Are retirees thinking about their portfolios incorrectly? 

The challenge that many retirees face, is constructing a portfolio to meet their funding goals. This challenge becomes even greater with interest rates near all-time lows and market values near all-time highs. Millions of baby boomers are discovering that their nest egg is not going to generate the income that they need to meet their budgets in retirement.

The question that everyone wants to know, is how much money they can withdraw from their portfolio without depleting their life savings. There is only one chance to get this question right.

In retirement, preserving the portfolio while managing for risk is essential for a successful outcome. The reality is that there will be a test along the way from a significant market correction that will cause second-guessing on whether or not the asset allocation is correct.

I believe to make matters worse, more and more retirees have bought into the notion that passive management is a far superior way of investing than active portfolio management. Indexing has become the rage as most major benchmarks have had enormous gains. Leading the way is the S&P 500 (SPY), with an average 15.36% return over the last 5-years. There is no shortage of commentary praising the merits of indexing. Almost a decade ago, Warren Buffett made a million-dollar bet that the S&P 500 would beat the gains earned by a high-powered hedge fund with a team of managers at the helm. It looks as though he is going to win this bet by 40% as the hedge fund managers have struggled.

It goes without saying that investors have very short-term memories. Investing in only the S&P 500 or having a large overweight would have been viewed as imprudent just a few short years ago. For example, a 65 year old, who retired back in 2000 over the course of their retirement years, would have experienced the following 5-year average returns of the S&P 500.

  • Jan 2000 to Dec 2004 = -10.96%
  • Jan 2007 to 2011 = -1.27%
  • Jan 2004 to Dec 2008 = -10.48%

In this example, investing in only the S&P 500 would have resulted in major budget shortfalls 8 out of 16 years. With the market near an all-time high, investing in only passive investments with no focus on active management is not the most appropriate advice for a retiree. This lousy investing advice perambulating the internet is setting up for future disappointment. I believe that diversification through both active and passive investing, with an eye on valuations, is the best way to manage a portfolio. Similar to politics, the best solutions are usually found somewhere near the middle and not at the extremes.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Please follow and like us: