Answers To Advisor Questions About Creating Reitrement Income Portfolios

Saturday, November 21, 2015 21:15
After presenting the performance statistics of various retirement portfolio designs over recent and long-term time frames, Dr. Craig Israelsen ran out of time to answer questions. So he answesr attendees questions here. 
Israelsen, an MPT expert, who provides model portfolios advisors can implement with clients for just 23 basis points using ETFs and index funds, recently began presenting to A4A members monthly instead of quarterly, answered questions from attendees at this session, which received an average 4.7-star rating.  To hear the entire session, log in or join A4A

What is the 100% stock portfolio over 1926-2014 with your survival statistics
Assuming a 4% withdraw rate, a 100% large cap US stock portfolio had a success rate of 94.5% vs 98.2% for the equally weighted 4-asset portfolio (25% large cap, 25% small cap, 25% bonds, 25% cash).  At a 5% withdraw rate, the all-stock model and the 4-asset portfolio both had 89.1% success rates.  (Success is defined as the portfolio lasting at least 30 years).
Why does Mr. Israelsen not utilize mid-cap stocks?
Mid cap stock is used in the 7Twelve model, but not in the portfolios that are analyzed back to 1970 or 1926 inasmuch as mid cap stock performance data is not available until 1982.
Is there some reason per his research over the years?
Not sure I understand the wording of this question.  If the question pertains to the time periods that I have analyzed (e.g. 1970-2014 and 1926-2014) it is based upon data availability for the asset classes being studied.
For the foreign stocks are they all large-caps?
Yes, the developed markets as well as emerging markets utilize funds that focus primarily on large cap stocks.
If so, why not mid and small as well?
Funds that focus on large cap stocks (both in developed and emerging markets) tend to have longer performance histories.  Plus, emerging markets are risky enough without dipping down in the small cap space.
I see the U.S. stocks include mid.  What about the foreign - developed and EM?  All large or all cap?
Answered above.
Is the real estate solely REITs?  Or are REOCs also utilized?
Correct, REIT based.
Is rebalancing done just 1 time per year?
Rebalancing at the end of the year generally produces better results than rebalancing monthly.  Quarterly rebalancing produces results very similar to annual rebalancing.
What are the chances of running out of money in the 50-60 & 60-70 age band portfolios using the $250,000, 5% withdrawals scenario?
Tough to say because I only have performance data on the 7Twelve portfolio back to 1998 (no TIPS data prior to that).  But, it’s possible to interpolate some results from the results in the table below (which only includes 4 asset classes).
The 7Twelve 50-60 model has about 47% in fixed income (of which more than half is cash) and 53% in equities.  This is close to a 60% stock/40% bond portfolio—so you can use the results below for a 60/40 portfolio.
The 7Twelve 60-70 model has 73% in fixed income and 27% in equities.  The closest approximation would be the 40% stock/60% bond portfolio below.
89-Year Period
Withdraw Rate
100% Cash Portfolio
100% Bond Portfolio
“Age-in-Bonds” Portfolio
Balance in Large US stock
40% Stock/60% Bonds
60% Stock/40% Bonds
50/50 4-Asset Portfolio
25% Large Stock, 25% Small Stock,
25% Bonds, 25% Cash
65/35 4-Asset Portfolio
40% Large Stock, 25% Small Stock,
25% Bonds, 10% Cash
Sorry, didn't know you would cover it... But why would anyone pick the more conservative models when they have a better chance of running out of money?
If a client had a very large retirement account balance that only needs to produce a 2-3% return to meet their needs there is no reason to choose a portfolio that exposes them to higher levels of volatility and loss.  They would be better served in a more conservative model.
During the 15 year periods, what is the assumption for rebalancing?
Once per year at the end of the year.
In your analysis, are you withdrawing equally from all asset classes?
Have you modeled the 7/12 using forward looking returns - using today's bond yields and the more muted equity asset class expectations that many of us are expecting?
Yes, I’m currently working a project with another professor where we are simulating performance in the future using a technique similar to Monte Carlo analysis.  The challenge, of course, in retirement portfolios is not so much the level of return but rather the sequence of returns.
Is this withdrawal presentation included in the full Education suite?
Yes.  More information about the 7Twelve Education suite is available at

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