We need to determine if you are on the right path and then formulate a plan to best keep you on pace. We structure your investments around that plan, aiming to maximize your odds of success.
The point: When you're on pace, let's do our best to keep you there!
If you're on track to achieving your goals, you care more about risk than return. We focus on decreasing your range of outcomes in an effort to lock it in. Reducing risk is key to accomplishing this goal.
Both have $1,000,000 and want to draw $45,000 in each year of their retirement, adjusted for inflation with a 4.5% withdrawal rate.
One investor places his assets in the S&P 500. The other diversifies.
Unbeknownst to the investors, they embarked on their journey during a fantastic decade for U.S. stocks.
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 shared their story with their younger friends, detailing their first decade as retirees.
Their friends retired making similar investing choices, each beginning with the same amount and draw.
Unbeknownst to the investors, they embarked on their journey during a terrible decade for U.S. stocks.
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 $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. We do claim that proper diversification can lower our risks, decrease our range of outcomes, and increase our odds of remaining on pace.
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.
The S&P 500 investor ended up 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 with $1,180,000. His portfolio draw is 5.6%.
Sequence of returns matters.
Will you experience positive or negative returns early on?
Higher risk portfolios will likely have higher ups and lower downs.
Range of returns matters.
When we're on track to reach our goals, our aim is to reduce both risk and likely range of outcomes.
Four of the ten-year periods in one chart.
Four of the two-decade periods in one chart.
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. For more information, please visit Betavisor.
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