FINANCIaL
FIELd NOTES
How to Save Your Retirement Investments in a Recession
Last week I discussed how the 4% rule is a good starting place for retirees. But to get the most out of your retirement, it’s important to go beyond this. The answer for many is to use Dynamic Withdrawal Rules where spending is slightly adjusted based on the market environment.
By being flexible, you can on average spend significantly more throughout your retirement. When your withdrawal rate gets too high because of increased spending or lower returns, you cut spending modestly. When your withdrawal rate gets too low because of lower spending or higher returns, you can increase spending.
Historical Results of a 4% Withdrawal Rate (1928-2023)
One often-quoted rule of thumb in retirement planning is the 4% withdrawal rate. It suggests that retirees can withdraw 4% of their initial investment portfolio balance annually, adjusted for inflation, without significantly depleting their savings over a 30-year retirement period. But how does this rule hold up under the scrutiny of historical data, particularly for a balanced investment portfolio?
The Compounding Cost of Avoiding Volatility
With interest rates rising for cash, CDs, and bonds, there is renewed interest in owning more conservative investments instead of riskier assets like stocks. Since the best estimate of future bond returns is roughly their starting yield, 5% is probably a fair place to start (while nothing is certainly guaranteed). Stocks on the other hand have earned 10% per year on average.
For some investors, it may make sense to take less risk and “clip” the bond coupon, especially for the money they plan to spend in the coming years. But many investors, including retirees, often have a portion of their investments that are for long-term growth over 10-20+ years that have historically been in stocks…
Is US Market Concentration a Concern?
Over the past decade, the weight of the top 10 stocks in the S&P 500 has nearly doubled.
It’s nearly impossible for the market to be up or down without these big stocks (Apple, Amazon, Google, etc.) going in the same direction. This is not a first – in the 70s, over 40% of the market was dominated by the top 10 stocks, and even more by the “nifty fifty.” While this does introduce some risks if these companies were to be broken up or face increased competition, in general, I don’t view it as a significant concern for three main reasons…
What’s Driving the Bull Market: A Wave of Earnings Growth
In the world of finance and media, there are often conflicting narratives about the state of the economy and stock market. Recently, with the S&P 500 reaching a new all-time high, there have been many voices in the media questioning the justification of the ongoing bull market.
However, a closer look at the numbers reveals that many of the companies reaching all-time highs are also significantly more profitable than they were in the past. The largest 20 US companies have grown earnings at 15% per year over the last 5 years on average…
Historically, All-Time Highs Are Nothing to Panic Over
With the S&P 500 reaching all-time highs for the first time in nearly 2 years, many are skeptical that a bear market is coming. Investors are often tempted to assume extremes are always around the corner - either a new bull market or the next bear market.
The reality is that somewhere in the middle is where most investing happens - but we often mistake it for the extreme…