I make the following assumptions. One investor is in the accumulation phase and one is in the withdrawal phase. Each have the same risk tolerance and can accept a 30% drawdown in a bear market, so they set their equity to 60% and bonds to 40%. The withdrawal rate is 4% per year of the initial balance with no inflation over the period of the analysis, and the withdrawals are taken at the start of the year. Both investors start with the same $1000 balance and no funds are added over the period of the analysis.
A bear market lasts two years and results in a net 30% drawdown in the portfolios. The following three years in a bull market results in gains of 20%, 10% and 9% per year.
The results show that the investor in the accumulation phase has regained his losses. However, the investor in the withdrawal phase is still down 23%. Obviously, the bear market risk is much higher for the investor in the withdrawal phase. Not only is the maximum drawdown 36%, the time to recover the loss is very long.
So, for this example, one could modify Adrian’s Rule to state that, for an investor in the withdrawal phase, set the equity percentage to 1.67 times the maximum acceptable loss. For this example, the equity would be lowered from 60% to 50%. Of course the results will vary depending upon the length of the bear market and the speed of recovery. YMMV.
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Date Gain/Loss Accum Withdraw 31-Dec 1000 1000 1-Jan 1000 960 31-Dec -17% 830 797 1-Jan 830 757 31-Dec -16% 697 636 1-Jan 697 596 31-Dec 20% 837 715 1-Jan 837 675 31-Dec 10% 920 742 1-Jan 920 702 31-Dec 9% 1003 766