A 60/40 portfolio of US stocks and bonds has only ended the year down double digits 5 times in the past 94 years to the end of 2021.1
With stocks and bonds down around 15% each in 2022 so far, it looks like this year will be the 6th time in 95 years:
If we ended the year the way it is today, it would be the third worst year for a 60/40 portfolio in nearly 100 years.
The only years it fell more than that occurred in the 1930s. In 1931, a 60/40 portfolio was down 27.3%. Then in 1937, a diversified portfolio fell by 20.7%.
“There’s nowhere to hide” is a common refrain this year.
I’ve always thought that long-term returns are the only thing that matters. Anything can happen in the short term. Diversification only works for patients.
It’s also understandable that many investors are frustrated with this year’s performance, especially retirees.
It can be scary if you encounter bad feedback at the wrong time.
The Wall Street Journal published an article this week that detailed the difficulties of a 60/40 portfolio this year and its impact on investors who have retired in recent years:
Eileen Pollock, a 70-year-old retiree living in Baltimore, saw the value of her portfolio, with a mix of around 60-40, drop by hundreds of thousands of dollars. The former legal secretary had amassed more than $1 million in her retirement accounts. To build up her savings, she left New York to live in a less expensive city and skipped vacations for many years.
“A million dollars seems like a lot of money, but I realized it wasn’t,” she said. “I saw my money disappear little by little.”
This has been a terrible year for a diversified mix of stocks and bonds, but if we zoom out, the returns ahead this year have been weak for a 60/40 portfolio.
Over the 3, 5 and 10 years ending in 2021, a 60/40 portfolio of US stocks and bonds grew by 63%, 81% and 184%, respectively.2
Even if we include this year’s loss of about 15% in the 60/40, the last 10 years have given investors 8% per year in this strategy.
The good has far outweighed the bad, which is usually the case in financial markets.
Bad years are no fun, but good decades tend to more than make up for it.
Losing a large chunk of your savings is never a good time, but investors need to realize that their portfolio value wouldn’t be so high in the first place if it weren’t for the bull market that led to these tough times.
It’s also true that you can’t bet on investment returns that weigh everything on your financial plan. Sometimes the markets just don’t cooperate.
And financial markets can only take you so far.
The Journal featured a study that shows many retirees have to cut their standard of living in retirement because they haven’t saved enough:
About 51% of retirees live on less than half their annual pre-retirement incomeaccording to Goldman Sachs Asset Management, which this summer conducted a survey of American retirees aged 50 to 75. Almost half of respondents retired early for reasons beyond their control, including poor health, job loss and the need to care for family members. Only 7% of survey respondents said they left the workforce because they managed to save enough money for retirement.
Most Americans said they would rather rely on secure sources of income, like Social Security, to fund their retirement, than on volatile market returns. But only 55% of retirees are able to do so, the firm found.
It doesn’t matter how well your investments perform if you don’t save enough at the start.
It would be much better if we lived in a world where more people had a pension or easier access to regular income streams in retirement.
Unfortunately, most of us struggle with financial markets, volatility and all, to improve our long-term standard of living.
But the important thing to remember is that it doesn’t matter how you invest your money if you don’t save enough in the first place.
The financial markets cannot save you if you don’t save.
The worst years ever for a 60/40 portfolio
1As usual, I use the S&P 500 for stocks and 10-year Treasury bills for bonds. Data source here.
2I’m pretty sure no one actually has a portfolio that’s 60% US stocks and 40% US bonds, but hey.
#Markets #save #dont #save