Using Portfolio Visualizer's Monte Carlo Stimulation feature, I back tested some of the funds I hold in my portfolio. As defind by PV,
the Perpetual withdrawal rate is the percentage of portfolio balance that can be withdrawn at the end of each year while retaining the inflation adjusted portfolio balance.@MJG's link here -
https://portfoliovisualizer.com/monte-carlo-simulation#analysisResultsAt the website, I switch Portfolio Type to "ticker". I entered the tickers one at a time and made the portfolio weight 100%. This provide me with stand alone data for each fund that I hold. I may later combine funds and weight them to see if the combined funds provide better overall results.
As I enter the phase of life where I will be spending some of these assets (using the 4% rule), I wanted to see how these funds fared as stand alone (asset concentration) and in combination with one another (asset allocation). Stand alone funds that provided the highest perpetual withdrawal rate at the 10th percentile (worst market conditions) were healthcare funds - VGHCX, PRHSX, FSMEX. This sector has historically had great risk adjusted returns. The big question is will they continue to be great funds to own into the future. I think so. Others that provided good withdrawal rates were - PRMTX (Communication & Media Tech Sector) and FSRPX (Retail Sector). Asset allocation funds that I own that did well were PRWCX (70 stocks/30 bonds) and VWINX (40/60). In fact, VWINX had a higher perpetual withdrawal rate than its sister fund VWELX when looking at the 10th percentile (worst market conditions).
Owning funds that have historically provide the best perpetual withdrawal rate in the worst market conditions (10th percentile) seems like a worthy review. Edited: adding criteria like "worst years first" makes your results even more sobering. Let me know your thoughts and how your funds fared using this criteria.
Comments
These were the standouts.
GLFOX hits 7.03% at the 10th percentile.
DODGX at 5.36. Which was better than VDIGX 2.51 or VEIRX 2.65. Shoot. DODIX is at 2.82
NBGNX at 5.26%
FDFAX at 5.48
FBIOX at 4.15. By this test perhaps I should have held onto VGHCX instead of selling it, and splitting it between FBIOX and FSMEX. But I wanted to get away from the providers in their portfolio.
PRBLX is at 5.26%. So I'll keep that on my watch list.
Thanks for the link Bee. I'm not sure what I learned though. My plan is to spend down the IRA completely anyway. I hope to leave the taxable to the kids.
The Monte Carlo simulation engine of PV does not appear to allow a user to pick the starting date for the simulated runs. When one specifies a range of dates (which one does by setting "Use Full History" to "No"), one is specifying the data set (annual returns) from which the simulator randomly selects returns. It doesn't mean that the simulated runs start with the 2007 performance.
By selecting 2007 to 2019, you're telling the simulator to use one of 13 annual returns for each year in each run. Which means, among other things, that a run of 20 years must duplicate the returns from some years, since it needs 20 1 year returns and it's got only 13 years to choose from.
See "Historical Returns" in the "Methodology" section of PV's FAQs.
The simulator does have an option where you can tell it to start with the worst year (or worst two, or worst three, or ...). So if a simulated run of 20 years has returns r1, r2, ..., r20, and r5 is the worst, the simulator reorders the returns as r5, r1, r2, r3, r4, r6, ....
Better, but not perfect, because the worst run in your data set may not be in the simulated run. Still, this is much better than nothing.
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Numbers:
If you use this option with QQQ over 30 years with an initial withdrawal amount equal to 4% of the portfolio (subsequently inflation adjusted), then the simulations say that about 5% of the time your portfolio doesn't survive 30 years.
2007 was not the worst time to start retirement. The S&P 500 returned 3.53% that year, and QQQ returned 18.7%. See graph. If one is looking for a poorly performing data set, one would be better off excluding 2007 and starting with 2008.
Running the model with data from 2008 through 2019, 5% of the time the portfolio doesn't survive. Add in the requirement that the first year in any simulated run is the worst, and 6% or so of runs don't survive. Not a big difference.
For kicks, I ran QQQ, 4% starting withdrawal (inflation adjusted) for the lost decade (2000-2009). Less than 1 in 5 survive for 20 years, barely 5% survive 30. Expand the data set to the past 20 years (2000-2019), and about 7 in 10 survive 20 years; a bit over half survive 30. That doesn't include starting each run with the worst year which would make things worse.
Not comforting figures. Forget about getting the original investment back (perpetual withdrawal rate). According to the model, assuming returns over the next 20 years are like the past 20, there's a good chance that the money won't even last at all.
OTOH, with PRWCX, based on returns over the past 20 years, starting with a 4% initial withdrawal amount (inflation adjusted), and requiring the worst year to come first, one may have a 98% chance of surviving 30 years.
Can’t help but wonder if it’s similarity possible to calculate the % chance that PRWCX will produce the same (or better) rate of return / drawdown assurance over those next 30 years as for the past 20? That aside, I would never bet against Giroux - though he’s already been at the helm 14 years and will be a bit grey-haired in 30 more.
Fans of PRWCX might be interested to know that even in the current dismal market it’s been consistently besting my stalwart benchmark fund, TRRIX. It is currently off only about 5% YTD compared to TRRIX’s 6% loss. That’s pretty amazing considering that longer term PRWCX is the more aggressive fund and usually outperforms TRRIX by a long shot. I suspect that speaks, in part, to the diminishing value / appeal of fixed-income investments.
My only suggestion would be that in the overall picture I think it more prudent to look at what a more diversified portfolio (focusing more on underlying assets) might generate long term than to focus on one or a handful of funds.
As I mentioned, VWINX historically seemed offered a better perpetual rate than sister fund VWELX.
I would like to hear from others who have back tested their favorite funds. Obviously, all of this is historical data and needs to be naively appreciated for that.
Stay Safe, Derf
https://mutualfundobserver.com/discuss/discussion/56127/low-risk-vanguard-retirement-portfolio#latest
VWINX(38/62) vs VWELX(65/35) no contest, over long term VWELX performance is about 10-15% better but SD(volatility) is about 50% higher and why VWINX is a better risk-adjust retuned fund.
PRWCX is one of the best allocation funds. It ranks 1 for performance for 5-10-15 years. PRWCX performance is about 1.5% better annually than VWELX. PRWCX SD is a bit higher but it still wins. PRWCX is so good it even beat SP500 for 1-3-5-15 years(10 is close) for performance and definitely for SD.
VWELX+VWINX are simpler with mainly 2 categories, US LC + higher-rated corp bonds. PRWCX is a flexible fund where the mangers made great calls.
QQQ (all stocks) crush all the above for performance. For 3 years it's more than double of SPY+PRWCX and almost double for 5 years. QQQ also leads several % for 10-15. High tech rule the world.