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Surprising results with Commercial Paper

 
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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Wed Mar 17, 2004 3:21 pm    Post subject: Surprising results with Commercial Paper Reply with quote

Overview

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:
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


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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Wed Mar 17, 2004 3:24 pm    Post subject: Reply with quote

Code:
Year  P/E10 C.Paper  HDBR80
1901   21.0   4.1   5.3
1902   22.3   4.4   5.2
1903   20.3   4.1   4.8
1904   15.9   4.2   5.9
1905   18.5   4.1   4.9
1906   20.1   4.2   4.5
1907   17.2   3.9   4.5
1908   11.9   3.9   5.8
1909   14.8   4.3   5.2
1910   14.5   3.9   4.4
1911   14.0   3.8   4.6
1912   13.8   3.9   4.9
1913   13.1   3.8   4.9
1914   11.6   3.7   5.3
1915   10.4   3.8   5.9
1916   12.5   4.1   5.5
1917   11.0   4.8   6.4
1918    6.6   5.4   9.1
1919    6.1   6.1   10.0
1920    6.0   5.7   9.3


Code:
Year  P/E10 C.Paper  HDBR80
1921    5.1   4.8   9.8
1922    6.3   4.6   9.9
1923    8.2   4.6   8.9
1924    8.1   4.4   9.2
1925    9.7   4.4   8.5
1926   11.3   4.1   7.5
1927   13.2   3.9   7.2
1928   18.8   3.7   5.8
1929   27.1   3.5   4.4
1930   22.3   3.1   4.5
1931   16.7   2.7   5.0
1932    9.3   2.3   6.9
1933    8.7   2.3   8.0
1934   13.0   2.4   6.2
1935   11.5   2.4   7.1
1936   17.1   2.4   5.4
1937   21.6   2.4   4.5
1938   13.5   2.3   6.0
1939   15.6   2.3   5.6
1940   16.4   2.3   5.8
1941   13.9   2.5   7.3
1942   10.1   2.7   9.0
1943   10.2   2.8   8.7
1944   11.1   2.8   8.1
1945   12.0   2.9   7.7
1946   15.6   3.4   7.4
1947   11.5   3.7   9.5
1948   10.4   3.8   10.2
1949   10.2   3.7   10.0
1950   10.7   4.0   10.3


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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Wed Mar 17, 2004 3:29 pm    Post subject: Reply with quote

Code:

Year  P/E10  C.Paper  HDBR80
1951   11.9   4.1   9.2
1952   12.5   4.1   8.5
1953   13.0   4.1   8.2
1954   12.0   4.1   8.4
1955   16.0   4.1   6.6
1956   18.3   4.2   5.7
1957   16.7   4.2   5.9
1958   13.8   4.3   6.5
1959   18.0   4.3   5.2
1960   18.3   4.3   5.1
1961   18.5   4.3   5.1
1962   21.2   4.3   4.6
1963   19.3   4.3   4.9
1964   21.6   4.3   4.4
1965   23.3   4.3   4.0
1966   24.1   4.3   3.9
1967   20.4   4.3   4.4
1968   21.5   4.3   4.1
1969   21.2   4.3   4.1
1970   17.1   4.3   4.8
1971   16.5   4.3   4.8
1972   17.3   4.3   4.6
1973   18.7   4.5   4.6
1974   13.5   4.6   5.9
1975    8.9   4.7   7.8
1976   11.2   4.8   6.6
1977   11.4   5.0   6.6
1978    9.2   5.2   7.9
1979    9.3   5.5   8.2
1980    8.9   5.6   8.2


In the stressful conditions for retirements begun in 1965, 1966, 1968 and 1969, owning stocks reduced a portfolio's 30-year survival rate.

Have fun.

John R.


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Mike
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Joined: 06 Jul 2003
Posts: 278

PostPosted: Wed Mar 17, 2004 7:54 pm    Post subject: Reply with quote

Quote:
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.

I think that speech is one of the worst things to ever happen to the aspiring retiree. Withdrawing 6% with perfect safety, defined benefit pensions maintaining their value, and being able to save your money for retirement without having to constantly take risks to stay ahead of inflation. It seems to me that those were the days for the frugal saver. Saving money in the bank has been deliberately punished for so long (in taxable accounts) that most Americans have ceased to save significant sums of money. They noticed that they could buy less when they took their money out than when the put it in.

Excellent research John. Today's super low interest rates make commercial paper somewhat less appealing than during most periods, but the rates will probably not stay this low forever. Of course, if recent history is any guide, when the market starts its reversion to the mean, the fed is likely to panic and keep rates below the CPI for an extended period. In his latest Forbes article, Jim Grant doesn't even like TIPS any more. He thinks the government will continue to manipulate the CPI so that it lags true retiree inflation even more than it does now. There may not be very many domestic safe havens for a few years when reversion begins in earnest. I am pondering the situation.


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BenSolar
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Joined: 25 Nov 2002
Posts: 242
Location: Western NC

PostPosted: Wed Mar 17, 2004 8:05 pm    Post subject: Reply with quote

JWR1945 wrote:
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. ...

Look back into the years just before the twentieth century. Commercial paper portfolios by themselves supported inflation matched withdrawal rates in excess of 6%. ...

Commercial paper ... 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.

More excellent posts, John Exclamation
Great!

I think the prognosis for commercial paper is poor right now, what with low interest rates and the (relatively) likely prospect of higher inflation coming. But, who knows. Crying or Very sad



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JWR1945
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Joined: 26 Nov 2002
Posts: 1697
Location: Crestview, Florida

PostPosted: Thu Mar 18, 2004 7:58 am    Post subject: Reply with quote

BenSolar wrote:
I think the prognosis for commercial paper is poor right now, what with low interest rates and the (relatively) likely prospect of higher inflation coming. But, who knows.

I agree. If you plan to stick with 100% commercial paper throughout your retirement, things are bleak.

Commercial paper can be used for preserving capital until other investments look more inviting. In addition, interest rates will not remain this low forever. (However, Mike made a good observation. They can stay lower than they should for several years.)

When we look at today's valuations (as measured by P/E10), we know that stocks are in dangerous territory. The risk far outweighs any reward at this time. Thanks to our ability to conduct switching studies (originally implemented by intercst at the urging of BenSolar and later including some additions by me), we see that it makes sense to preserve capital until valuations improve.

Have fun.

John R.


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