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Is Your Portfolio Suffering from Withdrawals?

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When ana­lyz­ing the per­for­mance of mon­ey man­agers, the indus­try stan­dard assumes a sin­gle invest­ment is made at the start of a 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.  How much can cash flows impact the finan­cial well-being of an investor?

Tackling the Distribution Challenge

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, 2014.  We explore three invest­ments alter­na­tives, name­ly:

  1. The broad U.S. equi­ty mar­ket, as rep­re­sent­ed by the S&P 500 Index
  2. The aver­age tar­get date fund posi­tioned for the time frame of 2000–2010. Such a port­fo­lio is designed for an investor at or near retire­ment dur­ing the time frame ana­lyzed
  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.

DRS, SP500, Mstar TD 2000-10 - table 1 No Withdrawals - Swan Blog

Source: Zephyr StyleAD­VI­SOR, Swan Glob­al Invest­ments

DRS, SP500, Mstar TD 2000-10 - table 1 No Withdrawals - Swan Blog

In the above case, because all have pos­i­tive aver­age annu­al returns over the 17 years and no with­drawals are 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 $50,000 at the end of every year and grows that by 3% a year to account for infla­tion? What impact would that have on the invest­ment?

DRS, SP500, Mstar TD 2000-10 - table 1 No Withdrawals - Swan Blog

Source: Zephyr StyleAD­VI­SOR, Swan Glob­al Invest­ments

DRS, SP500, Mstar TD 2000-10 - Table 2 Withdrawals - Swan Blog

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


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.

  • 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 dimin­ished if the investor was tak­ing out an addi­tion­al 5% each year to meet liv­ing expens­es.

In oth­er words, with­draw­ing funds in a bear mar­ket just makes the hole deep­er. This is can be thought of as the oppo­site of “the mir­a­cle of com­pound­ing returns.”

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 learn more about Swan’s DRS invest­ment approach and how this approach has fared in the past, please con­tact Swan at 970–382-8901.


About the Author:

Marc Odo, Marc Odo, CFA®, CAIA®, CIPM®, CFP®, Director of Investment Solutions - Swan Global InvestmentsMarc Odo, CFA®, CAIA®, CIPM®, CFP®, Direc­tor of Invest­ment Solu­tions, 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:

S&P 500 — 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.

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. Swan claims com­pli­ance with the Glob­al Invest­ment Per­for­mance Stan­dards (GIPS®). 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  061-SGI-111915

By | 2017-08-24T11:02:17+00:00 November 19th, 2015|Blog|Comments Off on Is Your Portfolio Suffering from Withdrawals?