(Photo: S&P 500 Index 1950 to present)
According to this article in the New York Times, fear of the stock market has driven investors away from stocks toward cash over the last couple of years. Globally, the percentage of individual investors’ assets held in cash has gone from 31 percent two years ago to 40 percent now. At the same time, the stock market keeps hitting fresh records and has notched another 45 percent in gains.
While I don’t hold 40 percent in pure cash, I also shifted my portfolio away from stocks, from 30 percent fixed income to 40 percent over the last couple of years. The effect was the same though--I missed out on that big run up of the market on that ten percent that I shifted out of. I share the same psychological scars as the cash hoarders. I lived through the great meltdown of 2008 with an allocation that was too aggressive for my taste. When things finally got back to where I started, I got a do-over and shifted to an allocation that I will feel more comfortable with when the market inevitably takes a turn for the worse.
I don’t regret it though, because I don’t need to hit it out of the ballpark. I just need to earn enough to meet my goal: to have enough money to live on comfortably for the next four or five decades.
The same Times article mentions that almost half of all investors surveyed didn’t know what the annual returns of their portfolios were. It may surprise you to know that I don’t have any idea what my annual returns have been either. Because what I have earned in the past doesn’t help me know whether I will meet my goal of having enough to live on for the rest of my life.
As the market (and my portfolio) have gone up over the first several years of my retirement (well first way down, then up, up, down, up, up, up), I’ve had to make adjustments along the way to make sure I would still meet my primary goal of not running out of money before I die.
The first two years of my retirement while the market was tanking, that meant cutting back on spending. The next two years I got a little boost with a part-time job. Now that the market has recovered (and then some) our nest egg is larger than what we started with, and that’s after taking out 6 years of living expenses. So whatever return I actually earned each of those years is not as important as whether the last cell in my spreadsheet is still positive when I hit 100.
Having enough money to retire depends on four variables: spending, inflation, investment returns, and life expectancy. The only number I know for sure is how much money I’m starting with, the rest of the inputs are just (educated) guesses. The variable I have the most control over is spending.
As my portfolio has grown, the spreadsheet will still work even when I assume a lower and lower rate of return going forward. When the portfolio shrinks it only works if I shrink spending (or supplement income another way like a part-time job).
Inflation has been next to nothing for our personal basket of goods so far. But just like returns, that’s history and irrelevant to me now. Or as Franco in the 1976 movie Gumball Rally says as he rips the rearview mirror from his car and tosses it out of the car, “And now my friend, the first-a rule of Italian driving: What’s-a behind me is not-a important.”
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