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  • Distribution Phase Of The 60/40 MDY/VUSTX Portfolio. 26 comments
    May 28, 2014 1:38 PM | about stocks: MDY

    This post summarizes a calculation for 60/40 MDY/VUSTX portfolio starting on Jan. 1, 2000. The portfolio is re-balanced at the beginning of every year after withdrawal which is made at the beginning of the year according to the following schedule: 4% on the first day of the first year, with the dollar amount increasing by 4% every year thereafter.

    The first table lists the adjusted close data obtained from Yahoo Finance, and the returns of the components as well as of the portfolio.

    Year

    MDY on 12/31

    VUSTX on 12/31

    Return MDY (%)

    Return VUSTX (%)

    Return 60/40 (%)

    1999

    69.35

    4.15

       

    2000

    81.52

    4.97

    17.55

    19.76

    18.43

    2001

    80.83

    5.19

    -0.85

    4.43

    1.26

    2002

    69.09

    6.06

    -14.52

    16.76

    -2.01

    2003

    93.46

    6.22

    35.27

    2.64

    22.22

    2004

    108.32

    6.67

    15.90

    7.23

    12.43

    2005

    121.89

    7.11

    12.53

    6.60

    10.16

    2006

    134.06

    7.24

    9.98

    1.83

    6.72

    2007

    143.74

    7.91

    7.22

    9.25

    8.03

    2008

    91.37

    9.7

    -36.43

    22.63

    -12.81

    2009

    125.69

    8.53

    37.56

    -12.06

    17.71

    2010

    158.72

    9.27

    26.28

    8.68

    19.24

    2011

    155.35

    11.98

    -2.12

    29.23

    10.42

    2012

    183.03

    12.4

    17.82

    3.51

    12.09

    2013

    243.54

    10.78

    33.06

    -13.06

    14.61

    In this table we summarize the growth of the portfolio with the withdrawals made as described above.

    Year

    Withdrawal

    Portfolio Value After Withdrawal

    Return (%)

    Portfolio Value at End of the Year

    1999

       

    100

    2000

    4.00

    96.00

    18.43

    113.70

    2001

    4.16

    109.54

    1.26

    110.92

    2002

    4.33

    106.59

    -2.01

    104.45

    2003

    4.50

    99.95

    22.22

    122.16

    2004

    4.68

    117.48

    12.43

    132.09

    2005

    4.87

    127.22

    10.16

    140.14

    2006

    5.06

    135.08

    6.72

    144.16

    2007

    5.26

    138.90

    8.03

    150.05

    2008

    5.47

    144.58

    -12.81

    126.06

    2009

    5.69

    120.37

    17.71

    141.69

    2010

    5.92

    135.77

    19.24

    161.89

    2011

    6.16

    155.73

    10.42

    171.95

    2012

    6.40

    165.55

    12.09

    185.57

    2013

    6.66

    178.91

    14.61

    205.05

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

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Comments (26)
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  • Mikegyver
    , contributor
    Comments (17) | Send Message
     
    A masterpiece in it's simplicity. Well done.
    28 May 2014, 02:05 PM Reply Like
  • varan
    , contributor
    Comments (4207) | Send Message
     
    Author’s reply » Thanks. This gives a good baseline for all the harebrained strategies that everyone (including me) proposes. If this cannot be outperformed, it is not worth the effort.
    28 May 2014, 02:18 PM Reply Like
  • extremebanker
    , contributor
    Comments (1740) | Send Message
     
    It appears that many of the passive gurus are correct. Most people should not try active investing.
    28 May 2014, 02:30 PM Reply Like
  • satan2liberals
    , contributor
    Comments (1206) | Send Message
     
    Great job!

     

    Of course one does wonder how much longer midcaps can continue outperforming should it become a meme of common knowledge.

     

    I don't think we have to worry about those in the cult of DGI waking up any time soon though ;)
    28 May 2014, 04:12 PM Reply Like
  • pietrusikm
    , contributor
    Comments (72) | Send Message
     
    varan your the best. wish you posted more. all your info /comments are 5 star. great job.
    28 May 2014, 07:41 PM Reply Like
  • varan
    , contributor
    Comments (4207) | Send Message
     
    Author’s reply » Thank you.
    28 May 2014, 08:54 PM Reply Like
  • Ptstanford
    , contributor
    Comments (504) | Send Message
     
    Varan

     

    You're quite good at assembling irrelevant comparisons.

     

    Mid Caps and Bond Funds.... is that about Dividend Growth Investing?

     

    Let's circle back and get back to the real discussion.

     

    A long term portfolio in the highest yielding stocks has an average CAGR since 1926 of 11.77%.

     

    This quite well sets your "Balanced 60/40 ETF straw man" on fire leaving our Million Dollar investor's all dividend stock portfolio with $2,761,985 at the end of the 14 years having drawn $40K per year growing at 4%.

     

    Your math indicates you end up with a bit over 2 Million.

     

    I think I'll take the extra $700,000.

     

    And with this all dividend stock portfolio, he doesn't have to sell off principal eroding total return.

     

    No bonds. No market timing. No Straw Men.

     

    This does not include the growth of the individual dividend payments, which I believe the over all average is something like 7% or so, well ahead of inflation. Great company like Target (TGT) for instance has a growth rate of about 16%. Five years ago the dividend was 86 Cents, now its $1.79.

     

    Are you starting to understand?

     

    If you don't believe me -- and I hope you don't -- then I suggest you read "What Works On Wall Street" by James O'Shaughnessy.
    28 May 2014, 08:43 PM Reply Like
  • pat12357
    , contributor
    Comments (104) | Send Message
     
    Wow, what a rambling comment, Ptstanford. Even after a few drinks, I can still think more clearly than you.
    28 May 2014, 11:07 PM Reply Like
  • varan
    , contributor
    Comments (4207) | Send Message
     
    Author’s reply » Author’s reply » Thank you very much for your interest.

     

    The closest implementation (of what you are suggesting as the O'Shaughnessy's ideas) that I could find was at this American Association of Individual Investors' site under O'Shaughnessy Value. I would be very interested in looking at the performance of an actual O'Shaughnessy Dividend Growth portfolio.

     

    http://bit.ly/1khX6wY

     

    Unfortunately the data for the O'Shaughnessy Value in this site does not include dividends, and its performance with the 4% distribution rule cannot be evaluated. However, the price return series has a CAGR of 6.9% during 2000-2013.

     

    It will be interesting to see the results of other implementations.

     

    Good luck with your investments.
    28 May 2014, 11:08 PM Reply Like
  • Ptstanford
    , contributor
    Comments (504) | Send Message
     
    Ah, but you're missing the context, my friend.... have a few more drinks and search the posts.
    28 May 2014, 11:41 PM Reply Like
  • pat12357
    , contributor
    Comments (104) | Send Message
     
    Not missing anything, amigo. I only express opinions that I'm certain of... and I am always right because I know what I know.
    29 May 2014, 12:31 AM Reply Like
  • varan
    , contributor
    Comments (4207) | Send Message
     
    Author’s reply » @pat

     

    The motivation for this post was a counterclaim made by him in another forum that his computation for the same portfolio, time frame, and withdrawal schedule yields an entirely different result. That is the 'context' that he may be referring to, but who knows?

     

    As of this moment, the counterclaim remains unsubstantiated.

     

    I, of course, remain open to refutation and correction, as all such computations should be.

     

    Thanks for your interest.
    29 May 2014, 01:11 PM Reply Like
  • wnb1929
    , contributor
    Comments (158) | Send Message
     
    Varan, great post, the DG crowd will never go along with different way of thinking, they can't stand that someone comes up with something simple, it really bugs them, & don't even talk of market timing or asset allocation. I fought this war a few years ago, but now I just sit back & laugh at them. Keep up the good work.
    28 May 2014, 11:30 PM Reply Like
  • dividendbonanza
    , contributor
    Comments (437) | Send Message
     
    Varan,

     

    Thanks for posting this.

     

    A couple of thoughts. Would many have suggested using MDY back in 2000 versus SPY?

     

    Have you considered comparing these results with the Dividend Growth Portfolio you created by looking back on the 10 Champions each year with the fastest DGR?
    29 May 2014, 12:21 AM Reply Like
  • varan
    , contributor
    Comments (4207) | Send Message
     
    Author’s reply » If memory serves, FDVLX, a mid-cap value fund, was very popular in the nineties, and it was sidelined by the dot-com mania. In one of my retirement portfolios I have had it for over 20 years. Having said that, I agree with the thrust of your question.

     

    It's a good suggestion for using the high DG yielders, but it will have a similar bias (as did my calculation that you refer to), since, as far as I know, the Champion lists are not available for times going back fifteen years. I think that such a selection may yield very good results.

     

    Thanks for your interest.
    29 May 2014, 01:01 AM Reply Like
  • extremebanker
    , contributor
    Comments (1740) | Send Message
     
    If one studies the academic side of investing including Fama French and Carhart then one certainly would be looking at size, value, beta and momentum. Fama French didn't win the Nobel prize for nothing. RPV has handily beat MDY over the last 5 years. There are many other choices that outperform MDY. There are also many funds that beat VUSTX over any given time period. So what Varan has illustrated is just one simple and successful approach to investing.
    29 May 2014, 09:01 AM Reply Like
  • dividendbonanza
    , contributor
    Comments (437) | Send Message
     
    Varan,

     

    Thanks. I haven't seen many products that look similar to my own DGI portfolio to use as a proxy do a chart as you have presented here. I am in theory 3+ years from retirement. My portfolio yields around 3.25%. The dividends at retirement will meet my income goals. Managing the portfolio is something that I embrace. My wife, not so much. It pays to consider alternative approaches.
    29 May 2014, 10:52 AM Reply Like
  • varan
    , contributor
    Comments (4207) | Send Message
     
    Author’s reply » @bonanza

     

    As the post indicates clearly, the purpose was only to summarize the results for a particular case.

     

    The problem of the estimation of the sustainability of a portfolio in the distribution phase is clearly a probabilistic one, and all you can hope for is some measure of the probability that it will generate the income for a particular withdrawal schedule. The result shown here by no means yields a definitive indication of what might happen in the future, but just provides an illustration of one of the myriad of possibilities.

     

    Thanks.
    29 May 2014, 11:07 AM Reply Like
  • Market Map
    , contributor
    Comments (418) | Send Message
     
    That's the beauty of the evolving ETF landscape. There are more and more innovative products coming out all of the time . We still think that QQQ is one of the great ones in terms of cost, tax ratios and performance comparisons ..
    29 May 2014, 01:04 PM Reply Like
  • varan
    , contributor
    Comments (4207) | Send Message
     
    Author’s reply » Thanks.

     

    Perhaps not just QQQ, especially for the purpose addressed here.

     

    QQQ alone ends up with nothing in year 10.

     

    60/40 QQQ/VUSTX does not do well either: it lasts for the whole period, but ends up with only 48% of the original value.

     

    All is not lost though. If you rebalance QQQ/VUSTX using risk parity every quarter, the results are pretty good: 9% CAGR with not a single year of loss, and you end up with 188% of the original capital, quite respectable in comparison to the 205% for MDY/VUSTX used here.
    29 May 2014, 01:26 PM Reply Like
  • spielerman
    , contributor
    Comments (241) | Send Message
     
    Hi Varan,

     

    To take this to another level, how much improvement (hopefully), would occur using your same MDY/VUSTX using quarterly risk parity asset allocation?

     

    That, I'm hoping would be another big step forward especially if it eliminated any year with a loss.

     

    Thanks,
    29 May 2014, 02:37 PM Reply Like
  • varan
    , contributor
    Comments (4207) | Send Message
     
    Author’s reply » I hesitate to go too much into finding the best one for this particular time frame, but what you suggest does improve the returns to 9.9% (once again with no yearly loss), and the residual capital of 227%.

     

    The most attractive result I have seen so far is yielded by the balanced strategy of my previous post applied to FLPSX, FDVLX, PSOAX (FSCRX was not available before 2002), VUSTX, and EDV. CAGR 13.85%. No year of loss. Residual capital 395%.

     

    Thanks.
    29 May 2014, 03:06 PM Reply Like
  • extremebanker
    , contributor
    Comments (1740) | Send Message
     
    How about some sample examples of risk parity?
    29 May 2014, 03:07 PM Reply Like
  • drftr
    , contributor
    Comments (348) | Send Message
     
    Any interesting results with buying the best 1 or 2 out of VTI-TLT-GLD? Or, in other words, Harry Browne's Permanent Portfolio on steroids? This should give great results in all economic climates so it may give most people the peace of mind they deserve. It's probably enough to look at the allocation once every quarter and see what has been doing best in the last 3 months.

     

    drftr
    15 Jun 2014, 10:02 AM Reply Like
  • varan
    , contributor
    Comments (4207) | Send Message
     
    Author’s reply » You have to add IYR or VNQ apparently to take care of all parts of the market cycles.

     

    Buying the best two of VTI, GLD, IYR, TLT every quarter based on the prior quarter's performance yields very good results during 2005-2014. The CAGR depends upon the method of allocation used : Naive Graham (16.5%), Risk Parity (16.1%) and Equal Weight (14.9%).
    15 Jun 2014, 03:17 PM Reply Like
  • drftr
    , contributor
    Comments (348) | Send Message
     
    Wow! That's not too bad!

     

    Personally I don't consider IYR / VNQ an asset in itself though. I would consider a building a commodity but I think the ETFs are made of companies investing in real estate and therefor don't reflect real estate prices per se. I'd love to have the real thing instead of a vehicle that MAY get me there. Only for that reason I would want to leave it out of my portfolio just like Harry Browne suggested. The companies in these 2 ETFs will be part of VTI anyway so no need for a double risk. If I were to extend my "fail proof" portfolio with other ETFs real estate would definitely be there plus more commodities and different bond ETFs.

     

    Thanks for the suggestion and results Varan!

     

    drftr
    16 Jun 2014, 10:14 AM Reply Like
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