Lsbcal
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Recently with the equity markets runup, I've begun to wonder if I should reduce risk since we are at relatively nice numbers. But how to do an analysis that shows where we are at? And how much should we cut back in equities?
To answer these questions I ran FIRECalc with various equity allocations and looked at spending levels for 100% success rates with a minimum portfolio balance at all times. One run results looks like this (snipped off the spending level numbers for privacy):
It shows success rate (Y-axis) versus spending levels (X-axis). I took the portfolio's result at the point where the curve breaks (blue arrow). Then I ran several portfolios varying only the % equities. The results are shown here:
The spending numbers are spending from the portfolio (not our actual numbers). The green line is for a portfolio that never goes below 50% of our current portfolio. The blue line is for a portfolio that never goes below 40% of our current portfolio. It is portfolio spending only and does not include Social Security although the FIRECalc analysis needs the SS numbers.
I was impressed that a maxima could be easily found. Of course, this is nothing particularly new but it helps me a lot in weening myself off some equities. One would expect that in very bad markets the volatility (and thus spending levels) would be enhanced by having more bonds in the portfolio.
So right now I'm considering going down from 65% to 50% equities and using the green line (50% of current portfolio value at all times). If the market really got insanely high, I'd probably go to 40%. This analysis assumes inflation adjusted spending, but we might just go with "percentage of current portfolio" to be more conservative. I doubt we would spend more highly should we get another 2008 type crisis.
Just wanted to share this in case it helps anyone in a similar review. Also maybe I'm missing some magic buttons in FIRECalc ? Probably somebody has already posted this sort of thing and I've forgotten, sorry if that is the case.
Of course, the numbers and conclusions depend on your own analysis. Comments encouraged.
To answer these questions I ran FIRECalc with various equity allocations and looked at spending levels for 100% success rates with a minimum portfolio balance at all times. One run results looks like this (snipped off the spending level numbers for privacy):
It shows success rate (Y-axis) versus spending levels (X-axis). I took the portfolio's result at the point where the curve breaks (blue arrow). Then I ran several portfolios varying only the % equities. The results are shown here:
The spending numbers are spending from the portfolio (not our actual numbers). The green line is for a portfolio that never goes below 50% of our current portfolio. The blue line is for a portfolio that never goes below 40% of our current portfolio. It is portfolio spending only and does not include Social Security although the FIRECalc analysis needs the SS numbers.
I was impressed that a maxima could be easily found. Of course, this is nothing particularly new but it helps me a lot in weening myself off some equities. One would expect that in very bad markets the volatility (and thus spending levels) would be enhanced by having more bonds in the portfolio.
So right now I'm considering going down from 65% to 50% equities and using the green line (50% of current portfolio value at all times). If the market really got insanely high, I'd probably go to 40%. This analysis assumes inflation adjusted spending, but we might just go with "percentage of current portfolio" to be more conservative. I doubt we would spend more highly should we get another 2008 type crisis.
Just wanted to share this in case it helps anyone in a similar review. Also maybe I'm missing some magic buttons in FIRECalc ? Probably somebody has already posted this sort of thing and I've forgotten, sorry if that is the case.
Of course, the numbers and conclusions depend on your own analysis. Comments encouraged.