Suggestions
Flexible Spending - Metric - cumulative annualized return in place of ATH
Original title: Enable more return metrics (e.g. annualized return) for determining flexible spending
The flex spending feature is great but having it be based on Post-Inflation All-Time High creates a lot of confusion and limitations.
For instance, the way I want to model flexible spending is to be be based on the average annualized return of my portfolio without inflation, not just % from latest ATH
Imagine this sequence of returns Year 1 - Market Return 0%, Inflation 3% Year 2 - Market Return 0%, Inflation 3% Year 3 - Market Return 0%, Inflation 3% Year 4 - Market Return 10%, Inflation 3%
At the end of Year 4 we are at a new ATH but my portfolio is severely underperforming historical average annualized returns. Average annualized returns before accounting for inflation (Nominal Return) is 2.41% per year, and after accounting for inflation (Real Return) is -0.57%
As a result, the correct response should be to keep cutting my discretionary until the market (hopefully) does some mean reversion upward to have higher annualized real returns. It makes no sense to increase discretionary spending after Year 4 when the real returns from Year 0 are NEGATIVE!
To account for this we shouldn’t use offset from All-Time High, but instead track the average annualized real return and set a threshold for flexing spending.
One benefit of tracking the annualized return from some date is that it accounts for length of downturn as well.
Say you want to capture these two ideas (and forgive the mathematical simplification):
- If annualized return is below 4% for FIVE YEARS flex spending down by 50%
OR
- If annualized return is below 20% for ONE YEAR flex spending down by 50%
This is more easily captured by simply tracking the annualized return over a window of the most recent 5 years than having separate rules
