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Global diversification and portfolio survival
Old 06-13-2005, 12:04 PM   #1
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Global diversification and portfolio survival

An interesting study:

http://www.journalofindexes.com/cont...hp?id=535&np=0
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Re: Global diversification and portfolio survival
Old 06-13-2005, 12:09 PM   #2
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Re: Global diversification and portfolio survival

Nice article thanks for sharing
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Re: Global diversification and portfolio survival
Old 06-13-2005, 01:16 PM   #3
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Re: Global diversification and portfolio survival

The article tends to favor global diversification - not a surprise. I am surprised that a 100% equity portfolio has a better survival rate at 4% withdrawl.
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Re: Global diversification and portfolio survival
Old 06-13-2005, 07:17 PM   #4
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Re: Global diversification and portfolio survival

Quote:
Originally Posted by Spanky
The article tends to favor global diversification - not a surprise. I am surprised that a 100% equity portfolio has a better survival rate at 4% withdrawl.
Interesting study, Ronin, thanks. Maybe it's my confirmation bias, but IMO this graph bears repeating.

Note that the 100% equities/0% fixed income portfolio is on the left, shifting in increments to 0% equities/100% fixed income on the right. I've edited the following two paragraphs to focus on Fig 4's 40-year period. There's actually four separate graphs in the paper switching among 30-40 year periods and 4-5% "S"WRs.

"In the following figures, we chart the percentage of [a] rolling... 40-year period that supported inflation-adjusted withdrawal rates of 4 percent... for two different portfolio types and six different portfolio allocations. The two portfolio types are a U.S.-only portfolio and a globally diversified portfolio. The six different allocations are 100 percent equity, 80 percent equity/20 percent fixed income, 60 percent equity/40 percent fixed income, 40 percent equity/60 percent fixed income, 20 percent equity/80 percent fixed income and 100 percent fixed income."

"Figure 24 shows the percentage success rates for each of the two portfolio types and six different allocations over rolling [40]-year periods with an inflation-adjusted withdrawal rate of 4 percent."

Of course these success rates don't reflect volatility, but those details are in the study as well.

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Re: Global diversification and portfolio survival
Old 06-13-2005, 10:01 PM   #5
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Re: Global diversification and portfolio survival

Great article, and as he mentions in a footnote, he doesn't know of any other studies, besides a Cooley Hubbard Study which used Monte Carlo analysis (fake history with no regression to mean in the data series, in other words), which looks at international diversification's effect on portfolio survivability frrom withdrawals.

So this makes me feel good, even though it shows how 60% stocks fare much better than 40% stocks over 40 years (as in the graph above) even though at 30 years the 40% stock portfolios look essentially the same as the 60% ones. which is to say, terrific (Table 2 in the paper).

Now to hunt down some of these new international data series, then try to get some value and small tilts figured into them....

Thanks, Ronin!
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Re: Global diversification and portfolio survival
Old 06-14-2005, 06:33 AM   #6
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Re: Global diversification and portfolio survival

Quote:
Originally Posted by ESRBob

Now to hunt down some of these new international data series, then try to get some value and small tilts figured into them....

Thanks, Ronin!
Good idea Ronin. Got me thinking. All I own internationally is VEURX (about 5% of port.). I figured it was an easy decision to pick up the Euro position and ignore the Asia markes for awhile. Time to take another look. Thanks, Ronin!

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Re: Global diversification and portfolio survival
Old 06-14-2005, 06:59 AM   #7
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Re: Global diversification and portfolio survival

Ive seen similar research time and time again, add this one to the mix.* Yeah (i think) 5% is too low.* The figures i've heard is that one should choose between 15% and 40% for "international" exposure, the lower end of that scale being for the more risk adverse, and the higher end being for those who are out to maximize return. This is a global economy we're in today. To place one's money solely in one country is way too risky IMHO, and that would include the U.S.

I think i'm at about 25% for international in my portfolio at the moment (stocks/bonds included)
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Re: Global diversification and portfolio survival
Old 06-14-2005, 07:15 AM   #8
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Re: Global diversification and portfolio survival

Am I reading this right that the period used is 40 years? Long run. Applies to me as I'll probably be around for 40 years but I wonder what the #'s are for a 20 year slice.
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Re: Global diversification and portfolio survival
Old 06-15-2005, 02:00 AM   #9
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Re: Global diversification and portfolio survival

On this subject, a fellow name of Less Antman (one link is through Andrew Tobias' web site) has the following to say:

http://p207.ezboard.com/fpersonalfin...icID=109.topic

Several points there:
* He sees social security as a bond-type investment, so that your other, outside investments can reasonably be 100% equities.
* He likes his equities to be 50/50 US/international, and
* 5 years of cash flow in TIPS.
* If one is using a mechanical safe withdrawal rate adjusted for inflation, he does not recommend more than 4%.
* However, he prefers a straight 5% withdrawal (5% of the balance each year) not adjusted for inflation and let the withdrawal go up and down with the market. He says that everything depends on how long we think we will live, but that is only a guess, so plan to enjoy yourself.
* He doesn't think much of safe withdrawal calculators, but that FIRE calc is the best of the lot.

It is an interesting forum, worth spending some time digging around in.

Cheers,

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Re: Global diversification and portfolio survival
Old 06-15-2005, 08:27 AM   #10
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Re: Global diversification and portfolio survival

Less is recomending all equity portfolio for pretty much everyone (with social security). What if you do not want to rely on social security?
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Re: Global diversification and portfolio survival
Old 06-15-2005, 12:30 PM   #11
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Re: Global diversification and portfolio survival

The study I initially referenced varied the stock/bond ratio and the number of years (30/40) but uses only a fixed 70/30 or 100/0 US to foreign ratio for both stocks and bonds.* I would be interested in a 50/50 US to International comparison.* Might help with extrapolation.* Also I'd be interested in jiggling the amounts in foreign equities and bonds rather than either both 0% or both 30% foreign.* For example, what if you had 30% foreign equity, but 0%-25% or 35%-50% foreign bonds and visa versa with stock?* Seems like it would have been easy enough to do.
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Re: Global diversification and portfolio survival
Old 06-15-2005, 07:22 PM   #12
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Re: Global diversification and portfolio survival

Ronin,
It would all be possible if we could get the DMS international data into FireCalc. Wonder what Ibbotson would charge us for it? 105 years of data from 16 countries sounds awesome.
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Re: Global diversification and portfolio survival
Old 06-15-2005, 07:50 PM   #13
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Re: Global diversification and portfolio survival

Ronin, have you read raddr's analysis of international diversification & SWR's?

http://raddr-pages.com/research/Inte...mprovesSWR.htm
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Re: Global diversification and portfolio survival
Old 06-17-2005, 07:22 PM   #14
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Re: Global diversification and portfolio survival

Thanks for the link.* It is informative re: equities.* At this point, my primary interest is in the bond side.* My personal model calls for 12% of my bond allocation in international, but I haven't funded it yet.* Having watched the last few years, I see it has run up tremendously, so I am hesitant at this point.* Clearly, it is largely a play on the dollar.* As such, it has a direct link to foreign equity performance (which I have).* I guess when I need to buff up my bond allocation, I'll start DCAing into foreign.
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