Let's start with a follow up to yesterday's post. We looked at taking a huge annual withdrawal from a bucket of money intended to last for just ten years, all the better if anything was leftover after ten years. It worked out very well but now let's consider the sustainability of the concept if the equity market cuts in half at some point along the way.
Only 37% of what we looked at yesterday was exposed to equities and even then the beta of the equity sleeve was only 0.71. LDDR shouldn't be impacted by equities getting cut in half but obviously that position will definitely deplete as it is intended to do so toward the end of this experiment the portfolio will be heavier in equity or equity-like exposure.
It took a little doing but Copilot came up with the following if the S&P 500 cuts in half at some point in the ten period.
The way to read that is if the S&P 500 cuts in half in year three then the expected finishing balance could be $270,000-$340,000 versus $350,000-$420,000 that just assumed lower growth than we've had recently with no equity crash.
Again, I would cut all of those numbers in half to be as conservative as we can with what is a pretty aggressive concept. Following that logic, our worst case outcome is that $450,000 drops to $115,000 (year one crash low end dividend by 2) leftover for a bucket of money we were willing to let go to zero in order to meet an aggressive income need as a bridge to IRA withdrawals. The bigger takeaway for me is about the reasonable probability of engineering a decent, not even great, outcome by thinking outside the lines a little bit.
Taking a completely different approach on the same scenario, I asked about the survivability of portfolio that was split evenly between LDDR, TJUL which is a 100% downside buffer ETF and SFLR which is a defined outcome product that starts to protect once the S&P 500 is down 20% (it rides the first 20% down with the index).
That combo is very crash resilient, moreso than the original iteration but it winds up with far less, about $80,000-$100,000 less depending on the sequence of market events.
Quick pivot to an email solicitation I got for the Evanston Multi-Alpha Fund. It is a multi-manager interval fund that benchmarks to the HFRI Fund of Funds Composite Index. It has a decently long track record with this included for its lifetime performance.
The next images are the general exposures and then more narrowly defined.
I don't think the narrower exposures could be completely mimicked with retail accessible products but the four strategies certainly can be. Going all the way back to July 2014 when there data starts limits the choices dramatically but it's still doable.
You can tell from the percentages, what's what. GPAIX isn't so great but I did not want use more than one fund from AQR. Generally speaking, I try to avoid using more than one fund from any provider in the context of actively managed or alternative. Having a tech index ETF and a health care index ETF from the same provider is not what I am talking about.
That mix compares favorably with Evanston.
In 2022, the Evanston fund was down 8.6% while the mimicking portfolio was up 7.39%. There are now many more funds available to choose from to try to recreate what Evanston is doing. We mimicked a static allocation though which may might be selling Evanston's track record short.
The bigger point is one we've been making for years. It is becoming easier to build very sophisticated portfolios with retail accessible funds that compete with less accessible fund structures that are billed as being superior.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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