These results have surprised me greatly. I had expected only to show that a 100% commercial paper portfolio is sometimes superior to an 80% stock / 20% commercial paper portfolio, as it was in 1965, 1966, 1968 and 1969. From this data, we may be able to explain, in part, why calculations from the early 1871-1920 period have behaved differently than later years.
Look back into the years just before the twentieth century. Commercial paper portfolios by themselves supported inflation matched withdrawal rates in excess of 6%. This helps us better appreciate the general background and appeal of the famous Cross of Gold speech.
Commercial paper seems to have gotten a bum rap. It has done quite well except for retirements that were started during the depression. Low interest rates and the high inflation just after World War 2 combined to hurt retirees. Undoubtedly, the war greatly influenced interest rates. Buying low interest rate war bonds was a patriotic means to support the survival of the nation. There were other factors as well such as price controls.
HDBR Table for Commercial Paper
These were run on the JanSz-Chips Deluxe V1.0 modified version of the Retire Early Safe Withdrawal [Rate] Calculator, Version 1.61, 7 November 2002. It could have been run on any version, including the original.
The portfolio consisted entirely of commercial paper.
The Historical Database Rates (as a percentage of the portfolio's initial balance) are listed along with P/E10. All portfolios survived for 30 years at the withdrawal rates in the tables. At a withdrawal rate of 0.1% more than what is listed they would have failed. Withdrawal amounts were adjusted each year to match inflation. That is, the real dollar buying power remained constant. Inflation was measured by CPI-U. The expense ratio was 0.20%. The initial balance was set at $100000 to keep the effects of rounding and truncation errors to a minimum. All (excess) interest was reinvested. Other values were left at their default settings.
The values of P/E10 were taken from the calculator. They are identical to Professor Shiller's numbers internally, but they are rounded to a single decimal value in the table. The source of P/E10 values from 1871-1880 was not explained.
I have included the results for HDBR80 for comparison. HDBR80 consists of 80% stocks and 20% commercial paper. It is re-balanced annually at no cost. Expenses are 0.20%.
Have fun.
John R.
Code: Select all
Year P/E10 C.Paper HDBR80
1871 13.3 8.8 9.4
1872 14.5 9.0 9.3
1873 15.3 8.6 8.7
1874 13.9 8.0 8.8
1875 13.6 7.7 8.6
1876 13.3 7.9 9.0
1877 10.6 6.7 9.1
1878 9.7 6.1 9.0
1879 10.7 7.4 10.4
1880 15.3 7.0 7.7
1881 18.5 7.6 7.3
1882 15.7 7.6 7.5
1883 15.3 7.0 7.1
1884 14.4 6.3 6.9
1885 13.1 6.1 7.7
1886 16.7 6.1 6.7
1887 17.5 6.3 6.7
1888 15.4 5.9 6.7
1889 15.8 5.5 6.4
1890 17.2 5.5 6.4
1891 15.4 5.0 6.5
1892 19.0 5.3 6.3
1893 17.7 4.3 5.4
1894 15.7 4.0 6.2
1895 16.5 4.0 6.3
1896 16.6 3.8 6.1
1897 17.0 3.8 6.4
1898 19.2 3.8 5.9
1899 22.9 4.3 5.9
1900 18.7 4.1 5.8