Our Thoughts This Quarter

Dear Friends,

2017 was a great year for the US and Global equity markets in the face of ongoing headlines from North Korea, Russia, and the Trump administration.

Despite all the rhetoric, Congress, by the thinnest of margins, passed the most sweeping Tax Legislation in many years in December.  

For our summary of the new Tax Legislation, click the following link, Tax Cuts and Jobs Act .

For our full economic report and thoughts for 2018, click this link, 2017-Q4 Economic Summary. Or, call us to talk more.

 

SEQUENCE OF RETURNS: Does "AVERAGE" Rate of Return really matter?

Our friends at Thornburg Investments provide many academic studies to illustrate the science of withdrawing (and NOT outliving) one's retirement portfolio. One such study is the impact an investor's SEQUENCE OF RETURNS can have on a porfolio rather than the AVERAGE rate of return. Below are the key points. To view the full THORNBURG SOR STUDY, click HERE.

1. WHAT IS THE SEQUENCE OF RETURNS (SOR)?

Sequence of Return is the ORDER that returns occur in a portolio over a period of time.  For example, over 3 years the returns might be +30, -3, and +10 percent versus the reverse order of +10, -3, and +30 percent.

2. HOW CAN THE SOR AFFECT PORTFOLIO OUTCOMES DURING ACCUMULATION?

During accumulation (assuming NO withdrawals) the sequence of returns are irrelevent from a financial outcome standpoint. You will end up with the same amount regardless of the return sequence. In meetings I cite that 2 x 3 equals 3 x 2. Simple enough.

3. HOW CAN THE SOR AFFECT PORTFOLIO OUTCOMES DURING OUR SPENDING YEARS?

When WITHDRAWING money from a portfolio, however, the outcomes can VARY DRAMATICALLY. In the Thornburg study from 1989 to 2008, the S&P 500 portfolio's "average" return was over 8% regardless of the sequence (1989-2008 or the same returns in reverse 2008-1989). In the 20 year study, each retiree started with a $1M portfolio and withdrew 5% annualy with 3% inflationary increases. The results are below:

RETIREE A: For the 1989-2008 retiree , there was an ending value in 2008 of over $3.1M, AFTER withdrawals.

RETIREE B: When the sequence of returns were reversed (2008-1989 order), this porfolio had an ending value of only $235k.

4. HOW MUCH AND WHY ARE THE OUTCOMES SO DIFFERENT?

Despite the same "AVERAGE" +8% return, retiree A had over $2.8M MORE than retiree B by the 20th year. The difference is primarily due to the SEQUENCE of returns: Retiree A had positive returns early (1989-2008 sequence) while Retiree B had negative returns early (2008-1989 sequence) although the "average" return was IDENTICAL.

The study also used a more conservative portfolio but this too had dramatic differences between the two retirees.

5. HOW CAN AN INVESTOR MANAGE SEQUENCE OF RETURNS RISK?*

There are a multitude of strategies available but depend on the specific facts and circumstances.  Covering them all is beyond the scope of this format. To explore this, and other planning options, feel free to contact our office at 978-649-2212 for a short, confidential phone call.

We Thank-You again for your continued trust in our firm to help add clarity and confidence to your future.

Warmest Regards,

 

Anthony J. Marino, CLU ChFC FLMI 
MarinoFA.com
(978) 649-2212

 

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*Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.

 

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***The FIVE STAR Award is granted by Five Star Professional, an independent 3rd party marketing firm. This award is not indicative of future performance or success and stems from nominations by industry professionals in a given market area and based upon objective criteria including retention rates, client assets administered, reviews conducted by the firm, as well as favorable regulatory and complaint history. For more information go to www.fivestarprofessional.com