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FIRECalc and the Hapless Y2K Retiree
Old 01-02-2014, 08:08 PM   #1
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FIRECalc and the Hapless Y2K Retiree

I was inspired by a concurrent thread by Haha, where he asked whether any of us has seen his/her portfolio going below its starting point.

See: How Many Here Have Experienced a Sustained Net Portfolio Decrease Since Retiring?

In the above thread, I contributed a link to a site where it was shown that a Y2K retiree with a portfolio of 75% equity and 25% 6-month commercial paper would be in deep trouble. By Jan 2013 his portfolio is already down to 36% in real terms. I was not the first to post a link to that table; in fact, I learned about it from earlier posts by several posters on this forum.

The 36% final value after 13 years of retirement looks bleak. However, raddr, the author of that table used a portfolio of high equity AA of 75%, plus a 4% WR. So, I wondered if the above could have compounded the effects of the "Lost Decade" in stocks.

I am glad I still had part-time income from 2000 till 2012, so I did fairly well financially. But to satisfy my own curiosity about the fate of earlier retirees, I've got to check further on my own. And FIRECalc is the natural tool to use here. And as I already collected the run results, I might as well share them here as a community service.

To aid anybody who wants to double check the results, here is what I did. I set FIRECalc to $1M initial portfolio, and for 12-year runs. In the "Investigate" tab, I chose to download a single-run result spreadsheet starting with the year 2000. If I set the run duration for 13 years, FIRECalc would back off the initial year to 1999. Apparently, FIRECalc only has data up to the end of 2011 (start of 2000 to end of 2011 encompasses 12 years).

On the portfolio tab, for the simple stock/bond portfolio, FIRECalc offers the following fixed income (FI) options: commercial paper, long-term rate, 30-yr Treasury, and 5-yr Treasury. I ran them all. For each choice of FI asset, I ran a mix with 60%, 50%, 40%, and 0% total equity market, with total market being the only choice here for equity. I believe the Total US Market index is fairly close to the S&P 500. The expense ratio was left at the default 0.18%.

The results are shown below for $1M initial portfolio in 1/2000, and a WR of 4% with COLA.

Commercial Paper + Ending Nominal Val (1/2012) Ending Infl. Adj. Value
100% equity 404K 300K
60% equity 525K 391K
50% equity 545K 406K
40% equity 561K 418K
0% equity 583K 434K

Long Int. Rate + Ending Nominal Val (1/2012) Ending Infl. Adj. Value
100% equity 404K 300K
60% equity 638K 475K
50% equity 692K 515K
40% equity 742K 553K
0% equity 907K 675K

30-Yr Treasury + Ending Nominal Val (1/2012) Ending Infl. Adj. Value
100% equity 404K 300K
60% equity 655K 488K
50% equity 714K 532K
40% equity 771K 574K
0% equity 960K 715K


5-Yr Treasury + Ending Nominal Val (1/2012) Ending Infl. Adj. Value
100% equity 404K 300K
60% equity 612K 456K
50% equity 657K 489K
40% equity 699K 521K
0% equity 825K 614K


Observations:
  • The 60% commercial paper + 40% equity portfolio ended with $391K. This is close to the 75/25 raddr case, which ended with $360K one year later in Jan 2013.
  • The 100% equity case is just terrible, with $300K final value.
  • The more equity, the worse the final value. That is true no matter what you choose for FI. They do not call the recent years the "Lost Decade" for nothing.
  • The best case is the portfolio with 100% 30-yr treasury. It ended with the portfolio nearly intact in nominal terms, but a bit above $700K in real terms. That is a lot better than the balanced portfolio with 50% equity mixed in.

So, balanced portfolios did not do well during the "Lost Decade" for stocks. We already knew that stock return was flat over this period of 2000-2012, even with dividends. What I found surprising was that rebalancing did not help that much, as the best one could do was holding no equity at all.

Now, knowing after the fact that 100% 30-yr Treasury was best, I wondered what happened if the unlucky retiree cut back on his WR. Following is the result showing effects of various WR rates.

100% 30-Yr Treasury Ending Nominal Val (1/2012) Ending Infl. Adj. Value
0.0% WR 1690K 1258K
3.0% WR + COLA 1143K 851K
3.5% WR + COLA 1052K 783K
4.0% WR + COLA 960K 715K

A cut back of WR by 25% from 4% to 3% helps the final value by 19% ($715K to $815K).

Final Observation:

As I explained, FIRECalc only lets me get to Jan 2012. Since then, the market has rallied, and 30-yr Treasury has dropped -14% in 2013, using VUSTX as a surrogate. This would equalize the results in the table somewhat, but I think our 50/50 indexed balanced-portfolio retiree is still sweating.

People in some active funds like Wellesley or Wellington might do better, thanks to the skill of the fund managers. I might do a follow-up on that.
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Old 01-02-2014, 08:17 PM   #2
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Good stuff, NW.

Quote:
Originally Posted by NW-Bound View Post
People in some active funds like Wellesley or Wellington might do better, thanks to the skill of the fund managers. I might do a follow-up on that.
I'd be very interested to see how a mix of W&W compares.
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Old 01-02-2014, 08:43 PM   #3
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For those of us getting ready to retire today, how comparable is the current market to 2000? Anyone got a crystal ball?

Great research, BTW. Thank you.
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Old 01-02-2014, 08:57 PM   #4
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Great work NW. I did not realize it was that bad.

Ha
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Old 01-02-2014, 09:35 PM   #5
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Originally Posted by REWahoo View Post
Good stuff, NW.


I'd be very interested to see how a mix of W&W compares.
I had the exact same thought as I was reading your post - what would today's results be if I had kept 3 years worth of annual withdrawals in Wellesley and the rest in Wellington?
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Old 01-02-2014, 09:37 PM   #6
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Originally Posted by aim-high View Post
For those of us getting ready to retire today, how comparable is the current market to 2000? Anyone got a crystal ball?

Great research, BTW. Thank you.
You can make a pretty good quick and dirty estimate by making a ratio of PE10 at the peak of that 2000 market, and PE10 now. 2000 was much more outrageously high. However, the current market PE10 is not far below the well remembered 1929 high.

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Old 01-02-2014, 10:03 PM   #7
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I knew it was that bad, as a proud member of Y2K retiree class. I also figured that my 2.5-3% withdrawal rate helped save me.

But I am still trying to figure out how I ended breaking even on nominal basis at the start of 2013 and after this year on inflation adjusted basis, with a portfolio that was between 55-85% equities
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Old 01-02-2014, 10:29 PM   #8
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Originally Posted by NW-Bound View Post
People in some active funds like Wellesley or Wellington might do better, thanks to the skill of the fund managers. I might do a follow-up on that.
Thanks for this thread, I was also reviewing that 'hapless retiree' thread.

This isn't a full update, but a quick eyeball of how Wellesley held up in the 2000-2003 time period is amazing. It didn't just not go down as much as as a balanced fund, it actually pretty much went UP the entire time!

Its response to the 2007-2008 downturn is more what I would expect. Did they get lucky in 2000? Was it skill? Could that have worked against them if they misjudged?

It would be interesting to see how a 30% allocation to Wellesley would have smoothed out the trough.

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Old 01-02-2014, 10:29 PM   #9
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Great post NW-Bound!!! I am going to go back and review your research in greater detail as it is interesting stuff.

I interpret your findings as what happens with reverse dollar cost averaging. The 2000 retiree had a sideways secular with two dramatic downturns to be withdrawing from a stock portfolio. Also it is interesting that Firecalc stops at 2011 which would ignore the bond bull market since that point but that is minor in the greater scheme of your research.

Aim Hi, haha hit the nail on the head. This is a good time to be cautious with new stock purchases. In 1999 the PE 10 was at 43.? as I recall, and right now it is about 26 which isn't as high as 1999 but is still a historically high number. However, who knows for sure which way the market is going to go and when? No one. If I did, I would not be typing away here but I'd be out shorting the market or buying more of it. As for me, I don't worry too much about it. I have an AA I am content with and I tend to ignore the markets.
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Old 01-02-2014, 11:14 PM   #10
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Its response to the 2007-2008 downturn is more what I would expect. Did they get lucky in 2000? Was it skill? Could that have worked against them if they misjudged?
I think that Wellesley held up pretty well in 2000 because it invested in "boring" dividend payers and avoided the kind of stocks that got decimated when the tech bubble burst. Its hefty bond allocation also juiced returns as interests rates decreased from 2000 to 2003.
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Old 01-02-2014, 11:28 PM   #11
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I think that Wellesley held up pretty well in 2000 because it invested in "boring" dividend payers and avoided the kind of stocks that got decimated when the tech bubble burst. Its hefty bond allocation also juiced returns as interests rates decreased from 2000 to 2003.
I think you are correct. I have a spreadsheet showing the following annual performance (including dividends) for Wellesley (VWINX) during that time period:

2000 16.2%
2001 7.4%
2002 4.6%
2003 9.7%
2004 7.6%
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Old 01-03-2014, 12:15 AM   #12
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Yes, Wellesley and Wellington have been conservative funds which buy stodgy low P/E stocks. Anyone can go to Morningstar to look at the performance of these two funds vs. VFINX (S&P index), and to see that these funds lagged the index badly during the go-go years of 1980-2000. But then, they have made up all that in the last 12 years. Reversion to the mean works, even if it takes two decades!

Anyway, from Yahoo, I have downloaded the annual total return of Wellesley, Wellington, VFINX (S&P Index), and VUSTX which is long-term Treasury fund, for the years 2000-2012. The numbers for Wellesley and Wellington are for the Admiral shares which have lower expense ratios. For the years 2000, 2001, I had to use the normal shares.

Looking at the table below, one can see that the S&P index got 3 bad years in a row, starting at 2000. However, VUSTX was the reverse.

So, how could a 50/50 blend of VFINX+VUSTX be so bad? By just eyeballing the data, I could not see the reason. Do I doubt the results of FIRECalc?

Let me just say that I am putting the returns of these 4 funds into a spreadsheet I am building, and will report back on what I find.

Note: All numbers are in percent.

Year Wellesley Wellington -- VFINX -- --VUSTX-- Inflation
     
2000
16.17
10.40
-9.06
19.7
3.4
2001
7.39
4.19
-12.02
4.31
2.8
2002
4.72
-6.81
-22.15
16.67
1.6
2003
9.78
20.90
28.5
2.68
2.3
2004
7.70
11.34
10.74
7.12
2.7
2005
3.56
6.99
4.77
6.61
3.4
2006
11.39
15.07
15.64
1.74
3.2
2007
5.76
8.48
5.39
9.24
2.8
2008
-9.79
-22.23
-37.02
22.51
3.8
2009
16.14
22.34
26.49
-12.06
-0.4
2010
10.71
11.04
14.91
8.92
1.6
2011
9.74
3.95
1.97
29.27
3.2
2012
10.10
12.67
15.82
3.46
2.1
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Old 01-03-2014, 02:29 AM   #13
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Even though having a portfolio high in 30-yr treasuries may have held up well against withdrawals since 2000, I would NOT recommend that strategy today.
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Old 01-03-2014, 10:29 AM   #14
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Even though having a portfolio high in 30-yr treasuries may have held up well against withdrawals since 2000, I would NOT recommend that strategy today.
Yes, the rate decline since the 1980's will not be repeated.

Maybe growth at "almost" any price will be pushed by governments around the world. Just a guess.
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Old 01-03-2014, 10:38 AM   #15
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...(snip)...
This isn't a full update, but a quick eyeball of how Wellesley held up in the 2000-2003 time period is amazing. It didn't just not go down as much as as a balanced fund, it actually pretty much went UP the entire time!
...
I think the chart posted might not be quite right. Here is a Morningstar chart with some selected balanced funds and the SP500 index:

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Old 01-03-2014, 10:44 AM   #16
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I think that Wellesley held up pretty well in 2000 because it invested in "boring" dividend payers and avoided the kind of stocks that got decimated when the tech bubble burst. Its hefty bond allocation also juiced returns as interests rates decreased from 2000 to 2003.
Yes, but when I use that site to check other DIV-based funds/ETFs they don't do anywhere near as well well as Wellesley, even if I eyeball some bond fund balance in there.

VDIGX looks about the same as SPY, DVY did better in the 2000 crunch, but still fell (again, eyeballing some bond holding in there doesn't help much). And DVY looks to have taken a huge hit from the 2007 peak down to 2008-2009, more volatile than SPY (though some bond allocation would temper that)!

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Old 01-03-2014, 10:56 AM   #17
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...(snip)...
To aid anybody who wants to double check the results, here is what I did. I set FIRECalc to $1M initial portfolio, and for 12-year runs. In the "Investigate" tab, I chose to download a single-run result spreadsheet starting with the year 2000. If I set the run duration for 13 years, FIRECalc would back off the initial year to 1999. Apparently, FIRECalc only has data up to the end of 2011 (start of 2000 to end of 2011 encompasses 12 years).
...
Nice work NW-Bound.

I recently ran FIRECalc to get some specific sequences that appear to be worst case:
1) start in 1929 - Great Depression and into WW2
2) start in 1966 - recessions + 1970's inflation
3) start in 2000 - recent nasty sequence

I might have gotten to these results a little differently then you. It's unclear to me from your discussion of your procedures above. Anyway, in the investigate tab I selected spreadsheet results and also selected the starting retirement year (like 1929, 1966 or 2000). Then in the results I selected the second spread sheet: "Open a spreadsheet showing the year by year inputs, data, ... ". The last column in this spreadsheet shows the sequence for the selected year.

This is a way to get the numerical results for those lowest level lines in the familiar colored line chart FIRECalc puts out in the summary sheet.
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Old 01-03-2014, 10:56 AM   #18
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I think the chart posted might not be quite right. Here is a Morningstar chart with some selected balanced funds and the SP500 index:

Note the time frames are slightly different.

I'm not saying some other balanced funds did not do as well as Wellesley (I didn't have Wellington or D&C in my chart). I'm just saying it looks to be more than some simple indexing, as the general style dividend 'index funds' did not do as well.

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Old 01-03-2014, 11:07 AM   #19
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Yes, but when I use that site to check other DIV-based funds/ETFs they don't do anywhere near as well well as Wellesley, even if I eyeball some bond fund balance in there.

VDIGX looks about the same as SPY, DVY did better in the 2000 crunch, but still fell (again, eyeballing some bond holding in there doesn't help much). And DVY looks to have taken a huge hit from the 2007 peak down to 2008-2009, more volatile than SPY (though some bond allocation would temper that)!

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I think that Wellesley is more value-oriented than most dividend "index funds". Therefore, Wellesley's management largely avoided the P/E expansion trap of the late 1990s.
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Old 01-03-2014, 11:17 AM   #20
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Note the time frames are slightly different.

I'm not saying some other balanced funds did not do as well as Wellesley (I didn't have Wellington or D&C in my chart). I'm just saying it looks to be more than some simple indexing, as the general style dividend 'index funds' did not do as well.

-ERD50
Yes, these finds do extremely well. I use Wellington as a benchmark. The way I do it is to mix Wellington, some international pure equity, and my short bond + cash into a benchmark. And damned it, that Wellington is tough to beat. If I beat it, it's only by a very small amount.

Yet, I still worry about turning it all over to any one active manager team. Maybe in my dotage I'll consider a mix of balanced funds like Wellington, Wellesley, and Dodge & Cox.
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