Struggling during Maintenance

Between accumulation and withdrawals, there is maintenance. There are no deposits. There are no withdrawals. Today’s marketplace is tough. We learn this from the Scenario Surfer.

Conditions

I started with $100000 and added nothing thereafter. I examined time periods of 10 years. I examined what happens with a P/E10=26 Bear Market. The short time period made things difficult.

I tried several conditions. This is what I ended up doing.

I invested entirely in stocks when P/E10 fell below 14.0 and 20% into stocks when P/E10 was 14.0 and higher. I latched on to a gain of 50% when it occurred. That is, I switched entirely into TIPS.

P/E10=13 or 14 is a typical condition. Today’s P/E10 is twice as high (above 28).

The Data

I looked at a P/E10=26 bear market. I took 5 runs.

Balances are only at Years 5 and 10. I include fixed stock-TIPS allocations for purposes of comparison.

Year 5. P/E10=26 Bear Market

Run: 1
Varying allocations: 90.7K
20% stocks: 99.2K
50% stocks: 83.9K
80% stocks: 70.0K

Run: 2
Varying allocations: 105.5K
20% stocks: 105.5K
50% stocks: 95.3K
80% stocks: 82.9K

Run: 3
Varying allocations: 109.3K
20% stocks: 109.3K
50% stocks: 107.1K
80% stocks: 104.2K

Run: 4
Varying allocations: 97.7K
20% stocks: 97.7K
50% stocks: 80.0K
80% stocks: 64.1K

Run: 5
Varying allocations: 109.5K
20% stocks: 109.5K
50% stocks: 106.8K
80% stocks: 102.3K

Year 10. P/E10=26 Bear Market

Run: 1
Varying allocations: 138.1K
20% stocks: 118.8K
50% stocks: 111.5K
80% stocks: 101.6K

Run: 2
Varying allocations: 126.5K
20% stocks: 116.9K
50% stocks: 104.1K
80% stocks: 86.6K

Run: 3
Varying allocations: 157.4K (Threshold Exceeded)
20% stocks: 125.2K
50% stocks: 126.8K
80% stocks: 123.8K

Run: 4
Varying allocations: 131.2K
20% stocks: 112.7K
50% stocks: 98.2K
80% stocks: 83.2K

Run: 5
Varying allocations: 112.7K
20% stocks: 116.4K
50% stocks: 107.0K
80% stocks: 96.4K

The balance exceeded $150K only once (run 3).

Powerful Bear Market

Without any deposits or withdrawals and with the short time frame, the bear showed its ugly head. Usually, the best fixed allocation would have been 100% TIPS (and 0% stocks). High stock allocations often lost money by the end of a decade.

Varying Allocations

Varying allocations almost always helped. Varying allocations were best at Year 10 except for run 5, where a fixed allocation of 20% stocks was best.

Conclusions

Today’s market is dangerous. Expect very little progress within a decade.

We can expect conditions to be much better ten years from now. The Scenario Surfer’s Year 10 P/E10 values were 12.6, 9.9, 16.0, 9.9 and 12.0, which are very attractive.

Have fun.

John Walter Russell
October 26, 2007