What's The Point?

What is the point of financial planning? What is the point of Investment management?

We need to determine if you are on the right path, and we need to formulate a plan to best keep you on pace.

We need to structure your investments around that plan, aiming to maximize your odds of success.


The point is:

When you are on pace, let's do our best to keep you on pace!

Let's discuss this through a simple story...

A Short Story

It is all about your Range of Outcomes

If we are on track to achieve our goals, we care more about risk than return. We tend to focus on decreasing our range of outcomes and ‘locking it in.’ Reducing risk is the key to accomplishing this goal.


Consider two individuals. Both have $1,000,000 and want to draw $45,000 in each year of their retirement, adjusted for inflation. For each of them, this is a 4.5% withdrawal rate. One investor places his assets in the S&P 500. The other diversifies. They begin their story on January 1, 1990. Unbeknownst to the investors, they had embarked on their journey during a fantastic decade for U.S. stocks. Here is how they fared:

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The S&P 500 investor experienced a great run, ending with $3,538,000. His ending draw of $60,000 represented 1.7% of his portfolio. He was in great shape.

The Diversified investor ended his run with $1,291,000, and his ending draw represented 4.7% of his portfolio. He was in fine shape, just not as well off as his counterpart.


Both investors told their younger friends about their first decade as retirees. Their younger friends retired and followed suit, making similar investment choices, each beginning with $1,000,000 while needing to draw $45,000 per year. The friend of the S&P 500 investor placed his assets in the S&P 500, and the friend of the Diversified investor decided to diversify. Unfortunately, these two friends retired after the 1990s, on January 1, 2000. Unbeknownst to the investors, they had embarked on their journey during a terrible decade for U.S. stocks. Here is how they fared:

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The S&P 500 investor experienced a poor run, ending with $369,000. His ending draw of $58,000 represented a daunting 15.6% of his portfolio. He was in very bad shape.


The Diversified investor ended his run with $1,334,000, and his ending draw represented 4.3% of his portfolio. He was in fine shape. Remember, both Diversified investors ended with similar $1.3M portfolios even though they retired during very different periods.


The investors were similar. The assets were the same. The portfolio draws were the same. 


The investment decisions were different. The risk was different. The range of outcomes was different. 


We just experienced the longest bull market for U.S. stocks, ever. We don’t claim to know what the future holds. But we do claim that proper diversification can lower our risks, decrease our range of outcomes, and increase our odds of remaining on pace for our goals.


What happened to the original retirees over the 20-year period?

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Over the first twenty years the S&P 500 investor ended up wealthier, with assets of $2.7M and an ending portfolio draw of 2.9%. 


The Diversified Investor ended with assets of $1.7M and a portfolio draw of 4.5%, right where he started. 


How did the second set of retirees fare over the nineteen-year period that ended after 2018? 

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The S&P 500 investor ended the nineteen-year period with just $95,000, and his annual withdrawal is now 68% of his portfolio. By the time you read this, he may be out of money. The Diversified investor ended the period with $1,180,000. His portfolio draw is 5.6%. 


The sequence of returns matters. Will you experience positive or negative returns early on? Risk matters. Higher risk portfolios will likely have higher ups and lower downs. Range of returns matters. When we are on track to reach our goals, our aim is to reduce both our risk and our likely range of outcomes. That is what we are laser-focused on.


Lastly, to wrap up, let’s look at all of four of the ten-year periods in one chart, and all four of the two-decade periods in one chart. 

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Absent a crystal ball, we are aiming for the green lines. We believe that a slow and steady pace wins the race.

Disclaimer

Risk is defined as standard deviation for the purposes of this letter. *Diversified portfolio is defined as equally split between U.S. stocks, international stocks, U.S. bonds, international bonds, real estate, gold and commodities, rebalanced annually and excluding fees, taxes, or other costs. This is not a template for how we manage money, but it is a template for how we show the benefits of diversification. The views expressed are the views of Randy Kurtz as of the date on this document and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. Past performance is not indicative of future performance. Individual results will vary, sometimes substantially, from any results discussed here. Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, a forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy. Any returns presented do not include the effect of fees of any kind or taxes.

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