(Graph Details: S&P 500 since the inception of Sydney's retirement, March 1, 2008)
As some of you that have been with me since the beginning of my retirement know, I retired in March of 2008, right as the market was melting down and we were entering the worst recession in my lifetime. I wrote several posts about my declining nest egg over that first year of my retirement. But I never panicked. I just hung on and kept rebalancing my portfolio to it’s 70/30 stock to fixed income ratio over the next five years.
And it took almost that long to get back to where I started when I retired. It was a long and scary road, and I learned the hard way that my 70/30 allocation toward stocks was actually, in retrospect, too aggressive for my taste. Going through the worst recession of your lifetime after you no longer have a job is a really great exercise for pinpointing your exact tolerance for risk.
At the beginning of 2013, I had the (incorrect) feeling that the market had probably run its course for the time being. And since I had finally gotten back to where I started from, I decided it would be a good time to shift my portfolio to a less aggressive 60/40 allocation toward stocks.
Now you can look back over 2013, when the S&P 500 Index raked in almost 30% gain, and say, “Sydney, you made the exact wrong decision!”
But I made the exact right decision for my own tolerance for risk. And the reason I know it was the exact right decision is because, even though I could have made more money last year if I kept my previous allocation, I feel a WHOLE lot better about missing out on that extra return than I felt in 2008, 2009, 2010, and 2011.
The bottom line is, when you pick an allocation that you are comfortable with, and then keep rebalancing your assets to remain with that allocation, you will never do as well as the market does in a spectacular year. You will also not lose as much as the market loses in a spectacularly awful year. That’s the whole point. Not to beat the market, but to keep yourself from doing something stupid, and to make returns that are good enough to meet your goals.
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