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

 Posted: Sun Jan 30, 2005 12:18 pm    Post subject: Switching with Large Cap Value using Exponential E10/P Switching with Large Cap Value using Exponential E10/P I copied the 1928-2000 Large Cap Value data from the Gummy's database. http://www.gummy-stuff.org/returns.htm I started with my Gummy 02B revision 1 version of the Deluxe Calculator V1.1A08 revised on January 27, 2005. I upgraded it to the Gummy 02B rev 1 exp E10/P version of the Deluxe Calculator V1.1A08, revised January 30, 2005. This new calculator uses Gummy's Exponential Weighting of E10/P data. I downloaded the values of E(10ma)/P from his spreadsheet. I used this link: http://www.gummy-stuff.org/E10-P.htm I calculated 1/[E(10ma)/P] on a separate worksheet. I pasted these values, which are P/E(10ma), into cells BG186-EA186. I used the fill handle to copy the year 2000 value as dummy data for the remaining years (up to 2010). I repeated my earlier study, but this time comparing P/E(10ma) to the thresholds. Conditions I set the starting balance at \$100000. I set expenses to 0.20%. I varied the withdrawal rate. I used the CPI for inflation. I examined 30-year sequences starting in 1928-1980. There are 53 sequences. Stock allocations consisted of Large Cap Value. The non-stock allocation consisted of commercial paper. I left the beginning and end of year withdrawal allocations at 50%, the default setting. I started by collecting a baseline with fixed stock allocations of 0%, 30%, 50%, 70% and 100%. Later, I took a brief survey. I varied the stock allocation depending upon P/E(10ma). When P/E(10ma) was below the lower threshold (which varied), the stock allocation was 100%. When P/E(10ma) was between the two thresholds, I used an intermediate allocation of 30% or 50% or 70% as indicated. When P/E(10ma) exceeded the upper threshold, which I set at 21, the stock allocation was 0%. The best intermediate stock allocation (when there was only one intermediate allocation) from a previous survey using commercial paper was 30%. The best P/E10 thresholds were 12 and 21. Procedure I increased the withdrawal rate in increments of 0.1%. I recorded the highest rate at which all portfolios from 30-year sequences beginning in 1928-1980 survived. I have listed those rates as HSWR. I continued increasing withdrawal rates in increments of 0.1%. I recorded the lowest withdrawal rate at which 1 or more, 5 or more and 10 or more portfolios failed. This method allows me to survey a large number of conditions rapidly. By including data with 5 and 10 failures, I am able to spot difficulties associated with probability distributions. Results This was a brief survey. This was not a full optimization. This did not include a full sensitivity study. Baselines Calculator data: 1928-2000. 30-year sequences from 1928-1980. \$100000, 0.20% expenses. [Calculator settings: Fixed allocations. No switching, but with annual rebalancing. Stock Allocations: 0%, 30%, 50%, 70%, 100%.] Stock Allocation = 0%. That is, 100% commercial paper. 30-year Failures in 1928-1980: HSWR: 2.3 First failure: 2.4 Five failures: 2.5 Ten failures: 2.6 Stock Allocation = 30% 30-year Failures in 1928-1980: HSWR: 4.0 First failure: 4.1 in year 1936 Five failures: 4.5 in years 1930, 1934, 1936-1937, 1939 Ten failures: 4.9 Stock Allocation = 50% 30-year Failures in 1928-1980: HSWR: 4.6 First failure: 4.7 in year 1930 Five failures: 5.4 in years 1928-1930, 1937, 1969 Ten failures: 5.9 [Previously, I incorrectly reported the five-failure rate as 5.3%.] Stock Allocation = 70% 30-year Failures in 1928-1980: HSWR: 4.2 First failure: 4.3 in year 1929-1930 Five failures: 5.6 in years 1928-1930, 1937, 1969 Ten failures: 6.7 [Previously, I incorrectly reported the first-failure rate as 4.4%.] Stock Allocation = 100% 30-year Failures in 1928-1980: HSWR: 2.9 First failure: 3.0 in year 1929-1930 Five failures: 5.6 in years 1928-1931, 1969 Ten failures: 7.3 The Survey of Thresholds and Allocations Calculator data: 1928-2000. 30-year sequences from 1928-1980. \$100000, 0.20% expenses. [Calculator settings: P/E10 thresholds: varies-21-24-80. Allocations: 100-varies-0-0-0.] P/E10 threshold = 9 and [Intermediate stock] Allocation = 30% 30-year Failures in 1928-1980: HSWR: 5.0 First failure: 5.1 in year 1939 Five failures: 5.4 Ten failures: 5.6 P/E10 threshold = 9 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 5.5 First failure: 5.6 in year 1930, 1969 Five failures: 5.9 Ten failures: 6.3 P/E10 threshold = 9 and Allocation = 70% 30-year Failures in 1928-1980: HSWR: 5.1 First failure: 5.2 Five failures: 6.2 Ten failures: 6.8 P/E10 threshold = 12 and Allocation =30% 30-year Failures in 1928-1980: HSWR: 6.1 First failure: 6.2 in year 1956 Five failures: 6.5 Ten failures: 6.9 P/E10 threshold = 12 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 6.5 First failure: 6.6 Five failures: 6.8 Ten failures: 7.2 P/E10 threshold = 12 and Allocation = 70% 30-year Failures in 1928-1980: HSWR: 5.9 First failure: 6.0 Five failures: 6.8 Ten failures: 7.3 P/E10 threshold = 15 and Allocation = 30% 30-year Failures in 1928-1980: HSWR: 5.7 First failure: 5.8 Five failures: 6.0 Ten failures: 6.3 P/E10 threshold = 15 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 5.2 First failure: 5.3 Five failures: 6.2 Ten failures: 6.5 P/E10 threshold = 15 and Allocation = 70% 30-year Failures in 1928-1980: HSWR: 4.6 First failure: 4.7 Five failures: 6.2 Ten failures: 6.8 Summary of results with the best intermediate stock allocation. Arguably, it was 50%. [There is an interaction at a high P/E10 threshold and a 30% stock allocation. In addition, there seems to be a change in the nature of the underlying distribution.] P/E10 threshold = 9 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 5.5 First failure: 5.6 in year 1930, 1969 Five failures: 5.9 Ten failures: 6.3 P/E10 threshold = 12 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 6.5 First failure: 6.6 Five failures: 6.8 Ten failures: 7.2 P/E10 threshold = 15 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 5.2 First failure: 5.3 Five failures: 6.2 Ten failures: 6.5 Additional conditions with an intermediate stock allocation of 50%. P/E10 threshold = 9 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 5.5 First failure: 5.6 in year 1930, 1969 Five failures: 5.9 Ten failures: 6.3 [Repeated here for convenience.] P/E10 threshold = 10 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 6.1 First failure: 6.2 Five failures: 6.5 Ten failures: 6.9 P/E10 threshold = 11 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 6.2 First failure: 6.3 Five failures: 6.6 Ten failures: 7.0 P/E10 threshold = 12 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 6.5 First failure: 6.6 Five failures: 6.8 Ten failures: 7.2 [Repeated here for convenience.] P/E10 threshold = 13 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 6.5 First failure: 6.6 Five failures: 6.8 Ten failures: 7.2 P/E10 threshold = 14 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 5.9 First failure: 6.0 Five failures: 6.3 Ten failures: 6.7 P/E10 threshold = 15 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 5.2 First failure: 5.3 Five failures: 6.2 Ten failures: 6.5 [Repeated here for convenience.] Comparisons These are the best results with a fixed allocation. Stock Allocation = 50% 30-year Failures in 1928-1980: HSWR: 4.6 First failure: 4.7 in year 1930 Five failures: 5.4 in years 1928-1930, 1937, 1969 Ten failures: 5.9 These are the best results with switching. P/E10 threshold = 12 or 13 and Allocation = 50% 30-year Failures in 1928-1980: HSWR: 6.5 First failure: 6.6 Five failures: 6.8 Ten failures: 7.2 Summary Large Cap Value stocks have much higher Historical Survival Withdrawal Rates than the S&P500 index. P/E(10ma) is not as good an indicator as P/E10 for portfolios with Large Cap Value. With an allocation of 50% stocks, a withdrawal rate of 5.2% produced zero failures for all conditions tested. That is, there were zero failures when the lower P/E(10ma) threshold was 9, 10, 11, 12, 13, 14 or 15. This is better than for all of the conditions without switching. The best thresholds were 12 and 13 for both P/E10 and P/E(10ma). However, the best stock allocations were 70% with P/E10 and 50% with P/E(10ma). Caution: I have not made any adjustments for today's valuations. The actual improvement starting with today's valuations are likely to be less. You can still estimate relative performance when compared to the S&P500 index. Have fun. John R.
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