Our Thoughts This Quarter

Dear Friends,

With two major 2016 surprises behind us, namely the UK "Brexit" vote and the Trump US presidential election victory, we are glad to provide our WINTER 2017 ECONOMIC UPDATE (click to open).

According to our friends at JP Morgan, the top equity and fixed income asset class leaders for 2016 were Small Company Stocks (+21%) and High Yield Corporate Bonds (+14 %) with Cash Equivalents, once again, lagging the pack at (+0.3 %). Another asset class worth noting were Commodites, which were up over 11% after a lackluster 2015 (-24%).*

Interestingly, Small Company Stock and High Yield Bonds were among the worst  performers, in equity and fixed income respectively, during 2015. This reversal, once again, shows the opportunisic benefit of re-balancing a portfolio AND being truly  diversified, adjusted for an investor's personal risk preference and time horizon.

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
 
Named a FIVE STAR Wealth Manager in Boston Magazine 2011, 2012, 2013, 2014, 2015
 
PIAM Financial Services in collaboration with Baystate Financial
A subsidiary of the Massachusetts Medical Society
Specialized services for Medical Professionals, Practices, and Families
 
* Source: JP Morgan Guide to the Markets, 12/31/2016
 

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