WATS Portfolio Stressor

Portfolio Stressor

Portfolio Stressor helps determine the soundness of a withdrawal or spending strategy by testing it against history. If you want to find historically optimal portfolios, see Black Box.

Using Portfolio Stressor, you specify the parameters of the strategy, such as asset allocation, funding requirements, horizon and ending value goal. You also specify the historical success rate. Portfolio Stressor calculates the maximum sustainable withdrawal rate for your strategy, using the WATS method of real-world simulations.

Different withdrawal schedules can be tested. Withdrawals can be the same amount each year, varied as a result of inflation (which maintains buying power) or varied by some fixed percentage. You can even base the withdrawal amount on the market value of the account, which assures you won't run out of money, but might lead to diminished buying power.

Different ending values can also be tested. You can set a goal of not running out of money (Don't Go Broke), or you can set a goal of maintaining the original value of the account, with or without an adjustment for inflation.

Portfolio Stressor accepts the following inputs:

	asset allocation
	beginning and ending year for data
	horizons, which are number of years withdrawals will be taken from the portfolio
	success rates to be achieved, where 100% means all historical observations must be successful
	timing of withdrawals
	schedule of withdrawals
	ending value goal

A sample input window is shown below:

When the above test was run it produced the following output file:

Some of the results can be summarized as follows:

1) We are looking for the maximum initial withdrawal rate such that we can maintain our purchasing power for various horizons (10, 20 and 30 years) while at the same time not run out of money before the horizon is over.

2) First year withdrawal amounts are shown in the table at the bottom of the report. Subsequent year withdrawals are equal to prior year withdrawals adjusted up/down by the prior year inflation/deflation rate.

3) Sustainable rates drop as horizons lengthen and as success rates increase. In the 30-year horizon the given portfolio was able to sustain a 3.78% initial withdrawal in 100% of the observations (that is, success in all 46 time frames, 1926-55, 1927-56, ..., 1971-2000). At the 75% success level the same portfolio was able to sustain a 10.36% initial withdrawal in the 10-year horizon.

Portfolio Stressor is included with WATS.

This sample study uses Ibbotson data from 1926 to 2000.

Last updated on 02/12/2004