How retirees can protect their income needs.
Oct/28/08 11:43 PM Filed in: Diversify
Risk |
Risk
Management
How can
retirees meet their income needs and manage current
market risks?
A Barbell portfolio is comprised of 50% very safe assets and 50% very risky assets. It did surprisingly well during the 1929 crash and also during the recovery from the 1974 crash. While it's had mediocre long-term performance, it does provide substantial benefits to retirees during extreme market environments like the ones we are seeing today.
What if we're halfway through a 1929 crash?
As you can see, changing to a Barbell portfolio in the middle of the 1929 crash safely funded an annual $50,000 distribution and still exposed the portfolio to enough equity risk so that it was able to recover when the markets rebounded.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
What if it's 1974 and we're about to recover?
The Barbell portfolio still did surprisingly well during the recovery period after the 1974 crash. It even outpaced the S&P 500 shown by the light blue line above.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
Why did this portfolio do so well in tough times?
There are two main reasons this portfolio has performed well during extreme market conditions:
A Barbell portfolio is comprised of 50% very safe assets and 50% very risky assets. It did surprisingly well during the 1929 crash and also during the recovery from the 1974 crash. While it's had mediocre long-term performance, it does provide substantial benefits to retirees during extreme market environments like the ones we are seeing today.
What if we're halfway through a 1929 crash?
As you can see, changing to a Barbell portfolio in the middle of the 1929 crash safely funded an annual $50,000 distribution and still exposed the portfolio to enough equity risk so that it was able to recover when the markets rebounded.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
What if it's 1974 and we're about to recover?
The Barbell portfolio still did surprisingly well during the recovery period after the 1974 crash. It even outpaced the S&P 500 shown by the light blue line above.
The portfolio illustrated is constructed out of three indexes. 10% 90 day treasuries, 40% intermediate government bonds and 50% small cap stocks. It assumes a $1,000,000 initial investment, is rebalanced annually, includes our maximum fee of 1.50% and an annual withdrawal of $50,000.
Why did this portfolio do so well in tough times?
There are two main reasons this portfolio has performed well during extreme market conditions:
- First, the government bonds were able fund the income distributions.
- Second, the small cap stock exposure provides a high level of market risk. Fortunately small cap investors have historically been rewarded for this risk.