Asset Allocation for Retirement

Comments posted to “Increasing Retirement Withdrawal Rates Through Asset Allocation,” by Michael Kitces and Wade Pfau, in the April 2014 AAII Journal.

I am curious what asset class was used for the equity allocation in this analysis. The article does mention U.S. historical data. What would be the effects of having a broader collection of equities, including international and emerging markets, and other asset classes such as REITs?
— Pete K. from Missouri

Wade Pfau responds:
This article uses historical data for large-capitalization U.S. stocks (S&P 500) from Robert Shiller’s website. Generally, greater diversification should be expected to provide a positive influence through better risk and return trade-offs. It’s hard to quantify precisely what the improvement might be without knowing your assumptions about the various other asset classes, but I developed a framework for how to go about analyzing this in a January 2012 article from the Journal of Financial Planning called “Capital Market Expectations, Asset Allocation, and Safe Withdrawal Rates.” You can find a working paper version of this article on the SSRN website at http://ssrn.com/abstract=2544656.

Earnings Probation in Shadow Stock Portfolio

Comment posted to “Model Shadow Stock Portfolio: Sell Rules Dictate a Change,” by James B. Cloonan, in the April 2014 AAII Journal.

The table listing current holdings in the Model Shadow Stock Portfolio used to identify those companies on earnings probation. If I understand the sales rules correctly, there are at least three companies that should be on earnings probation now. Hardinge (HDNG), International Shipholding (ISH) and VOXX International (VOXX) all reported negative earnings for the past year, according to their most recent quarterly reports. Why is that fact not noted in the “Notes” column for those holdings?
— Dave Kretzmann from California

James Cloonan responds:
We use the adjusted earnings for sell and probation rules. We use official reported earnings for the initial decision because that is what is in our Stock Investor Pro database and because it is more conservative.

Withdrawal Strategies for Retirement

Comments posted to “Rebalancing Update: Retirement Adjustments Necessary,” by Charles Rotblut, CFA, in the April 2014 AAII Journal.

Very interesting and helpful article. Does the withdrawal scenarios assume withdrawals are made on an equal basis across all equity classes?

In my personal portfolio, I have established three separate objectives: a short-term portfolio, a mid-term portfolio, and a long-term portfolio. Each has different growth objectives: short-term for withdrawals in the next three years, mid-term for withdrawals three to five years from now, and long-term for withdrawals more than five years away. I anticipate rebalancing within each as I drawdown the short-term portfolio. My question: Does this strategy seem to be too conservative?
—Dennis Spurgeon from Ohio

Charles Rotblut responds:
The withdrawals in my scenarios are made evenly from all funds. The calculation is simply the withdrawal amount divided by the number of funds used. Four funds were used between 1988 and 1998, and five funds have been used since 1999. The formula would need to be adjusted if additional or fewer funds are used.

We cannot give personalized advice regarding investment questions. What I can tell you is that there is nothing inherently wrong with a bucket strategy if it allows you to stick to your long-term strategy.