What I tried to do was look for a similar historical period and see how different stock allocations would perform under those conditions. The cash buffer was a conceptual attempt to mitigate most, but not all impact of market swoons.
In essence, I started with a traditional 60/40 portfolio and swapped some or all of the bonds for more equity and cash, figuring (hoping?) that the cash would add stability allowing for a higher equity allocation.
Intuition says that if one has too many market corrections/bear markets in a span of a few years, preserving one would be better off with cash. I tend to agree with this intuition. However, it turns out that this risk sometimes vanishes if there is a full recovery between the periods of market decline.
Looking at the
1968-
1980 period (assuming withdrawals and reallocations are done on calendar year boundaries), at the end of
1972 (right before the
1973-74 bear market) the allocation methods (including withdrawals) all are in the black. The portfolio values (nominal dollars) range from $
10
1,402 (all stock) to $
102,728 (90/
10 with a cash buffer). A 28% cash buffer (7 years
@4%/year) ended in the middle of the pack with $
10
1,964.
Since all methods ended
1972 above their high water marks, they would rebalance to their "normal" allocations. It would be as if
1969-
1972 hadn't happened, except that some portfolios would have a few hundred dollars more or less than others.
The reason why starting with
1969 instead of
1973 seems to make a difference is that this moves the ten year mark. If one ends after
1978, one ends just before the market has a big run up:
18.52%, 3
1,74%, -4.70%, and 20.42% from
1979 through
1982. It's the arbitrariness of the time periods and not the method that's the problem here.
Finally, a mea culpa. In looking more closely at the two sets of results, I realized that I erred in building the results for 40/60 in
1973-
1982. That method (stocks/bonds, annual rebalancing) came out pretty well. The 30% bond return in
1982 (vs. 20% for stocks) and 8% return in
198
1 (vs. -5% for stocks) surely helped.
Year December 31 Balance
100% stock 90/10 90/10 75/9/16 75/9/16 60/40 55%-40% 40/60
single asset annual rebal cash buffer annual rebal cash buffer annual rebal glide path annual rebal
1972 $96,000.00 $96,000.00 $96,000.00 $96,000.00 $96,000.00 $96,000.00 $96,000.00 $96,000.00
1973 $77,916.04 $79,964.65 $79,964.65 $82,774.63 $82,774.63 $84,941.86 $85,820.08 $88,454.77
1974 $52,849.69 $57,065.02 $56,366.89 $62,757.74 $62,779.42 $66,449.90 $68,565.60 $73,770.73
1975 $67,177.97 $71,171.20 $71,526.14 $75,940.95 $75,586.94 $77,923.98 $78,943.98 $82,707.22
1976 $77,709.51 $81,312.30 $83,093.89 $85,862.08 $86,793.31 $89,157.97 $89,949.56 $93,980.77
1977 $66,440.91 $70,788.22 $71,449.48 $76,681.03 $76,733.21 $81,584.58 $83,607.73 $88,682.57
1978 $64,393.97 $69,072.33 $69,728.56 $75,016.17 $74,903.38 $78,784.24 $80,338.99 $85,247.72
1979 $69,100.59 $74,061.67 $75,423.11 $79,380.19 $80,871.40 $80,108.79 $79,673.90 $84,001.59
1980 $82,907.47 $87,939.43 $91,236.47 $91,378.46 $95,352.49 $86,229.83 $81,409.15 $84,953.48
1981 $70,161.78 $76,604.00 $79,004.86 $82,044.34 $85,902.92 $77,823.31 $74,781.73 $78,754.87
1982 $75,302.27 $82,308.84 $85,951.03 $89,100.42 $94,318.06 $87,801.30 $85,465.37 $90,618.38
