Recession- Investment Portfolio Value

[nico08]

I am trying to get a sense of how low my investment portfolio will go when we hit another recession. If I can get a sense of the value of my investment portfolio, in the midst of a recession, I can then see if a 4 percent withdrawal from that investment portfolio value would at least meet my bare-bones annual spending.

I currently have a 60 percent stock and 40 percent bond asset allocation. When a recession hits, I will still maintain that asset allocation. I thought about using historical data from Vanguard Total Stock Market Index Fund Investor Shares VTSMX and Vanguard Total Bond Market Index Fund Investor Shares VBMFX, but I was not sure how to apply this historical data to find an answer to my question.

Let’s assume that my investment portfolio is currently $1,000,000 and that we are at a market high. Approximately, how low would that investment portfolio value be if I kept a 60 percent stock and 40 percent bond allocation and we have a recession similar to the one from December 2007 to June 2009?

Thank you for your insight.

 

[fosterscik]

I've done similar estimations and decided to use the 2008 data (peak before the crash to trough at its worst point). These are the losses I use:
S&P (VTI) -52.0%
World (VXUS) -58.0%
Bonds (BIV) -3.9%
REITs (VNQ) -62.0%

Then it's a quick calculation to judge your own performance for your AA if that event were to repeat itself.

 

[dtbach]

This tool can get you pretty darn close:

https://www.portfoliovisualizer.com/backtest-portfolio#analysisResults

 

[USGrant1962]

You could play around with Portfolio Visualizer at www.portfoliovisualizer.com I believe it only does annual, not monthly.

Here's your example case from '07 to '09. It shows a max drawdown of 30.72%, but back to where you started by the end of '09. Scroll down to see the results.

https://www.portfoliovisualizer.com...io3=Custom&TotalStockMarket1=60&TotalBond1=40

 

[dtbach]

You could play around with Portfolio Visualizer at www.portfoliovisualizer.com I believe it only does annual, not monthly.

Here's your example case from '07 to '09. It shows a max drawdown of 30.72%, but back to where you started by the end of '09. Scroll down to see the results.

https://www.portfoliovisualizer.com...io3=Custom&TotalStockMarket1=60&TotalBond1=40

Like minds maybe?? Any way you can do month to month with the tool. I put in Jun 08 to March 09 and it showed a -32% decline

 

[COcheesehead]

The tools others have mentioned are useful and can show you the “lifeboats” that may be options for you. Many forget treasuries were actually UP in 2008. One of the only assets that were. Stay short, stay high quality with your bonds and you’ll have something to balance with when the you know what hits the fan.

 

[OldShooter]

I think this isn't the right way to look at things. If history is any guide, the market recovers from major market hits in 3-5 years. So even if you don't have the courage to rebalance when stocks are cheap, you can still maintain some non-equity assets in a bucket and just plan to spend from that bucket after a hit.

The other thing to remember is that during that 3-5 year period, the market is recovering, recovering, recovering. So if your bucket goes dry before the 100% completion of the recovery, you will still be selling equities long after they have bounced off the bottom.

 

[nico08]

This is really helpful. Thank you. Can you help me to understand what "max drawdown" means? Does that simply mean that between 2007 and 2009, the lowest value my $1,000,000 starting investment portfolio would be $692,800?

 

[nico08]

So is this the math equation I would use?

.60 * (-.52) + .40 * (-.039) = -32.8

S&P (VTI) -52.0%
Bonds (BIV) -3.9%

 

[Lawrencewendall]

Might get flamed for this but my recommendation is go to PC , create a FREE account, go to the retirement planner and create varios scenarios. I don’t know the max scenarios but I created about 10 and can compare them against each other. I did one with a 25% haircut, one at 50% and another at 75% and others drawing SS at various ages. SWAN knowing that even in the worst case (if we drop more than 75%, ammunition will be more important than my portfolio) i’ll Be ok. Just a thought. Someone posted a graph in another thread showing length of bear versus bull. Really gave me peace mind. Ignore MSM.

 

[nico08]

Hi. Can you tell me what PC means? And when you say ignore MSM, do you mean main stream media? I'm not sure how that pertains to my question. Did you say ignore MSM because MSM is predicting a long and deep bear market? I'm just trying to understand where you are coming from. Oh, and what does the acronym SWAN mean? I never heard that before. Thanks.

Might get flamed for this but my recommendation is go to PC , create a FREE account, go to the retirement planner and create varios scenarios. I don’t know the max scenarios but I created about 10 and can compare them against each other. I did one with a 25% haircut, one at 50% and another at 75% and others drawing SS at various ages. SWAN knowing that even in the worst case (if we drop more than 75%, ammunition will be more important than my portfolio) i’ll Be ok. Just a thought. Someone posted a graph in another thread showing length of bear versus bull. Really gave me peace mind. Ignore MSM.

 

[USGrant1962]

Like minds maybe?? Any way you can do month to month with the tool. I put in Jun 08 to March 09 and it showed a -32% decline

Now I see, you have to "back test portfolio" to get month-to-month. I back tested "asset allocation" which does not have that option.

 

[Gotadimple]

That's one way to do it.

It's nice to have the confidence of math, but experience may be just as useful. Here's mine:

In 2008 my allocation was 55/45. By December the S&P500 had dropped 38%, my portfolio dropped 15%. Volatility is really the issue and what sectors got hit. The only thing that was up during 2008-2009 were Treasuries, and Municipals, but all other stock/bonds took a hit.

PC means Personal Capital, a web site. There are many tools out there you can use, but your basic question is what is the impact to my portfolio if we have a downturn like 2008-2009? A solution is always to maintain a large bond/cash position to cushion during the downturn. So I maintain 5-7 years of expenses in bonds/cash. In a downturn, I don't need to rely on equities for my drawdown.

HTH,
Rita

 

[fosterscik]

So is this the math equation I would use?

.60 * (-.52) + .40 * (-.039) = -32.8

S&P (VTI) -52.0%
Bonds (BIV) -3.9%

Yes that's correct. Remember that that's from the very top of the market to the very bottom. As noted above its started to recover fairly quickly after that.

 

[Cayman]

History is a Guide to the Past, the future will likely differ

I think this isn't the right way to look at things. If history is any guide, the market recovers from major market hits in 3-5 years. So even if you don't have the courage to rebalance when stocks are cheap, you can still maintain some non-equity assets in a bucket and just plan to spend from that bucket after a hit.

The other thing to remember is that during that 3-5 year period, the market is recovering, recovering, recovering. So if your bucket goes dry before the 100% completion of the recovery, you will still be selling equities long after they have bounced off the bottom.

I use the reserve "bucket" mentioned above. It may work for you if your goal is to optimize peace of mind, enjoy life and not worry much about a protracted bear. You'll just pull cash out of that bucket when markets are low. You may even buy some equities with part of that reserve fund and if you have enough money in it, you'll weather a long downturn relatively easily. You may lose a bit of money (vs having in equities) on those specific $, but you'll gain peace of mind. Have fun instead of stressing about your portfolio being down 68% when you need to withdraw $.

Also - The future may or may not look like the past. Consider that any of us may experience a bear market with a duration exceeding 5 years, and it is not a great leap of imagination to think that any economic downturn may equal or exceed the worst US bear (>-80%). Then, you may plan accordingly for your situation.

 

[capjak]

Hi. Can you tell me what PC means? A
.

I am guessing PC is Personal Capital, I use it and it is excellent for tracking expense/cash flow/investments etc....

 

[rodi]

nico08 -
A few assumptions you are making give me pause. You are looking for a bullet proof plan but you also state a 4% WR. The studies that came up with the 4% withdrawal rate had some potential gotcha's.... 1) it resulted in a 95% success rate (not 100%) for a balanced portfolio. 2) it assumed a 30 year retirement... which is shorter than many early retirees plan on.

One way to make sure you have enough to survive inflation, market downturns, etc, is to use a smaller withdrawal rate. You see figures of 3% and 3.5% bandied about on these boards all the time.

Another tool is to remain flexible... this can happen with spending adjustments... the market goes down, you tighten your belt or increase income (side gigs, a job, etc.)

Some prefer a percentage of remaining portfolio approach. By its very nature - the percent is taken annually of the actual portfolio at the time... not the portfolio value at the start of retirement.... So you can never run out of money. But you have to be able to adapt your spending or have a buffer for years when the portfolio is down. I think there are several members of er.org using this method.

 

[OldShooter]

nico08 -
A few assumptions you are making give me pause. You are looking for a bullet proof plan but you also state a 4% WR. The studies that came up with the 4% withdrawal rate had some potential gotcha's.... 1) it resulted in a 95% success rate (not 100%) for a balanced portfolio. 2) it assumed a 30 year retirement... which is shorter than many early retirees plan on.

One way to make sure you have enough to survive inflation, market downturns, etc, is to use a smaller withdrawal rate. You see figures of 3% and 3.5% bandied about on these boards all the time.

Another tool is to remain flexible... this can happen with spending adjustments... the market goes down, you tighten your belt or increase income (side gigs, a job, etc.)

Some prefer a percentage of remaining portfolio approach. By its very nature - the percent is taken annually of the actual portfolio at the time... not the portfolio value at the start of retirement.... So you can never run out of money. But you have to be able to adapt your spending or have a buffer for years when the portfolio is down. I think there are several members of er.org using this method.

Actually, you're not making it complicated enough. First, the 4% WR based on the initial portfolio assumes constant dollar withdrawals, so the withdrawals in nominal dollars are increasing with inflation.

Second, the safe WR depends on age and potential life expectancy. At age 102, a 25-50% WR is probably conservative. Even at age 75, running the calculation will give you something greater than 4%.

H.L. Mencken: “For every complex problem, there is a solution that is simple, neat and wrong.”

 

[pb4uski]

You could play around with Portfolio Visualizer at www.portfoliovisualizer.com I believe it only does annual, not monthly.

Here's your example case from '07 to '09. It shows a max drawdown of 30.72%, but back to where you started by the end of '09. Scroll down to see the results.

https://www.portfoliovisualizer.com...io3=Custom&TotalStockMarket1=60&TotalBond1=40

Better yet, you can start in 2007 and incorporate annual withdrawals of 40k a year (4% WR), inflation adjusted.... at the end of 2009 your portfolio would be $879k... expand it to the end of 2011 and it is $939k.

The trough would have been the end of February 2009... at $688k... a 31.2% decline (including withdrawals) from the beginning of 2007 and a decline of 36.9% from the peak and the end of October 2007.

https://www.portfoliovisualizer.com...io3=Custom&TotalStockMarket1=60&TotalBond1=40

 

[ncbill]

Another vote for Personal Capital's retirement planner.

It seems to be more conservative than other online retirement planners I've found.

 

[Lawrencewendall]

Hi. Can you tell me what PC means? And when you say ignore MSM, do you mean main stream media? I'm not sure how that pertains to my question. Did you say ignore MSM because MSM is predicting a long and deep bear market? I'm just trying to understand where you are coming from. Oh, and what does the acronym SWAN mean? I never heard that before. Thanks.

Sorry I didn’t get back with you earlier. Computer froze and I forgot about it. As others mentioned, PC IS Personal Capital. I love it, others hate it. One buddy had to block their number as they were calling him so much to hawk their FA services. You are correct with MSM. They are trying to sell their own gloom and doom story. SWAN is sleep well at night.