Expanded Allocator Insights B

I tried a variety of allocations to determine the value of fine grain optimization. It is not much.

Conditions

I used my Expanded Allocator. I used four investment types as well as 2% TIPS to manage the cash flow. I started with equal allocations.

Investment 1: 3% initial yield with 8% per year growth.
Investment 2: 4% initial yield with 5% per year growth.
Investment 3: 5% initial yield with 3% per year growth.
Investment 4: 6% initial yield with 0% per year growth.
TIPS: 2% real interest.
Inflation: 3%.

CONDITION A:

Investment 1 allocation: 20%.
Investment 2 allocation: 20%.
Investment 3 allocation: 20%.
Investment 4 allocation: 20%.
TIPS allocation: 20%.
Withdrawal Rate: 4.9%.

CONDITION B:

Investment 1 allocation: 30%.
Investment 2 allocation: 20%.
Investment 3 allocation: 10%.
Investment 4 allocation: 20%.
TIPS allocation: 20%.
Withdrawal Rate: 5.0%.

CONDITION C:

Investment 1 allocation: 30%.
Investment 2 allocation: 10%.
Investment 3 allocation: 10%.
Investment 4 allocation: 20%.
TIPS allocation: 30%.
Withdrawal Rate: 5.0%.

CONDITION D:

Investment 1 allocation: 40%.
Investment 2 allocation: 0%.
Investment 3 allocation: 10%.
Investment 4 allocation: 20%.
TIPS allocation: 30%.
Withdrawal Rate: 5.0%.

CONDITION E:

Investment 1 allocation: 40%.
Investment 2 allocation: 0%.
Investment 3 allocation: 10%.
Investment 4 allocation: 10%.
TIPS allocation: 40%.
Withdrawal Rate: 5.1%.

CONDITION F:

Investment 1 allocation: 40%.
Investment 2 allocation: 0%.
Investment 3 allocation: 20%.
Investment 4 allocation: 0%.
TIPS allocation: 40%.
Withdrawal Rate: 5.1%.

CONDITION G:

Investment 1 allocation: 40%.
Investment 2 allocation: 0%.
Investment 3 allocation: 20%.
Investment 4 allocation: 0%.
TIPS 1 allocation: 40%.
Withdrawal Rate: 5.175%.

CONDITION H:

Investment 1 allocation: 20%.
Investment 2 allocation: 20%.
Investment 3 allocation: 20%.
Investment 4 allocation: 20%.
TIPS allocation: 20%.
Withdrawal Rate: 4.970%.

Percentage Increase:
5.175/4.970 = 1.0412
Optimization produced a 4.12% increase in withdrawals.

Conclusion

Optimization offered an upside potential of 4.12%. It requires reduced diversification.

Diversification reduces risk (not defined as volatility alone). Reducing risk is more important than a 4.12% increase in withdrawals.

Have fun.

John Walter Russell
April 17, 2007