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Sunday, October 2, 2016

How's the Market Doing?

When asked about how the market is doing people tend to respond with "it's pretty much going sideways".  Really?

Mostly they focus on stocks which is understandable since stocks are the most volatile component of the markets over the short term. Still I think it is more appropriate to look at markets from a broader perspective.

For example, many investors follow an allocation of roughly 60% stocks/40% fixed income (bonds) and cash. This is a pretty conservative allocation even for those at the beginning of their retirement.

Here is Schwab's model for this particular allocation:

35% Large Cap Equity
10% Small Cap Equity
15% International
35% Bonds
5% Cash

Readers of this blog and many other investors know it is easy to get low cost index Funds to mirror this and similar allocations.

So how is this model doing? Year - to - date thru 9/30 it has  total return of 5.89% and over the 12 months ended 9/30/2016  it has a total return of 10.69%. So the market is hardly going sideways and those who have stayed on the sidelines are falling behind.

I'm just the messenger so don't kill me. And I, along with everyone else, have no idea where the market is going next. I'm just reporting where we are.

Let's consider the results thus far for retirees. For retirees 4% is an important metric. It is the amount that can be withdrawn with an inflation adjustment and have concerns about running out of money be pretty much a non event.

Inflation over the past 12 months on the basis of the Personal Consumption Expenditures (PCE) price Index (the FOMC's preferred inflation measure) is running at 1.7% (ex Food & Energy) through the end of August.

Thus, the retiree who can achieve a return of 4% + 1.7% = 5.7% is right on target. Actually he or she is ahead a bit because they hit the target and they are one year closer to the grim reaper! I hate to put it like that but it is what it is!

In essence the bottom line is that they can end the year with the the same portfolio value in real terms after extracting their income need.

Just one final point on the question " do I have enough to retire?".  As we have seen there has been a sharp rise in the stock market and bond prices from the depths reached in March 2009.

Understandably some people will look at their portfolios, consider Social Security and possibly throw in a pension or rental income, add it all up and conclude they have enough to retire. If you are in this boat I suggest you look at your "nest egg" and only count 80%. In other words take your income from this source at 4% times 80% of your egg. It just means you can withstand a decent size downturn and not be in a quandary. In 2000 and then again in early 2009 market downturns pushed some retirees out of retirement. One of the tricks in retirement is to make it past the first 5 or so years!

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