The 4 percent Strategy Revisited: A Pre-Commitment Optimal Mean-Variance Approach to Wealth Management

29 Pages Posted: 1 Mar 2015 Last revised: 6 Sep 2017

See all articles by Duy-Minh Dang

Duy-Minh Dang

University of Queensland - School of Mathematics and Physics

Peter Forsyth

University of Waterloo - Cheriton School of Computer Science

Ken Vetzal

University of Waterloo - School of Accounting & Finance

Date Written: April 2, 2016

Abstract

In contrast to single-period mean-variance portfolio allocation, optimal multi-period mean-variance allocation can be modified slightly to be effectively a down-side risk measure. With this in mind, we consider optimal multi-period mean-variance portfolio allocation in the presence of periodic withdrawals. The investment portfolio can be allocated between a risk-free investment and a risky asset. The risky asset is assumed to follow a jump diffusion process. We consider two wealth management applications, namely optimal de-accumulation rates for a defined contribution pension plan, and sustainable withdrawal rates for an endowment. Compared with a constant proportions strategy, the optimal mean-variance policy achieves the same expected wealth at the end of the investment horizon, while significantly reducing the standard deviation and probability of shortfall.

Keywords: multi-period mean-variance optimal, endowment, pension de-accumulation

Suggested Citation

Dang, Duy-Minh and Forsyth, Peter and Vetzal, Ken, The 4 percent Strategy Revisited: A Pre-Commitment Optimal Mean-Variance Approach to Wealth Management (April 2, 2016). Available at SSRN: https://ssrn.com/abstract=2571530 or http://dx.doi.org/10.2139/ssrn.2571530

Duy-Minh Dang (Contact Author)

University of Queensland - School of Mathematics and Physics ( email )

Priestly Building
St Lucia
Brisbane, Queesland 4067
Australia

HOME PAGE: http://people.smp.uq.edu.au/Duy-MinhDang/

Peter Forsyth

University of Waterloo - Cheriton School of Computer Science ( email )

Waterloo, Ontario N2L 3G1
Canada

Ken Vetzal

University of Waterloo - School of Accounting & Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
67
Abstract Views
497
rank
337,009
PlumX Metrics