It is not just about returns. It hardly ever was, we just thought that was all that was important (an illusion brought on by extended “good markets”).
Turns out, returns are in the category of “what can’t be controlled.” Yes, an allocation can be designed to have more or less fluctuation in value. However, that is something different than returns. Return can still fluctuate between (and sometimes exceed; think Black Swans) historical return variability regardless of your allocation. Even interest rates on cash change over time.
So … if it is not about returns what is it about? What can you control?
For retirees, you can control how much you spend. For the not-yet-retired, you can control how much you save (which is another way of saying how much you spend). How much you spend determines your Standard of Individual Living. Your Standard of Individual Living is not a factor of returns. Thus, returns should not be a variable you use when you plan for how much you need to retire on, or how much you need once you are retired.
Returns should not be chased. A prudent plan establishes an ability to capture returns from key asset classes as returns occur. However, a prudent retirement plan, whether you are pre- or post-retirement, should not depend on returns calculations to determine how you are doing. Rather, ongoing retirement research is refining how to measure and monitor what you need (for not-yet-retired) or what you have (for retirees).
When I was a pilot in the Air Force, we would go into the simulator every year to practice emergency procedures … things that you couldn’t practice in the aircraft or didn’t think about most of the time. Why practice? To develop habit patterns that went against the emotional grains and natural reflexes should the situation be encountered in real life.
My contributions to retirement thought leadership and research are part of my habitual mental simulator exercises to develop processes and procedures to address situations not often encountered in life such as the economic and market downturns in the late 2000’s. Have you gone into your simulator recently? What are your emergency procedures (other than panic and bailing out)?
Moral of the story: Focus on what you can control … spending.
Another perspective on returns: Are Market Returns Really the Key to Your Portfolio Value?
Returns footnote:
Opportunity, or future returns, more often than not come from the asset class that most people are currently shunning; rather than from the asset class most people are chasing. Why? A run-up in prices requires someone else still willing to buy at yet higher prices (greater fool theory). Eventually there are fewer, or nobody else, willing to buy and prices collapse. Then people look for what is now going up after that collapse (or flight to safety in cash to wait for rising prices signals in something). Prudent allocation (and proper diversification) recognizes this and has allocations such that rising assets are sold (brought back into target allocation) and proceeds put into falling assets (also brought back into allocation target). In other words, rebalancing.
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