sustainable withdrawals , and it ’ s recommended in books such as Living Off Your Money by Michael McClung . However , as I did in my 2016 article , let ’ s ask , “ What if we depart from conventional wisdom ? Could other , more extreme asset allocations improve withdrawal rates ?”
FIGURE 1
-10 Jan 1926
We ’ re all familiar with the concept that asset class performance occurs in waves , and that the best-performing asset classes vary considerably from year to year . Figure 1 presents the annualized geometric returns of six of my asset classes ( excluding Treasury bills ) for the first 10 years of
10-Year Annualized For 6 Asset Classes Jan . 1 , 1926 thru Jan . 1 , 2013
■ U . S . Large Cap ■ U . S . Small Cap ■ U . S . Mid Cap ■ U . S . Micro Cap ■ Int ’ l ■ Interm-Term U . S . Gov ’ t Bond
10-Year Annualized Geometrical Return (%)
35 30 25 20 15 10 5 0 -5
Jan 1936
Jan 1946
Jan 1956
Jan 1966
Retirement Year
Jan 1976
Jan 1986
Jan 1996
Jan 2006
Jan 2013
FIGURE 2
Optimal Asset Allocation For Individual SAFEMAX Jan . 1 , 1926 thru Oct . 1 , 1959
■ U . S . Micro Cap ■ Interm-Term U . S . Gov ’ t ■ Int ’ l ■ U . S . Mid Cap ■ U . S . Small Cap ■ U . S . Large Cap
■ U . S . Treasury Bills
Portfolio Allocation (%)
100 80 60 40 20
0 Jan 1926
Jan 1930
Jan 1935
Jan 1940
Jan 1945
Retirement Year
Jan 1950
Jan 1955
Oct 1959
FIGURE 3
Optimal Asset Allocation For Individual SAFEMAX Jan . 1 , 1960 thru Jan . 1 , 1993
■ U . S . Micro Cap ■ Interm-Term U . S . Gov ’ t ■ Int ’ l ■ U . S . Mid Cap ■ U . S . Small Cap ■ U . S . Large Cap
■ U . S . Treasury Bills
Portfolio Allocation (%)
100 80 60 40 20 0 Jan 1960
Jan 1965
Jan 1970
Jan 1975
Retirement Year
Jan 1980
Jan 1985
Jan 1990
Jan 1993 retirement of 349 individuals , retiring on the first day of each quarter from January 1 , 1926 , through January 1 , 2013 . I chose the first 10 years for this chart , as that period is the most important for determining the eventual “ safe ” withdrawal rate .
The chart demonstrates clearly how asset returns fluctuate over time , both in absolute terms , and relative to one another . Historically , each asset class has spent some time at the “ top of the heap ” ( as the best-returning class ) and some time at the “ bottom of the heap ” ( as the worst-returning ).
To understand the chart better , let ’ s follow one of the asset classes — international stocks ( on the green line )— across history , beginning at the far left . In the 1920s and early 1930s , international stocks were consistently one of the best-performing classes . Then , beginning in the middle 1930s and extending through the 1940s , the class ’ s performance began to lag against all other assets , even bonds . It consistently generated negative 10-year returns . This was presumably connected with World War II .
Over the next several decades , the international class saw varying levels of success where it was either lagging or it returned to a leadership position . But since the late 1980s , it has remained at or near the bottom of all five stock classes through to the right end of the chart , a 30-year period of underperformance .
Just about every stock asset class is familiar with this roller-coaster ride . Bonds behave somewhat differently ( as you can see from the intermediate-term bond line in the chart ); they are less volatile and more likely to produce consistent ( if lower ) returns . However , they can be affected by long-term ( secular ) bull and bear markets stretching over decades .
What if we went beyond the diversified allocation I mentioned earlier and selected an allocation for each retiree that would maximize their safe withdrawal rates , allowing the six asset classes besides bonds to assume any allocation ( while we keep a constant 5 % Treasury allocation for a ready source of cash )?
The outcome of this inquiry is de-
16 | FINANCIAL ADVISOR MAGAZINE | MAY 2024 WWW . FA-MAG . COM