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“I feel like I’m falling behind,” Sara told us. She’d retired about a year ago, and she figured she could live comfortably off her retirement account for many years as long as her balanced portfolio grew 6 to 8% a year. Then in 2015, her portfolio hardly budged. “I could run out of money if this continues,” she said. “What should I do?”
Stock and bond markets had lower-than-average returns in 2015, and many investors like Sara worry that low returns will continue. Low returns put investors’ plans, even their dreams, at risk, and investors naturally feel like they should do something about it.
But be aware that changing your long-term investment plan based on one year’s returns, is unlikely to turn out well. Adding more stocks to try to catch up could add more risk than you can handle, and reducing your stock exposure could deprive you of the growth you’ll need to fund your life in retirement.
Your allocation to stocks and bonds should be aligned with your long-term goals, and over the long term, both stocks and bonds have had good gains. But over shorter time periods, like one year, returns typically vary dramatically from their long-term averages.
Stocks, as measured by the S&P 500, gained 11.1% annually from 1950-2015. But in order to participate in that 11.1% annual return, investors had to stay invested in extreme years when the S&P 500 lost -39% as well as years when the index gained as much as 47%. Bonds, as measured by the Barclays Aggregate Bond index, gained 6.0% annually since 1950, but on a one-year basis, bond returns also varied considerably, from high of 43% to a low of -8%.
Sara aimed to grow her portfolio 6 to 8% a year, and historically a balanced portfolio has done just that. A portfolio of 50% stocks, as measured by the S&P 500, and 50% bonds, as measured by the Barclays Aggregate Bond index, gained 8.9% annually from 1950 to 2015. But the balanced portfolio rarely returned 8.9% in any calendar year; the annualized 8.9% return smoothed out a wide range of calendar-year returns, from a high of 33% to a low of -15%.
How often did a balanced portfolio earn more than 6%? Over rolling five- and 10-calendar-year periods, a 50/50 balanced portfolio of stocks and bonds (as measured by the S&P 500 and the Barclays Aggregate Bond index) has gained more than 6% about 70% of the time. And over rolling 20-year periods, a balanced account gained of 6% or more 91% of the time.
During the year when a balanced portfolio lost -15%, it probably didn’t feel like the portfolio was going to be able to deliver an annualized 8.9% return over the long term. But if we hope to be successful investors, we need to stay focused on the long-term, even during short-term setbacks. We’ll likely experience years like 2015 when it may not feel like we’re on track to reach our goals. These years can make us doubt whether our allocation or our strategy can really help us get ahead. But history shows that if we hope to participate in the terrific long-term results of stocks and bonds, we may need to stick with our plan and stay invested, even through challenging markets.
Low-return years can be particularly worrisome for retirees who hope to take a steady paycheck from their retirement accounts. But we can’t expect our investment returns to be as consistent as a paycheck. We may have to accept that we’ll have some low-returning years and some high-returning years over the long term.
Even in retirement, you are a long-term investor. You won’t need all of your money at once, and given today’s life expectancies, new retirees could be invested for another 20 or even 30 years. In that context, one lower-than-average year among 20 or 30 years probably won’t derail your long-term plans.
If you’re looking for a fund that seeks to provide the growth potential of a stock fund combined with the lower volatility of a bond fund, you might consider investing in the Conservative Upgrader Fund (RELAX).
RELAX is a balanced portfolio of stock and bond funds: 60% of the portfolio is invested in core, diversified stock funds, which have the potential for growth, and the remaining 40% is invested in bond and total-return funds, which seek stability. The Fund has no exposure to aggressive sector funds and we limit exposure to more volatile bond funds, like high-yield funds.
Since its July 1, 2002 inception through March 31, 2016, RELAX has gained 6.35% on an average annual basis.
The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Barclays Aggregate Bond Index is an unmanaged index generally representative of intermediate-term government bonds, investment grade corporate debt securities and mortgage-backed securities. You cannot invest directly in an index.
Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower or higher than the performance quoted. Performance data quoted current to the most recent quarter- and month-end may be obtained by clicking here.
Diversification does not assure a profit or protect against loss in a declining market.