Setting AA and remembering past bad markets?

[Lsbcal]

I don't think a really really bad decline is eminent but I feel so good about my portfolio value right now that it worries me. So I remind myself that bad markets have crept up on us in the past. But just how bad? I wanted to see in dollar terms how bad it could look.

So I added a little table to my investment spreadsheet. It shows how my current portfolio value would look should we encounter one of those nasty bear markets of the past. It helps me to remember why I have my AA set where it is. Some key bad years were 1969, 1973, 1974, 2008.

The 1973-74 bear market started in mid 1973 (inflation, oil embargo, Watergate, Vietnam). It ended towards the end of 1974 so it looks particularly bad on an annual basis. It is kind of a poster child for how bad things could get.

Here is a table showing how some AA's would do if you had a $1,000,000 portfolio and were spending at 4% annually in 1973-74:

This was done using VPW. Bonds are Total Stock Market. Note one could cut spending in those 2 bad years but you'd still have a lot smaller portfolio. And yes, this was the low point basically but things didn't improve all that much until the early 1980's.

 

[Spanky]

Thanks for the reminder that a steep decline could really hurt your portfolio.

 

[capjak]

Guess you could do the other side of the coin and show the best markets to justify why you have the stock allocation high

 

[W2R]

Interesting! I think you are SO smart to be thinking about this in advance. Maybe I'm a pessimist, but I do think that such scenarios are as likely as not.

Actually, I was pretty lucky in that 2008-2009 was a strong "test" of my 45:55 AA and my ability to do nothing during a market crash, just before I retired (11/9/2009). So I feel pretty confident in that AA, for me.

Not only that, but I have SS also by now, which I didn't have back then. That's a huge help, even though I am only getting 1/2 of my ex's SS for now.

When I compute my WR every year, I compute it 3 ways:

1) % of 12/31 portfolio value
2) % of standard CPI adjusted initial portfolio value
3) % of portfolio value at the absolute bottom of the recession, on 3/9/2009.

The latter really helps me to see how things would be for me if a similar market crash occurred now.

 

[ejman]

I don't think a really really bad decline is eminent but I feel so good about my portfolio value right now that it worries me. So I remind myself that bad markets have crept up on us in the past. But just how bad? I wanted to see in dollar terms how bad it could look.

So I added a little table to my investment spreadsheet. It shows how my current portfolio value would look should we encounter one of those nasty bear markets of the past. It helps me to remember why I have my AA set where it is. Some key bad years were 1969, 1973, 1974, 2008.

The 1973-74 bear market started in mid 1973 (inflation, oil embargo, Watergate, Vietnam). It ended towards the end of 1974 so it looks particularly bad on an annual basis. It is kind of a poster child for how bad things could get.

Here is a table showing how some AA's would do if you had a $1,000,000 portfolio and were spending at 4% annually in 1973-74:

This was done using VPW. Bonds are Total Stock Market. Note one could cut spending in those 2 bad years but you'd still have a lot smaller portfolio. And yes, this was the low point basically but things didn't improve all that much until the early 1980's.

Just to make sure I understand correctly, the assumption here is $1,000,000 on 12/31/1972 and the table shows the ending balance at 12/31/1974 given 4% annual withdrawals based on the original $1,000,000? If so WOW, even high bond levels didn't help as much as I would have thought.

 

[Lsbcal]

Interesting! I think you are SO smart to be thinking about this in advance. Maybe I'm a pessimist, but I do think that such scenarios are as likely as not.

Actually, I was pretty lucky in that 2008-2009 was a strong "test" of my 45:55 AA and my ability to do nothing during a market crash, just before I retired (11/9/2009). So I feel pretty confident in that AA, for me.

Not only that, but I have SS also by now, which I didn't have back then. That's a huge help, even though I am only getting 1/2 of my ex's SS for now.

In the 2008-2009 decline I had the portfolio set at 55/45. Still was a nasty ride. And yep, we didn't have SS at that time either so it came as a bit of a surprise how bad the portfolio could decline. Not working so no excess income to cushion things.

When I compute my WR every year, I compute it 3 ways:

1) % of 12/31 portfolio value
2) % of standard CPI adjusted initial portfolio value
3) % of portfolio value at the absolute bottom of the recession, on 3/9/2009.

The latter really helps me to see how things would be for me if a similar market crash occurred now.

I do something similar to yours WR. I keep an inflation corrected value for the portfolio low water mark and the portfolio high water mark.

 

[Lsbcal]

Just to make sure I understand correctly, the assumption here is $1,000,000 on 12/31/1972 and the table shows the ending balance at 12/31/1974 given 4% annual withdrawals based on the original $1,000,000? If so WOW, even high bond levels didn't help as much as I would have thought.

Yes, you are right on all counts. And bonds didn't do so hot in the increasing inflation of the later 1970's. Thankfully now there is more indexing of things like taxes.