Investing and personal finance are such a personal journey. Some people are better at it than others, but we can all learn and improve. Conventional wisdom leaves much to luck in investing as well.
Imagine two similar investors, Leslie and Bob.
- They each retire with a $500,000 portfolio.
- And they each withdraw 4% of their portfolio in the first year of retirement, then adjust that amount upward each year to account for inflation (as measured by the Consumer Price Index).
- Their portfolios are identical: 60% in Vanguard Total Stock Market Index Fund and 40% in Vanguard Total Bond Market Index Fund, rebalanced at the end of each year.
- The only difference is that Leslie retired at the end of 1994, and Bob retired at the end of 1999.
I sure would rather retire earlier like Leslie, wouldn’t you? Let’s take a closer look.
- 10 years into her retirement, Leslie’s portfolio had more than doubled, with an ending value of $1,062,606. (And 5 years after that, it had grown further to $1,105,982.)
- 10 years into his retirement, Bob’s portfolio was worth only $400,354.
They each followed the rules (more or less) with fairly conservative, low-cost portfolios, rebalanced annually. Yet because of when they retired, their retirements look very different. Did Leslie somehow have more luck in investing?
Leslie will be (mostly) free from money worries. And she’ll be able to give generously to her children, grandchildren, and charities of choice. In contrast, Bob will have to be careful so as to avoid running out of money.
Why such a difference? Luck In Investing And Timing Matters!
For the first few years of Leslie’s retirement, the stock market was shooting upward. So she did experience luck in investing in this sense. In contrast, Bob’s retirement began with a 3-year bear market. When Leslie liquidated investments to pay for living expenses, she was selling high. Bob was selling low.
By the time the market began to rebound, Bob had already liquidated a good portion of his portfolio. So he didn’t benefit as much from the bull market as he would have if it had occurred at the beginning of his retirement.
In short, if you follow conventional investing wisdom:
- A bull market in the first few years of your retirement puts you on easy street, yet
- A bear market in the first few years of your retirement can mean money worries for the rest of your life.
Ways to Protect Yourself And Have More Luck In Investing
What can you do to avoid finding yourself in Bob’s position during retirement?
1) Most importantly, lower your retirement withdrawal rate. Many experts argue that a 4% withdrawal rate involves taking on very real risk of outliving your money.
2) If you don’t have enough saved to use a withdrawal rate lower than 4%, annuitizing a portion of your portfolio can be help reduce the chance of outliving your money. (On the other hand, it also reduces the amount you’ll end up leaving to your heirs.)
3) Take valuation levels into account when determining your asset allocation. In other words, it was a mistake for Bob to have 60% of his portfolio in stocks at 1999 price levels.
The more investment lessons you learn, the better you can navigate through patches of back luck in investing.
Related Reading To Help You Get More Luck In Investing
- The Recommended Split Between Passive And Active Investing
- To Get Luckier, Realize Success Is Mostly Luck
- Success Is Mostly Luck: Never Give Yourself Full Credit
- Why I Dislike Investing In The Stock Market Even In Good Times
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