We recognized that the tools and techniques most people use to accumulate their portfolio during their working years was not an optimal approach during the retirement years.  For instance, during the accumulation phase, temporary drops in asset prices actually increase the portfolio in the long-term, if the client is investing a consistent amount into their portfolio over time (such as monthly contributions to a 401k.)  This is because investments made during the temporary drops buys more shares of the asset, resulting in more shares of the asset in the long-term.  This is known as dollar cost averaging.  After retirement, these normal ups and downs of the assets in a portfolio become much more problematic.  The positive impact of dollar cost averaging during the accumulation years becomes a negative impact in withdrawal mode, causing a diversified portfolio to be depleted much quicker than one might expect.  This is why a portfolio with an average 8% annual return has a safe withdrawal rate of 4%, if you want to have a high confidence that the portfolio will last 30 years. 

In the past, we recommended the use of a “pooled” approach to portfolio construction in retirement in order to decrease the probability of running out of money.  This involved the use of three pools:

§  Pool 1 – one year’s worth of required portfolio withdrawals invested in a money market account

§  Pool 2 - one year’s worth of required portfolio withdrawals invested in a very short-term bond fund or in individual bonds with 18 months or less to maturity

§  Pool 3 – remainder of portfolio, invested in a diversified asset allocation designed to allow withdrawals to keep pace with inflation over time

While this approach helped to reduce the need to sell equity assets during down markets in order to fund living expenses, it did not lead to a secure increase in the retiree’s standard of living.  It was an improvement over the normal investment approach, but it was certainly not ideal, and Pool 3 was still subject to significant declines in poor equity markets.  These declines naturally have a much bigger impact on the psyche of one who has completed the accumulation phase than one who has many years of accumulation ahead. 

In 2007 Glenn learned of a company named Compound Stock Earnings, headquartered in Ft. Worth.  This company, founded in 1999, provides education and software tools in support of the use of covered calls as a way to grow portfolios in both up and down equity markets.  Glenn spent a year learning the techniques and software tools for his own personal investing use, and realized that these tools and techniques could be used to better serve clients in or near retirement.  From this realization was born ASCET. 

 
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