Achieving Retirement Goals

There is an old adage in the investment world that in order to generate greater returns you may have to be willing to assume more risk. But at what point is additional risk only that - additional risk with no additional return? I see many investors that try to squeeze out every ounce of return they can, but in the end achieve nothing more than substantial investment volatility and mediocre returns. Frequently, even well intended investors become anxious if the overall market is up 15% in a given year and their portfolio is only up 11%. In some ways it is almost like a “market return addiction.”

When we look under the hood of investment returns a bit more closely, it is interesting to note how the variability of these returns can affect long-term retirement distribution strategies. As a quick example the average annualized return for the Dow Jones Industrial index from 1982 through 2000 was over 16%, while the same index for the period of 1966 through 1982 was actually negative.* In essence, you had a 16-year window that produced no return whatsoever. The obvious “elephant in the room” question is how to accomplish proper retirement planning and simultaneously account for the variability of these different market scenarios.

When dealing with these kinds of markets, sometimes the answer can be as simple as ratcheting down your portfolio risk profile. We at OakBridge have done quite a bit of research on what might be termed “normal” market volatility versus what the industry calls “black swan events” or put in more common terms, market events that are considered quite rare. The Great Recession, as it has now become known, is considered by many to be a black swan event. It was indeed a very intimidating period where from October 2007 through March of 2009, the broad market as measured by the S&P 500 had lost over 57%.** But if looked at from more of a macro view, our current downturn was part of a much larger and extended period of what could be termed less of a black swan and more of just a normal negative market cycle. The point being that we can’t just discount this event as a once in a lifetime event that will never have an impact upon our portfolio and retirement goals ever again; especially given our longer life expectancies.

Not including our current market cycle, since the early 1900’s there have been three windows of time in which the market has given negative returns over an extended period. The longest period of negative returns was 16.5 years and the shortest was 12.5 years. All of these extended windows would have created serious headwinds for the more traditional asset allocation models thus very dramatically affecting longer-term retirement income goals. Our objective in portfolio management is to lessen the impact of these extended negative markets thus enabling greater asset predictability. Even so, we don’t believe that a more conservative portfolio automatically equates to lower long-term returns. If returns can become more stable thus avoiding many of the downside market traps, your portfolio doesn’t have to generate nearly the return on the upside to accomplish your future goals.

No asset allocation strategy can guarantee against all market losses. You cannot invest directly in an index.
*Source: Ned Davis Research
** Source: BigCharts.com