iM’s Improved Floor-Leverage Rule, a low-risk investment strategy for retirement with a high 5.7% withdrawal rate, uses market timing to avoid large losses of the Surplus Portfolio, and additionally uses a strategy to guard the Surplus Portfolio against black swan events, e.g. the 1987 stock market crash, by buying put options.
Tagged with: Retirement
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The original Floor-Leverage Rule for Retirement, as proposed by Scott and Watson, calls for two parallel investments. The first one is to establish a low risk Spending Floor Portfolio with 85% of one’s funds. The second, the Surplus Portfolio, is an investment of the remaining 15% in equities with 3× leverage. If the Surplus Portfolio exceeds 15% of the total portfolio value at annual rebalancing when withdrawals are made, it is adjusted to 15% of the total portfolio value with the excess being transferred to the Spending Floor Portfolio. The problem is that 3× leveraged stock portfolios can lose most of their value. For example, they lost 94% from 2000 to 2008, which would have wiped out almost 15% of retirement capital if one had followed the Original Floor-Leverage Rule. A better approach, and one that could avoid such losses, is to time one’s exposure to equities as put forward by our Improved Floor-Leverage Rule, which is a low-risk spending and investment strategy for retirees.
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