Discontinued Strategies
Retiree Portfolios (12/10/99 - 12/4/00)

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Discontinued Strategies
Brief History
Three real-money retiree portfolios were established on December 10, 1999, by Dave Braze (TMF Pixy). They were developed as aggressive, moderate, and conservative approaches to the stock investments within a retiree's portfolio. All were based on a Foolish Four (FF) stock investing strategy, but each portfolio used a different allocation between stocks and bonds. Each was established to illustrate the impact of using the FF as the only stock investment in portfolios from which inflation-adjusted income withdrawals were taken in retirement. The sole purpose of the three real-money retiree portfolios was to show folks what could and would happen when a retiree used one of those three FF allocation strategies while making annual income withdrawals.

As the announcement indicated, the portfolios were developed based on a FF study for the years 1961 through 1998 conducted by Dave Braze. The study was undertaken to help answer two key questions all retirees face: How much can we withdraw from a portfolio and still remain reasonably certain that our money will last as long as we do? And can we increase our withdrawals each year to ensure we maintain our purchasing power? Braze's study indicated superior results for inflation-adjusted withdrawals from hypothetical portfolios using a FF investment strategy. Those results were far superior to similarly constructed portfolios that used the same proportion of the S&P 500 Index for the various stock allocations.

What went wrong
Over the year following the establishment of these three portfolios, the FF methodology itself was challenged by many as an invalid technique. Scholarly critics claimed, with some justification, that the strategy is simply a random association of variables, and that the FF method is the product of data mining, a grievous statistical error. Further, an internal study lent strong support to those arguments.

As a result of these arguments, Dave determined that the criticisms levied against the FF method had substantial merit. Consequently, its continued use as the sole component of a retiree's mechanical stock investing strategy seemed inappropriate. Also, the addition of any other mechanical stock investing strategies to these portfolios seemed inappropriate due to the lack of long-term historical data for those methods. Accordingly, Dave decided to discontinue the real-money retiree portfolios.

Lessons learned
While the historical data on the FF demonstrated its superior performance for income withdrawals during the period studied, the apparent lack of statistical validity for the selection of the FF itself indicates most strongly that a similar performance would be difficult to achieve in the future. Consequently, the FF should not be used as the sole component of stock selections within a retiree's portfolio.