Retirement Planning: It isn't Just about Age: Part 2

11/28/2019 5:00 pm EST

Focus: RETIREMENT

Landon Whaley

Editor, Gravitational Edge

Commonly held retirement planning assumptions are flawed, writes Landon Whaley.

Wednesday, I shared my concern about a recent article on baby boomers and retirement. I noted that the Old Institution prescriptions on asset allocation based on age is flawed. Here we explain why.

The problem with this allocation is that the prevailing Fundamental Gravity doesn’t give a flying blue monkey how old you are or when you’re punching your timecard for the last time.

In the summer of 2016, the U.S. economy is coming out of an industrial recession, growth is beginning to accelerate for the first time in 15 months, and the U.S. economy is solidly in a Spring Fundamental Gravity.

Your decision to overweight bonds because your adviser or the “gurus” on television told you equities was a kid’s game put your portfolio squarely in the drawdown crosshairs because all manner of bonds lost money over your last six months of work. Heck, even long-dated Treasuries got tattooed for a -14.6% cumulative decline in the second half of 2016 and experienced a near crashworthy drawdown of -17.9%!

How’s that for a retirement gift!

While bonds were getting the woodshed treatment, those “risky” stocks everyone told you to underweight or stayed away from entirely, they posted a 7.7% gain with just a 4.2% maximum peak-to-trough drawdown.

What you can’t know in December 2016 is that your portfolio pain is only just beginning because the economy is in the early stages of what will become the second-longest expansion in U.S. history!

From June 2016 (where our story began) through Sept. 28, 2018 (when U.S. growth peaked), the overweight bond allocation in our retiree’s age-appropriate portfolio declines 10.7% on a cumulative basis, with a 17.9% peak-to-trough move along the way. Said differently, owning bonds for those two years was a proposition where the reward-to-risk was skewed entirely in favor of the downside!

Not only did your bond allocation not make you money for 27 months, but it also dug you a hole.

While your bonds were bleeding your portfolio dry for over two years, the equities that you are underweight (or avoiding like the bubonic plague), gain 44.9% cumulatively (17.8% annualized) with just a 10.1% drawdown. That’s an impressive R-2-R of 4.4-to-1!

Let me say this loudly and succinctly: it doesn’t matter how old you are, no one can afford to go two years without making money, or to invest in asset classes with all downside and no upside.

I’m not cherry-picking with this 2016-2018 case study; the U.S. economy spends 47% of its time in growth accelerating regimes where it's more favorable to be in stocks than bonds, from both a risk and reward perspective.

That means the economy spends 57% of its time in growth slowing regimes, which favor bonds rather than stocks. We’ve been in just such a growth slowing regime since October 2018, and over that period, long-dated Treasuries are up +23.1% (with only a -8.2% drawdown) compared with the S&P 500 which has gained a decent +8.4% (all of it in the last five weeks), but suffered a -19.9% crash in route to that gain.

Which asset class would you have rather owned over the last 13 months? Is your answer different depending on your age? Heck no! Whether I’m a millennial or I’m on my way to the pasture, give me the asset class where the odds of success are skewed 3-to-1 in my favor, and I can earn more than +20% in just one year!

The retirement allocation bottom line is that you need to remove your age and your career timeline from the investing equation. Financial markets don’t care how old you are or how much longer you have before you retire to a beach to drink Mai Tais.

Financial markets, and more accurately, their risk and return characteristics, care about the trajectory of growth and inflation and how central banks respond to those economic conditions. Focus your efforts on keeping your portfolio aligned with the prevailing Fundamental Gravity, and whether you are a 20-something millennial or a 60-something baby boomer, you’ll consistently be positioned to minimize drawdowns and earn positive returns regardless of market conditions.

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