June 2015 – Take Our 1-Question Downside Risk Quiz
Our Risk Quiz - How Much Money are You Comfortable Losing?
How would you answer the following? You are 55 years old and have managed to accumulate $337,400 in your retirement savings account. During the next market correction, how much of that balance are you willing to lose?
The last significant bear market is US stocks occurred during the period from October 31, 2007 to February 28, 2009. The S&P 500 lost over 50% of its value during this period. Keep that in mind as you review our comments on the choices in our quiz:
If your answer is $0:
It is unrealistic to assume that you would lose no money during a period when all asset classes except cash fell in value. A cash or stable value fund in your plan would have achieved this result, but you will have little chance achieving your investment goals over the long run by using nothing but cash or stable value funds in your account in every market condition.
If your answer is $25,440:
A moderately conservative portfolio fell by about 7.5% during the sixteen month decline ending in early 2009. What do we mean my moderately conservative? Well, about 20% of your total portfolio would have been in the stock market, with the balance in bond and cash funds. Many investors think holding only 20% in stock funds means you cannot reach your investment goals, but protecting from significant market declines when risks are extremely high can often help over the long haul.
If your answer is $37,400:
Some investors feel a psychological benefit in not having your portfolio fall from the $300,000 range to the $200,000 range, so this is a rational reaction. Recognize, however, that this is only an 11% decline during a market environment where stock lost half of their value, or more, so you would have needed to position your portfolio very conservatively to limit your losses to this amount.
If your answer is $67,480:
A bear market is generally defined as one in which stocks fall by 20% or more. A decline of this amount represents the decline you would have suffered were you invested entirely in stocks during a typical bear market decline. If you are comfortable with losses of this magnitude, you can consider yourself an aggressive investor.
If your answer is $158,900:
Almost no one chooses this answer, that’s a huge decline! Guess what – that is the amount of money you would have lost from October, 2007 through February, 2009 if you were invested in any of the 13 largest target date funds with a 2030 target date (the date closest to your retirement age if you are 55). Those funds lost 47% during that period, a loss that will be difficult to overcome should your retirement date be something closer than 2030.
We are reminded of commentary from Ed Easterling of Crestmont Research delivered over ten years ago (1):
Risk can be friend or foe, and as an investor you will succeed or fail depending on how you deal with it. Risk is an inherent condition of all investments and should be respected, assessed, managed, and prudently controlled.
You may have heard, “If you want greater returns, you have to take more risk.” The implication is that risk creates returns—as though risk represents an element that mixes with investment capital to morph into returns. In reality, risk represents a condition that drives investors to demand compensation and protection.
The first step toward making money is not losing it.
(1) Excerpted from Chapter 5 of Just One Thing: Twelve of the World's Best Investors Reveal the One Strategy You Can't Overlook (John Wiley & Sons: 2005; John Mauldin, Editor
Are U.S. Long Term Growth Rates Permanently Reduced?
Very long term investment gains for common stocks are driven by long term growth in the economy. Most growth models assume that the economy - as measured by “nominal” GDP growth - will average between 6% and 7% per year. “Real” GDP growth (growth adjusted for inflation) is assumed to average 3% - 3.5%. Recent data, unfortunately, is pointing to numbers significantly lower:
Nominal GDP Growth
Real GDP Growth
In this century, growth in both nominal and real GDP have fallen well short of historical norms. If that trend continues, you should plan on a significantly reduced rate of return for your stock portfolio and for your retirement assets in general.
All the more reason to place an extra emphasis on the amount of money you are saving in your retirement accounts.
Corporate Profits Fall for Second Straight Quarter
Corporate profits decreased 5.9 percent at a quarterly rate in the first quarter after decreasing 1.4 percent in the fourth quarter of 2014.
- Profits of domestic nonfinancial corporations decreased 7.7 percent after increasing 1.4 percent.
- Profits of domestic financial corporations decreased 0.6 percent after decreasing 2.7 percent.
- Profits from the rest of the world decreased 6.0 percent after decreasing 8.8 percent.
Over the last 4 quarters, corporate profits increased 3.7 percent.
Social Security Curiosity?
Did you know there are strategies available to maximize the amount of money you receive from Social Security over the course of your retirement?
Since Social Security will be an important factor in your overall retirement income, why not consider the options available to you, and make an informed decision that is best for you and your partner over your entire retirement.
If you are 59 or older and would like a free, no-strings-attached Social Security evaluation, send us a note at firstname.lastname@example.org.
Key Market Returns (Periods Ending May, 2015)
Year to Date....5.65%
Moderately Aggressive Index
Year to Date..4.40%
Year to Date...3.04%
Moderately Conservative Index
Year to Date...1.59%
Year to Date...0.55%
Year to Date....3.23%
Year to Date.........8.60%
Investment Grade Bonds
Year to Date...... 1.00%