Our Thoughts This Quarter

Dear Friends,

Despite worries over geopolitics (North Korea, Russia, Washington gridlock) and natural disasters (Hurricanes Harvey, Irma, and Maria), the bull market, which began in 2009, continued to slowly grind forward to new highs in Q3 2017.

Year to date through 9/30/2017, the top performing investment asset classes were Emerging Market Stock and Developed Market International Stock with Cash Equivalents, once again, lagging the pack as highlighted in JP Morgan's Guide to Markets Q4 2017 (click to open).

For a full report, click this link, 2017 Q3, 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
 
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, 09/30/2017
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