The view of the surfers from the deck was excellent. I could appreciate them because I spent a day surfing in Galveston, Texas in the Gulf of Mexico years ago. I only made it on the board once or twice, but it was fun!
Our stay in Ocean City was great place to welcome the New Year. I hope everyone's New Year was as enjoyable.
Now, back to the real world.
A useful research piece on market performance is the "Asset Class Returns: A 20-Year Snapshot" table produced by BlackRock and discussed at Cedar Financial Advisors. It shows annual asset class returns, color-coded, ranked so that investors can easily see the best-performing and worst-performing sectors for each year over the 20-year period.
Similar so-called periodic tables of investment returns are produced by others, but the BlackRock table is unique in its inclusion of a diversified portfolio. The diversified portfolio is an excellent benchmark for many DIY investors to consider, in my opinion. It is comprised of low-cost, index exchange traded funds. The 20-year annualized return of the portfolio was 8.89% for the 20-year period ended 12/31/2010.
2011 was undoubtedly a challenging year for many investors. Those swayed by their emotions had plenty of opportunities to make portfolio-busting shifts. Most of those who had a plan and stuck with it probably came out OK. The table shows performance achieved by various sectors as represented by low-cost ETFs and the weights of the various sectors. Europe was the obvious drag on the portfolio as evidenced by the -12.17% return on EFA. Once again, the overall bond market was the knight in shining armor, with AGG returning +7.58%. Overall the portfolio returned +1.61% for the year. Although below the rate of inflation, many investors would have been satisfied with this return. For those with the funds parked in money funds or even short-term certificates of deposit, this performance would have been acceptable.
|Source: Data from Morningstar/BlackRock Diversified Portfolio|
Accumulators vs. Decumulators
My clients include both accumulators and decumulators. Accumulators seek to take advantage of dollar-cost averaging. They are contributing a fixed amount to their 401ks, etc. Down markets benefit them as they buy at lower prices. Decumulators, on the other hand, can unambiguously get hurt in a down market if they don't have a plan to draw down their nest egg. Dollar-cost averaging can seriously harm the retiree drawing funds from their nest egg.
2011 was fairly neutral for both as long as no rash portfolio shifts were made. The following shows the S&P 500 as represented by the SPY ETF:
CLICK TO ENLARGE As shown in the chart, U.S. stocks tried to trend upwards over the first half of the year and then hit a serious air pocket from which it again trended upwards. The second half of the year was extremely volatile, as headlines out of Europe dominated even economic data showing the U.S. economy was showing some life. In this market, dollar-cost averaging resulted in paying more for shares early in the year compared to where the market ended up. Still, if investors held in and no shifts were made, shares were accumulated over the later half at attractive prices as the market rebounded strongly in the 3rd quarter. In other words, dollar-cost averaging paid off over the later 6 months.
By the same token, the decumulator, drawing what is essentially a paycheck off of the nest egg, who had sufficient funds to ride out the downturn participated in the upturn. In contrast, the decumulator who sold equities to fund cash needs during the first half of the year partially missed out on the rebound. To stave off this negative impact, those living off their nest egg should have, at a minimum, 9 months in cash and a portfolio yield dividends and interest) of at least 2.4% to replenish required payments.
Disclosure: This information is intended for educational purposes. Individuals should do their own research or consult a professional before making investment decisions.