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Withdrawal Rates, Savings Rates, and Valuation-Based Asset Allocation

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  • Pfau, Wade Donald

Abstract

While most everyone would agree that valuations matter, the question remains as to whether clients with a long-term outlook (such as those planning for retirement) can hope to act successfully on information about valuations. This article provides favorable evidence based on the historical record for long-term conservative investors to obtain improved retirement planning outcomes (lower savings rates, higher withdrawal rates) using valuation-based asset allocation strategies. This is illustrated with a specific example comparing a 50/50 fixed allocation strategy to a Graham and Dodd inspired valuation-based strategy with a stock allocation of 25, 50, or 75% determined by the value of the cyclically-adjusted price-earnings ratio with respect to its median value up to that point in history. Important caveats are discussed. But even if clients or advisors decide against adopting valuation-based asset allocation, advisors may at least be able to use the findings of this research to help persuade clients to stay the course and not give in to the temptation to change their asset allocations in the “wrong direction,” such as increasing stock holdings after valuations rise or panicking and selling stocks after a plummet in valuations.

Suggested Citation

  • Pfau, Wade Donald, 2011. "Withdrawal Rates, Savings Rates, and Valuation-Based Asset Allocation," MPRA Paper 35329, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:35329
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    File URL: https://mpra.ub.uni-muenchen.de/35329/1/MPRA_paper_35329.pdf
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    References listed on IDEAS

    as
    1. Kenneth L. Fisher & Meir Statman, 2006. "Market Timing In Regressions And Reality," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 29(3), pages 293-304, September.
    2. Pfau, Wade Donald, 2011. "Can We Predict the Sustainable Withdrawal Rate for New Retirees?," MPRA Paper 30877, University Library of Munich, Germany.
    3. Pfau, Wade Donald, 2011. "Safe Savings Rates: A New Approach to Retirement Planning over the Lifecycle," MPRA Paper 28796, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Withdrawal Rates, Savings Rates, and Valuation-Based Asset Allocation
      by Wade Pfau in Pensions, Retirement Planning, and Economics Blog on 2011-12-14 07:37:00

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    More about this item

    Keywords

    market valuations; cyclically-adjusted price-earnings ratio; PE10; stock returns; asset allocation; retirement planning;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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