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Is Your Portfolio Suffering from Withdrawals?

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Tackling the Distribution Challenge

When ana­lyz­ing the per­for­mance of mon­ey man­agers, the indus­try stan­dard assumes a sin­gle invest­ment is made at the start of peri­od and that no addi­tion­al deposits or with­drawals are made. Cash flows in or out of an invest­ment are assumed to be out­side of the con­trol of a port­fo­lio man­ag­er, and there­fore shouldn’t be used to judge the effec­tive­ness of a port­fo­lio manager’s invest­ment skills. This method­ol­o­gy is known as time weight­ed returns.

How­ev­er, when ana­lyz­ing the suit­abil­i­ty of an invest­ment for an actu­al indi­vid­ual, how real­is­tic is it to assume that the investor makes no con­tri­bu­tions or with­drawals over a span of five, ten, or twen­ty years?

In the real world, most investors are either in the accu­mu­la­tion or dis­tri­b­u­tion stages, where con­tri­bu­tions or with­drawals are indeed occur­ring.

So the ques­tion becomes, how much can cash flows impact the finan­cial well-being of an investor?

 

Comparing Income Withdrawal Scenarios

In this exam­ple we will con­sid­er an investor with a start­ing port­fo­lio val­ue of $1 mil­lion and invest­ed between Jan­u­ary 1st, 1998 and Decem­ber 31st, 2017.  We explore three invest­ments alter­na­tives, name­ly:

  1. The broad U.S. equi­ty mar­ket, as rep­re­sent­ed by the S&P 500 Index
  2. A bal­anced port­fo­lio, rep­re­sent­ed by a mix of 60% S&P 500 and 40% Bar­clays Aggre­gate U.S. Bond
  3. The Swan Defined Risk Strat­e­gy Select Com­pos­ite.

In the first case, we assume a sin­gle invest­ment with no cash flows: the stan­dard, ster­il­ized time-weight­ed return analy­sis.

Growth of DRS S&P 60.40 - Suffering from Withdrawals - Swan Insights

Source: Zephyr StyleAD­VI­SOR, Swan Glob­al Invest­ments. All data based on his­tor­i­cal per­for­mance of the Swan DRS Select Com­pos­ite, the S&P Total Return Index and a 60% S&P 500/40% Bar­clays Aggre­gate Bond blend. The Bar­clays U.S. Aggre­gate Bond Index and the S&P 500 Index are unman­aged indices, and can­not be invest­ed into direct­ly. Pri­or per­for­mance is not a guar­an­tee of future results.

 

No Withdrawals Withdrawal Table- Suffering from Withdrawals - Swan Insights

Source: Zephyr StyleAD­VI­SOR, Swan Glob­al Invest­ments. The Bar­clays U.S. Aggre­gate Bond Index and the S&P 500 Index are unman­aged indices and can­not be invest­ed into direct­ly. Past per­for­mance is no guar­an­tee of future results. Swan DRS results are from the Select Com­pos­ite, net of fees, as of 3/31/2018. Struc­tures men­tioned may not be avail­able with­in your Broker/Dealer.

In the above case, because all have pos­i­tive aver­age annu­al returns over the 20 years and with no with­drawals tak­en, the end­ing val­ue of the invest­ment is sig­nif­i­cant­ly high­er than the ini­tial invest­ment.

 

Withdrawing Income Changes the Picture

But what if the investor is retired and in the dis­tri­b­u­tion stage? What if the investor takes out $60,000 a year* and grows that by 2% a year to account for infla­tion? What impact would that have on the invest­ment?

Once with­drawals are begun, the end­ing val­ue of the port­fo­lio is sig­nif­i­cant­ly dif­fer­ent for the dif­fer­ent invest­ment strate­gies:

Growth of DRS S&P 60.40 - Suffering from Withdrawals - Swan Insights

Source: Zephyr StyleAD­VI­SOR, Swan Glob­al Invest­ments. Source: Zephyr StyleAD­VI­SOR, Swan Glob­al Invest­ments. All data based on his­tor­i­cal per­for­mance of the Swan DRS Select Com­pos­ite, the S&P Total Return Index and a 60% S&P 500/40% Bar­clays Aggre­gate Bond blend. The Bar­clays U.S. Aggre­gate Bond Index and the S&P 500 Index are unman­aged indices and can­not be invest­ed into direct­ly. Pri­or per­for­mance is not a guar­an­tee of future results. *Cal­cu­la­tions based on month­ly with­drawals of $5,000 per month.

 

With Withdrawals Withdrawal Table- Suffering from Withdrawals - Swan Insights

Source: Zephyr StyleAD­VI­SOR, Swan Glob­al Invest­ments. Source: Zephyr StyleAD­VI­SOR, Swan Glob­al Invest­ments. All data based on his­tor­i­cal per­for­mance of the Swan DRS Select Com­pos­ite, the S&P Total Return Index and a 60% S&P 500/40% Bar­clays Aggre­gate Bond blend. The Bar­clays U.S. Aggre­gate Bond Index and the S&P 500 Index are unman­aged indices and can­not be invest­ed into direct­ly. Pri­or per­for­mance is not a guar­an­tee of future results. *Cal­cu­la­tions based on month­ly with­drawals of $5,000 per month.

 

 

As one can see here, includ­ing with­drawals can have an extreme impact on the val­ue of an invest­ment.

 

Why Withdrawals Have Such an Impact on Value

For the retiree, bear mar­kets are no longer a gold­en buy­ing oppor­tu­ni­ty. An investor in the dis­tri­b­u­tion stage of their life cycle is forced to liq­ui­date hold­ings at a mar­ket low.

So if the mar­ket sells off 45% over the course of three years, like it did in 2000–2002, the prin­ci­pal left to make a recov­ery will be much more dimin­ished after the investor was tak­ing out an addi­tion­al 6% each year to meet liv­ing expens­es.

With­draw­ing funds in a bear mar­ket just makes the hole deep­er, the dark side of com­pound­ing returns.

 

Defined Risk Strategy and Income Withdrawals

One of the rea­sons that the DRS ends with a high­er val­ue than the S&P 500 and the tra­di­tion­al 60/40 port­fo­lio sce­nar­ios is because it active­ly seeks to lim­it the impact of large loss­es, like bear mar­kets.

By design, the DRS was meant to min­i­mize loss­es. One of the core beliefs of Swan Glob­al Invest­ments is that the best way to make mon­ey is to not lose it in the first place. This is espe­cial­ly impor­tant for those investors in the retire­ment stage, draw­ing down their accounts to fund liv­ing expens­es. That is why the DRS always hedges the port­fo­lio against cat­a­stroph­ic mar­ket loss­es: to seek a bet­ter posi­tion for investors to live their lives with­out fear of run­ning out of mon­ey.

About the Author:

Marc Odo, Marc Odo, CFA®, CAIA®, CIPM®, CFP®, Director of Investment Solutions - Swan Global InvestmentsMarc Odo, CFA®, CAIA®, CIPM®, CFP®, Client Port­fo­lio Man­ag­er, is respon­si­ble for help­ing clients and prospects gain a detailed under­stand­ing of Swan’s Defined Risk Strat­e­gy, includ­ing how it fits into an over­all invest­ment strat­e­gy. For­mer­ly, Marc was the Direc­tor of Research for 11 years at Zephyr Asso­ciates.

 

 

 

Impor­tant Dis­clo­sures:

Swan Glob­al Invest­ments, LLC is a SEC reg­is­tered Invest­ment Advi­sor that spe­cial­izes in man­ag­ing mon­ey using the pro­pri­etary Defined Risk Strat­e­gy (“DRS”). SEC reg­is­tra­tion does not denote any spe­cial train­ing or qual­i­fi­ca­tion con­ferred by the SEC. Swan offers and man­ages the DRS for investors includ­ing indi­vid­u­als, insti­tu­tions and oth­er invest­ment advi­sor firms. Any his­tor­i­cal num­bers, awards and recog­ni­tions pre­sent­ed are based on the per­for­mance of a (GIPS®) com­pos­ite, Swan’s DRS Select Com­pos­ite, which includes non-qual­i­fied dis­cre­tionary accounts invest­ed in since incep­tion, July 1997, and are net of fees and expens­es. The Swan Defined Risk Strat­e­gy Select Com­pos­ite demon­strates the per­for­mance of non-qual­i­fied assets man­aged by Swan Glob­al Invest­ments, LLC since incep­tion. It includes dis­cre­tionary indi­vid­ual accounts whose account hold­ers seek the upside poten­tial of own­ing stock, and the desire to elim­i­nate most of the risk asso­ci­at­ed with own­ing stock. The Com­pos­ite relies on LEAPS and oth­er options to man­age this risk. Indi­vid­ual accounts own S&P 500 exchange trad­ed funds and LEAPS asso­ci­at­ed with the exchange trad­ed funds as well as mul­ti­ple oth­er option spreads that rep­re­sent oth­er indices that are wide­ly trad­ed. The Defined Risk Strat­e­gy was designed to pro­tect investors from sub­stan­tial mar­ket declines, pro­vide income in flat or chop­py mar­kets, and to ben­e­fit from mar­ket appre­ci­a­tion. Stock and options are the pri­ma­ry com­po­nents of the strat­e­gy.

Swan claims com­pli­ance with the Glob­al Invest­ment Per­for­mance Stan­dards (GIPS®) and has pre­pared and pre­sent­ed this report in com­pli­ance with GIPS. Swan’s com­pli­ance with GIPS has been inde­pen­dent­ly ver­i­fied for the peri­ods July 1, 1997 through Decem­ber 31, 2017. The Spauld­ing Group con­duct­ed Swan’s ver­i­fi­ca­tion. The three-year annu­al­ized stan­dard devi­a­tion mea­sures the vari­abil­i­ty of the com­pos­ite and the bench­marks over the pre­ced­ing 36-month peri­od. The dis­per­sion of annu­al returns is mea­sured by the stan­dard devi­a­tion of asset-weight­ed port­fo­lio returns rep­re­sent­ed with­in the com­pos­ite for the full year. For those peri­ods with five or few­er port­fo­lios includ­ed for the entire year, dis­per­sion is not pre­sent­ed. A copy of the ver­i­fi­ca­tion report is avail­able upon request. To receive copies of the report, please call (970) 382‑8901 or email operations@swanglobalinvestments.com. Ver­i­fi­ca­tion assess­es whether (1) the firm has com­plied with all the com­pos­ite con­struc­tion require­ments of GIPS on a firm-wide basis, and (2) the firm’s poli­cies and pro­ce­dures are designed to cal­cu­late and present per­for­mance in com­pli­ance with GIPS. Ver­i­fi­ca­tion does not ensure the accu­ra­cy of any spe­cif­ic com­pos­ite pre­sen­ta­tion. All data used here­in; includ­ing the sta­tis­ti­cal infor­ma­tion, ver­i­fi­ca­tion and per­for­mance reports are avail­able upon request.

The S&P 500 Index is a mar­ket cap weight­ed index of 500 wide­ly held stocks often used as a proxy for the over­all U.S. equi­ty mar­ket. Index­es are unman­aged and have no fees or expens­es. An invest­ment can­not be made direct­ly in an index. Swan’s invest­ments may con­sist of secu­ri­ties which vary sig­nif­i­cant­ly from those in the bench­mark index­es list­ed above and per­for­mance cal­cu­la­tion meth­ods may not be entire­ly com­pa­ra­ble. Accord­ing­ly, com­par­ing results shown to those of such index­es may be of lim­it­ed use. The adviser’s depen­dence on its DRS process and judg­ments about the attrac­tive­ness, val­ue and poten­tial appre­ci­a­tion of par­tic­u­lar ETFs and options in which the advis­er invests or writes may prove to be incor­rect and may not pro­duce the desired results. There is no guar­an­tee any invest­ment or the DRS will meet its objec­tives. All invest­ments involve the risk of poten­tial invest­ment loss­es as well as the poten­tial for invest­ment gains. Pri­or per­for­mance is not a guar­an­tee of future results and there can be no assur­ance, and investors should not assume, that future per­for­mance will be com­pa­ra­ble to past per­for­mance. All invest­ment strate­gies have the poten­tial for prof­it or loss. Fur­ther infor­ma­tion is avail­able upon request by con­tact­ing the com­pa­ny direct­ly at 970.382.8901 or vis­it www.swanglobalinvestments.com   232-SGI-060818

By |2018-10-02T13:01:29+00:00November 19th, 2015|Blog|Comments Off on Is Your Portfolio Suffering from Withdrawals?