Retirement Spending: Your Portfolio’s Volatility Matters
As the current bull market has lasted for a very long time (since 2009) and stocks have delivered some good returns with the strong backing of the Federal Reserve bank, many investors have developed complacency to stocks. They might think that as long as they can withstand the volatility (large fluctuation), buying and holding stocks is just fine.
This attitude is generally valid if the following conditions are met:
- You hold a broad base stock index fund such as S&P 500 (SPY, VFINX, for example) instead of holding individual stocks. S&P 500, for example, has never lost money in a rolling 20 year period (see, for example, April 17, 2017: Risk vs. Volatility: Long Term Stock Market Returns). Individual stocks, however, are subject to company specific risk and it’s much less certain to guarantee to have a good return even in a very long time.
- You hold these funds for a long time. From the study in the above newsletter, S&P 500 can even lose money in a 15-year period. Furthermore, to get a reasonable return that can beat inflation (say 5% over inflation), you’d have to hold stocks for an even longer period and/or just have a good entry point (i.e. buying them at a cheap valuation when markets are in distress).
For many retirees or those close to retirement, they might have to tap their investment portfolios regularly. It might not be possible to leave their stock portion untouched for so long. For them, the risk or the volatility of their portfolios matters. In fact, it matters a lot.
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