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Mutual Funds with the Highest Perpetual Withdraw Rate

beebee
edited May 2020 in Fund Discussions
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 As defind by PV, the Perpetual withdrawal rate is the percentage of portfolio balance that can be withdrawn at the end of each year while retaining the inflation adjusted portfolio balance.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#analysisResults

At 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

  • beebee
    edited May 2020
    Here is an article on Perpetual Withdrawal Rates and why it is a better data point than "SWR" (Safe Withdrawal Rate):
    So what is a perpetual withdrawal rate, anyway?

    By definition, safe withdrawal rates plan for failure. They are explicitly defined to cause you to just barely not run out of money under certain historic conditions. In contrast, perpetual withdrawal rates follow the first rule of investing — don’t lose money! These are the withdrawal rates that preserved the original inflation-adjusted principal even at the end of the single worst investing timeframe of a given duration. By weathering the storm and leaving you with the same amount of money you started with, you’re prepared not to quietly pass away with a few dollars remaining but to start all over again. Even if you’re unlucky and the worst-case scenario repeats, your portfolio is still protected. Perpetual withdrawal rates are designed to last forever, which is why they are popular among college endowments and other institutional investors.
    https://portfoliocharts.com/2016/12/09/perpetual-withdrawal-rates-are-the-runway-to-a-long-retirement/
  • what's interesting is to not use longest time frame but to set the start date to 2007, so you're going into retirement at a very bad time. i did it w PRWCX. started with 1 mil and at the end of 2019 you had 780k with a max drawdown of 55%, at the 10th percentile. scary. but at least you still had money. oh -- did retirement of 20 years. thanks for posting this!
  • linter said:

    what's interesting is to not use longest time frame but to set the start date to 2007, so you're going into retirement at a very bad time. i did it w PRWCX. started with 1 mil and at the end of 2019 you had 780k with a max drawdown of 55%, at the 10th percentile. scary. but at least you still had money. oh -- did retirement of 20 years. thanks for posting this!

    Great point...thanks. Wonder if starting in the year 2000 (tech bubble) had more dire results. The perpetual Withdrawal Rate would surely be lower (for both starting years) and maybe a better data points to use for this 2020 start year scenario.
  • Thanks for posting this topic. Will work on PV on funds invested.
  • I don't know enough to fool with any of the default settings.

    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.
  • Try QQQ.
  • qqq, starting in 2007. that's some drawdown!
    image
  • linter said:

    what's interesting is to not use longest time frame but to set the start date to 2007, so you're going into retirement at a very bad time. i did it w PRWCX. started with 1 mil and at the end of 2019 you had 780k with a max drawdown of 55%, at the 10th percentile. scary. but at least you still had money. oh -- did retirement of 20 years. thanks for posting this!

    I could not figure out where to set a custom start date. I'm pretty sure I clicked all the options. What am I missing?
  • WABAC said:

    linter said:

    what's interesting is to not use longest time frame but to set the start date to 2007, so you're going into retirement at a very bad time. i did it w PRWCX. started with 1 mil and at the end of 2019 you had 780k with a max drawdown of 55%, at the 10th percentile. scary. but at least you still had money. oh -- did retirement of 20 years. thanks for posting this!

    I could not figure out where to set a custom start date. I'm pretty sure I clicked all the options. What am I missing?
    There is a tendency to use this tool as black box oracle. I'm not faulting the use of a simulator to run models per se. Rather I'm suggesting that people may not fully appreciate what is being modeled.

    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.

    ---------

    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.

  • Thanks for the education msf. Much appreciated.



  • msf: yes, thanks so much. super enlightening!
  • edited May 2020
    msf said:

    ... 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.

    Superb number-crunching from @msf. Suspect he carries a slide-rule day and night.:)

    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.
  • beebee
    edited May 2020
    @hank said,
    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.
    When I play with the PV website I am impressed with most Healthcare funds. Also Utilities sector funds have historically have offered higher perpetual rates. Both VGHCX (VHT) and VUIAX (VPU) look like great funds to own for retirement income.

    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.
  • @hank &@bee: Thanks to both of you for food for thought !
    Stay Safe, Derf
  • edited May 2020
    From memory because I have done it so many times.
    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.
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