Portfolio Stress Test: Part 2

Stress Testing the Curie Portfolio

Go back and review Stress Test Part 1 to understand the original information used when applying a three standard deviation loss for the Curie Portfolio.  As you will recall, the owner of the Curie Portfolio plans to withdrawal, using today's rates, $40,000 from a $500,000 portfolio.  Due to the addition of new money, the portfolio should be closer to $700,000 before any money is withdrawn at retirement.  This is assuming there are no major bear markets over the next 15 to 16 years, an unlikely assumption.

$40,000/$700,000 = 5.7% or a high withdrawal rate.  I recommend not withdrawing more than 4%.  Nevertheless, we will proceed forward with the stress test analysis using our original assumptions.

Remember that the portfolio had a projected risk factor of nearly 17%.  When another 3 standard deviation event occurs as it did in 2008, the Curie portfolio is set up to lose 3 * 17% or 51% in a major bear market.  This will cut the $500,000 portfolio down to $245,000 or if this happens after retirement it will reduce the $700,000 portfolio to less than $350,000.  When this event occurs, will the owner of the Curie Portfolio have sufficient funds in retirement?  Read on to find the answer.

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