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How To Avoid Emotional Portfolio Withdrawals

The Standard & Poor's 500 stock index is the benchmark against which most investors measure the performance of their portfolios, but that's not such a good thing.  For, although the widely-cited index represents the value of America's 500 largest publicly-held companies, it does not represent the performance you should expect from a retirement portfolio. 

Prudence demands diversification of a retirement portfolio far beyond 500 blue-chip stocks into multiple asset classes.  Surprisingly, so do history, math, and greed. 

It turns out that a multi-asset retirement portfolio historically generates returns almost identical to the S&P 500 but without much of the drama. 

Since performance data on a broad range of asset classes first became available 44 years ago, investors in a seven-asset portfolio sidestepped the worst of the terrible dips that befell the S&P 500. 

In 2008, for example, when the world financial system teetered on the edge of collapse, the S&P 500 lost as much as 37%.  Investors in a multi-asset also suffered frightening losses, but the 28% pullback they suffered was a mere two-thirds of the loss on the S&P 500. 

Put another way:  The 10.4% annualized return on the S&P 500 versus the 10.3% multi-asset portfolio over 44 years are nearly identical, but investors in the multi-asset portfolio earned their return without experiencing the extreme lows of the S&P 500 -- losses so large they are more likely to compel selling stocks at market-lows and then missing the next bull-run. 

The "math of losses" makes it hard for a portfolio diminished by losses to become whole again.  Losing 20.0% of a portfolio requires a 25.0% gain to break even.  And the math becomes more tyrannical with larger losses. 

Recovering from the 37% loss in the S&P 500 investors sustained at the market bottom in 2008 required a 58.7% gain.  To recuperate from its 28% decline sustained by investors in the multi-asset portfolio required a 37% gain.

It pushes investors into scarier situations and makes it more difficult to have faith that nothing -- no natural disaster or political, financial, religious crisis or war -- will bring down the world and bring an end to the progress of humanity.



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