Actuarial Harvesting, I’m an idiot.

  1. There was a mistake in the Actuarial Harvesting algorithm that was causing it to harvest “too much”. This had the result of keeping the portfolio extremely heavy on bonds. Usually 70–80% bonds. Well, crap. So I fixed that.
  2. I also realised there was a problem with my Monte Carlo simulation. Previously I had used the same code to test different withdrawal strategies. When you do that, the asset allocation stays the same. But when you’re testing harvesting strategies, the asset allocation changes. After all, that’s the whole point of a harvesting strategy. But the Monte Carlo simulation wasn’t changing the asset allocation properly. Well, crap again. So I fixed that as well.

Bootstrapping

For the first test, we’ll use historical bootstrapping. That is, we’ll take actual historical returns but randomly shuffle them up. This allows to create thousands of variations and test them.

Historical Data

The test above took historical data and shuffled up the order. So sometimes 1952 might come after 2003. Let’s try the test again but preserve the actual historical order.

  1. When using the bootstrapped simulation, Japan had similar results to the US and UK. But when we switch to historical ordering, Japan looks quite different from the US and UK.
  2. When looking at the US and the UK they have the same results for bootstrapping versus historical ordering. But Japan looks different from itself: the bootstrapping and historical ordering give us fairly different results.
  1. Prime Harvesting’s average asset allocation is 71/29
  2. OmegaNot’s average asset allocation is 76/24
  3. Weiss’s average asset allocation is 70/30
  • #1 on HREFF-4 for US bootstrapping
  • #1 on HREFF-4 for UK bootstrapping
  • #1 on HREFF-4 for Japan bootstrapping
  • #1 on HREFF-4 for US historical
  • #1 on HREFF-4 for UK historical
  • #1 on US mean & median income
  • #1 on UK mean & median income
  • #1 on UK 5th and 10th percentile income (i.e. the worst case scenarios)
  • #1 on Japan mean & median income

The interesting question is why an all‐equity portfolio is considered such a risky alternative. The answer, in fact, is far from clear.

In “The Retirement Glidepath”, Javier Estrada looks at similar data (though he looks at many countries, not just these three) and comes to a similar conclusion. In the section “Why Not 100% Stocks?” he suggests that “having a retirement portfolio fully invested in stocks is a strategy that should be seriously considered by retirees”.

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EREVN

Learn how to enjoy early retirement in Vietnam. With charts and graphs.