To adapt a line from Robert Burns, “The best laid plans of mice and men…” often go awry and that includes many retirement plans. In the ’80s, withdrawing seven percent a year from retirement accounts seemed reasonable. We were living in one of the best economic and stock market environments since the Great Depression. Until we ran into the Y2K technology collapse, our retirement plans seemed solid. The result was that withdrawal rates were cut to four percent.
Easy mortgages created an economic recovery that restored hope until the 2008 financial collapse. Then, even a four percent withdrawal rate seemed risky. Currently with stock prices that can be hard to justify based on earnings and with interest rates at historic lows, a buy and hold investment strategy offers little hope for retirees. Retiring at the beginning of a bull market or a bear market is not within a retiree’s control. However, it seems to be the real determinant for a successful retirement.
Most investors have portfolios built on a foundation of Modern Portfolio Theory published by Harry Markowitz in 1952. Due to the bear markets being statistically impossible to model, there is no provision for investors to avoid the carnage of bear markets. Statistically, bear markets are a one in five hundred year phenomenon. 1
Today’s global, digital markets are different than long-term historical averages imply. We have had sixteen bear markets since 1929. Without a disciplined exit strategy, investors should expect bear market seventeen during their retirement. To learn about how a portfolio exit strategy can work, attend one of the up coming seminars.
- The (Mis)Behavior of Markets; Benoit Mandelbrot: 1997