A Simple Dynamic Strategy for Portfolios Taking Withdrawals: The Case for Using a 12-Month Simple Moving Average

Garrison, Michael H.; Sera, Carlos H.; Cribbs, Jeffrey G.
February 2010
Journal of Financial Planning;Feb2010, Vol. 23 Issue 2, p51
Academic Journal
Case Study
• This paper examines the long-term effects of using a dynamic investment strategy based on a 12-month simple moving average for portfolios in both the accumulation and withdrawal phases. It compares the results of this dynamic strategy to standard static portfolio allocations based on Modern Portfolio Theory to determine whether such a strategy is optimal. • We created six portfolios using historical data (1926-2008) from two asset classes: U.S. large-cap equities and U.S. intermediate-term government bonds. The six portfolios were examined for 3, 4, 5, 6, and 7 percent withdrawal rates over 30- and 40-year annual rolling periods from 1927-2008. • For the first year we took the beginning portfolio value and subtracted the first year withdrawal, then added its return for the year For each subsequent year we adjusted the withdrawal for inflation. All withdrawals occurred at the beginning of the year • During the withdrawal phase, the dynamic portfolio produced the highest initial safe withdrawal rate, greatest probability of success across all withdrawal rates, and consistently highest terminal values compared to the static portfolios. • The differences in terminal values were considerable. • For long-term investing periods (more than 0 years), the dynamic portfolio earned comparable rates of return to a 100 percent equity portfolio with less risk, as measured by maximum drawdown. As the investing period increased, the dynamic portfolio tended to outperform the 100 percent equity portfolio. • This paper concludes that a dynamic asset allocation using a I 2-month simple moving average is a consistently better strategy over statically allocated portfolios for investors in both the accumulation and withdrawal phases.


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