Tag Archives: investment returns

Me and my spouse are approaching retirement; how should we allocate our investments so that we can protect some and grow some?

This was a question asked by a visitor to Investopedia.
Several other advisors responded.  Here’s my contribution to the discussion.
 

You have gotten some good advice from the others who have responded.  The only advice I would add to theirs is that the years just prior to retirement and the first few years of retirement are the most critical years for you.  These are the years when significant investment losses have the biggest impact on your retirement assets.

That’s because of something referred to as “sequence of returns.”  “Sequence of returns” refers to the fact that market returns are never the same from year to year.  For example, here are the returns for the S&P 500 from 2000 to 2010.  That was a dangerous decade for retirees.

2000 -9.1%
2001 -11.9%
2002 -22.1%
2003 28.7%
2004 10.9%
2005 4.9%
2006 15.8%
2007 5.5%
2008 -37.0%
2009 26.5%
2010 15.1%

When you are accumulating assets, the sequence of returns has no impact on the amount of money you end up with.  But when you are taking money out, the sequence becomes very important.  That’s because taking money out of an account exaggerates the effect of a market decline.

If you retired in the year 2000 with $100,000 and took out 4% ($4000) to live on each year, by 2010 your account would have shrunk to about $66,200 and, if you continued to withdraw the same amount each year you would now be taking out 6%.  If you have another 30 years in retirement, that rate of withdrawal may not be sustainable.

For that reason, most financial advisors recommend creating a portfolio that can cushion the effect of poor market performance near your retirement date.

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Why Your Home is a Poor Investment

Image result for homes

A couple we know moved to a new house recently.  They sold their old for a little more than twice the price they originally paid.  Doubling your money sounds like a great deal, right?

Not so fast.

To determine if the house was a good investment we need to make some calculations.  They originally bought their old home about 33 years ago.  That means that the return on their investment was just 2.4% per year.  To put it in perspective, 33 years ago CD rates were around 10%.  Viewed strictly from an investment perspective, they could have made a better return on their money if they had bought a CD.  And that’s to say nothing of maintenance and upkeep, costs not associated with CDs.

On the other hand, you can’t live in a CD.

How about investing that money in the stock market?  Over that same period the S&P 500 grew 8.5% annually.  That means that every $100 invested in the market 33 years ago would have grown to $1476!

The reason that so many people think that their home is their best investment is that they don’t sell their home very often.  As a result, they look at what they paid and what they sold it for.  If they held it for many years, it usually looks like a big number, and it is. But when viewed strictly as an investment, the annual growth rate is small compared to the alternatives.

As we alluded to earlier, home ownership also involves many other expenses.  There are property taxes and insurance.  Homeowners know that repairs and maintenance are expensive and never ending.  After all of the expenses are taken into account, the real return on home ownership may be even less that our earlier calculation.

But a home is much more than an investment.  It’s a place to live, a place to raise a family, a place to call your own.  A home is a refuge from the rest of the world.  The alternative is renting, wherein you often have more flexibility and are not on the hook for all of the repairs and maintenance.  But it also means that your monthly payment to your landlord is not going into equity that home ownership provides.

We are homeowners and advocates of home ownership.  The point of evaluating the true value of the home as an investment is to bring reality to the financial aspects of home ownership. It’s also a warning against investing too much of our resources in the family home, making many people “home poor.”

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