By J. William G. Chettle, EVP, Loring Ward
The problem with good advice is that it tends to be boring, especially when it comes to your portfolio.
This is a good thing.
For investors, excitement can be your worst enemy. Excitement generates headlines; it causes people to be greedy or fearful; it drives volatility and speculation — all resulting in too many people compromising their financial futures.
If you’ve been invested over the past 15+ years, you’ve certainly lived through more than your share of excitement. In the period from 2000 to 2015, we experienced two bear markets, the Great Recession, war, terrorism and 11 of the 20 worst days in the stock market since 1950!
Did you stay invested, or did you listen to the headlines? Were you globally diversified, or did you try to guess which stocks or sectors or countries would outperform?
This chart shows how two portfolios did during this “exciting” 15-year period. Both portfolios are owned by couples in retirement making regular withdrawals from their portfolios to sustain their lifestyles. They are both smart and prudent and stayed the course during this tumultuous period. However, the Smiths invested in a portfolio that tries to mimic the S&P 500. On the other hand, the Johnsons invested in a globally-diversified, index-type portfolio that is 65% stocks/35% bonds and includes allocations to small and value stocks in the U.S. and abroad, as well as U.S. REITs and emerging markets.
Both couples start with a $500,000 portfolio and withdraw 5% of the initial value ($25,000 of initial $500,000 starting value) on January 2 each year. This withdrawal is increased 3% each year, to help the couple’s income keep pace with inflation.
Your goals and comfort with risk will determine what portfolio is right for you, but the Johnsons prefer a moderate portfolio since it is right in the middle between a conservative, mostly-bonds portfolio and an aggressive, all-stock portfolio.
As the chart below shows, over this time period, the 65/35 asset class portfolio mix of the Johnsons had an annualized rate of return around 5.64%, while the Smiths’ S&P 500 returned just 4.06% a year. And the Johnsons’ portfolio experienced much less volatility (shown as “Risk” in the chart) as well.
Return & Risk for Moderate and S&P 500 Portfolios
Lowering volatility is important for investors, especially those making regular withdrawals, because it can keep your money working for you longer. And this is exactly what happened for the Johnsons.
By 2015, they still had $375,539 in their portfolio (and this is after withdrawing $503,922 in income).
Meanwhile, in 2015 the Smiths ran out of money.
It isn’t difficult to be a better investor: Diversify globally, don’t try to beat the market, don’t panic…and save excitement for the non-investment parts of your life.