Sub-Par Market Performance Over 10
Years
In the following example, an employee leaves
his company at the end of 1999 with $1,000,000 in retirement
savings. He needs to take $40,000 per year from this portfolio to
supplement his retirement income. He will also need to give himself
a 3% pay raise each year to account for inflation.
If his assets were invested in a diversified mix of stocks and
bonds at the end of 1999, the value at the end of 2008 would be
just shy of $700,000. The same amount of money, with the same
withdrawal rate, invested in 100% stocks, would be worth a little
less than $400,000 at the end of 2008. Common investment
wisdom says that stocks beat bonds over the long term. For
any long-term period over the past two centuries this is
true1. But as shown below, sequence of returns and
portfolio withdrawals affects short term results.
Source: Financeware,
Standard and Poors, Barclays Capital. The above illustration is
hypothetical and does not represent the return of any specific
investment or portfolio.
Obviously, the foregoing example is an extreme demonstration of
how a negative sequence of returns can drastically affect a very
volatile portfolio. With the market declines of 2000, 2001
and 20022, the likelihood of being able to recover
assets lost is minimal, even utilizing a risky, aggressive
portfolio. Although the example above is hypothetical and
does not represent any single investor, many retirees in early 2000
saw exactly this type of performance in their investments,
particularly if very little asset class diversification was used in
the portfolio construction.
1. Source:
Jeremy Siegel
2. Source: According to Standard and Poors, the S&P 500 lost
9.1% in 2000, 12.0% in 2001 and 22.3% in 2002 for an average
compound loss of 14.5% annually/
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