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Performance Of An MPT Based And A DG Portfolio

Performance of an MPT based and a DG portfolio

Performance of two portfolios is compared for a person who retired at the end of 1999.

MPT Portfolio: An yearly rebalanced portfolio of market indices based ETFs (SPY and QQQ), a bond fund from Fidelity (MUTF:FBNDX) and the long term treasury fund from Vanguard (MUTF:VUSTX). At the beginning of every year starting in 2000, the weight for each of these assets is computed by the classical Markowitz variance minimization for an annual expected return of 10%. The data used at the beginning of each year is only the historical data available at the time starting from January 1990 - thus, e.g., only the historical data for the period 1990 thru 2003 is used for constructing the portfolio for 2004. Further, the historical data for the SP500 index is used for computing the weights for SPY, and, similarly the historical data for the NASDAQ index is used for computing the weights for QQQ.

DG Portfolio: An yearly balanced equally weighted portfolio of CL, CLX, KMB, PG, MCD, and KO.

Withdrawal/Income strategy: For both the cases the initial desired income is $4 (for an initial portfolio of $100) at the end of the first year, and this desired income increases by 3% every year. At the end of each year, the higher of the two quantities - (a) 4% of the value of the current value of the portfolio (b) the desired income - is withdrawn.

Result

Accounting for all the withdrawals as described above, the current value of the MPT portfolio is $164, whereas the DG portfolio is worth $112. The income from the MPT portfolio has been higher than that from the DG portfolio since 2008. The growth of income and of the values of the portfolios are shown in the following figure.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.