense.

It's possible that stocks could return >50% over the next five year, but a -30 or -40% is also possible. I think bonds are very unlikely to return much over 15% and are equally likely to have -20% (all numbers real returns.)

The VIX at 13 is well below normal levels this makes portfolio insurance pretty cheap relative to historical levels.

I wonder if you could safely raise your withdrawal rate to 5 or even 6%, if we could eliminate a more than 10% loss over a 2 year period...

It seems like really interesting question for some graduate student to answer...

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