With P/E10 Close to 20

Today, P/E10 is below 23. Stock prices have fallen sharply. What should we expect when P/E10 falls to 20?

Previous Findings

My previous investigations at P/E10=26 (Bear Market) showed that you can almost, but not quite, withdraw 5.5% of your original balance (plus inflation) using Valuation Informed Indexing and corporate bonds and preferred stock.

Traditional rebalancing almost always failed.

Scenario Surfer Runs

I looked at a traditional liquidation approach, where withdrawals increased to match inflation.

I invested entirely in stocks and TIPS. I started with a $100000 balance. P/E10=20 Bear Market initially. I withdrew $6000 (plus inflation) each year. I set the TIPS interest rate to 3.0%. Here are the Year 30 balances. I have included fixed allocation results for comparison.

Run 1. bankrupt in year 30.
20% rebalanced: bankrupt in year 23.
50% rebalanced: bankrupt in year 21.
80% rebalanced: bankrupt in year 19.

Run 2. bankrupt in year 19.
20% rebalanced: bankrupt in year 22.
50% rebalanced: bankrupt in year 19.
80% rebalanced: bankrupt in year 17.

I invested entirely in stocks and TIPS. I started with a $100000 balance. P/E10=20 Bear Market initially. I withdrew $5500 (plus inflation) each year. I set the TIPS interest rate to 3.0%. Here are the Year 30 balances. I have included fixed allocation results for comparison.

Run 1. 188,199.
20% rebalanced: bankrupt in year 28.
50% rebalanced: bankrupt in year 28.
80% rebalanced: bankrupt in year 23.

Run 2. 78,175.
20% rebalanced: bankrupt in year 29.
50% rebalanced: 15,681.
80% rebalanced: 25,545.

Run 3. 150,234.
20% rebalanced: bankrupt in year 27.
50% rebalanced: bankrupt in year 28.
80% rebalanced: bankrupt in year 28.

Run 4. 31,155.
20% rebalanced: bankrupt in year 26.
50% rebalanced: bankrupt in year 23.
80% rebalanced: bankrupt in year 19.

Run 5. 101,420.
20% rebalanced: bankrupt in year 26.
50% rebalanced: bankrupt in year 24.
80% rebalanced: bankrupt in year 21.

Conclusions

When P/E10 falls to 20, you will be able to withdraw 5.5% of your original balance (plus inflation) safely, but not 6.0%.

Maintaining a fixed allocation (rebalancing) fails almost all of the time.

Have fun.

John Walter Russell
July 5, 2008