I’ve posted Entry #433 to my weekly Valuation-informed Indexing column at the Value Walk site. It’s called Finding a Middle Ground Between Buy-and-Hold and Valuation-Informed Indexing.
Juicy Excerpt: Say that an investor was thinking of retiring at a time when valuations were as high as they were in 2000 and the safe withdrawal rate was only 1.6 percent. Is there a way to permit a withdrawal closer to the 4 percent number favored by Buy-and-Holders without putting the retirement at excessive risk? There is.
The 1.6 number assumes an 80 percent stock allocation. Move the stock allocation down to 50 percent and put the remaining 50 percent in Treasury Inflation-Protected Securities (TIPS) paying 3 percent real (it was possible to obtain TIPS paying 4 percent in 2000, when the P/E10 level was 44) and you move the safe withdrawal rate to 3.4 percent. Accept a withdrawal rate that has only an 80 percent chance of working out for 30 years rather than a 95 percent chance and the number moves up again to 3.7 percent. That’s not quite 4 percent, but it’s not too terribly far off. It’s a compromise that might make neither “side” ecstatic but that both sides might be able to live with.
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