Menu Close

A bucketing approach for retirement investing

view original post

Contrary to popular belief, retirement investing is not all that different than investing at any age. It’s all about knowing how long your money will be invested for and choosing your investments accordingly. Some investments are built more for the short-term. Others are best used for long periods of time. The key is to define both and match your investment strategy with your personal financial plan.

So, what investments are best for the long term? We can begin by evaluating stocks. The question we need to answer is “How long do I need to invest in stocks to receive a positive or desired return?”

To find a fair and reasonable answer, you can evaluate historical returns for context. After some trial and error, we’ve settled on defining “long-term” as 10 years or more. Why? We evaluated historical returns data for the S&P 500 from 1926 – 2021 (from the 2022 Dimensional Fund Advisors Matrix Book). During that time, there were 87 10-year calendar periods (1926 – 1936, 1927 – 1937, etc.). Of those 87 10-year periods, the S&P 500 generated at least a positive average annual return 83 times, or 95.4% of those periods.

The average of all the 10-year period returns was approximately 10.5%. Also, there were 75 of the 87 (or 86.2% of the) periods where the 10-year average return was 4.4% or greater.

Conversely, if you evaluate 3-year periods, the frequency of a positive return for stocks decreased significantly down to 82.7%, or 72 of the 87 3-year periods from 1926-2012.

So, what does this tell us? It shows that historical stock returns have had less variance over longer periods of time. Now, does this data mean that stocks will perform the same way over the next 86 years? Absolutely not, but it does provide strong context and supports the notion that the longer you give stocks, the higher the likelihood of a positive return, and the more likely that your stock returns outpace bonds and cash.

And, even if it doesn’t feel like it, a 75-year-old could easily live another 10 years, 15 years, or even 20+ years. That is usually why it makes sense even for older retirees to still invest in stocks to some degree.

Mid-Term Investing

The same exercise can be done with bonds and bond returns. Ask yourself, “How long do I need to remain invested in bonds to receive a positive return.” According to BlackRock’s Student of the Market from May of 2022, U.S. bonds have generated a positive return in 90% of 1-year periods, 99% of 3-year periods, and 100% of 4-year periods. That means that the probability of receiving a positive return is fairly high in the mid-term.

Now, as you go out longer, you’ll find that stocks will begin to outperform bonds on a consistent basis. But, in that 2-9-year window, bonds can be an attractive investment option if you analyze historical returns.

Short-Term Investing

Short-term investing is anything that is invested for less than 1 year. The key for short-term money is that when markets are volatile, when stocks and bonds have lost value, you don’t want to be forced to sell them at a loss. However, cash investments like savings accounts, checking accounts, and money market funds do not fluctuate like the stock market.

No, cash investments are known, for better or worse, for being incredibly stable. They don’t go up much, but they don’t go down much either. That is a perfect combination for short-term investments. Sure, we’d all love that investment that averages 10% per year and does so reliably over 1-year periods, but that just doesn’t exist.

Besides, the primary goal for most short-term money is not growth. What we usually want from our short-term money is safety and liquidity. A cash-like investment can provide both.

During periods like 2022 when the stock and bond markets are both down, it sure is nice to have some money in cash that hasn’t been affected. Why? Because now you can be patient and allow for your stocks and bonds to recover.

Therefore, it’s not that your savings account, checking account, money market accounts, and CDs are bad investments. They are just bad long-term investments. They can be great short-term investments.

Retirement Investing, or Investing at Any Age

This bucketing philosophy is really one that could and should be used at any age in determining asset allocation.

Investing and investing at any age depends on your specific situation. It starts with a plan and an understanding of future cash flows. Investing always involves risk. All of these factors should be taken into account when putting together a comprehensive financial plan. Seek help from a CERTIFIED FINANCIAL PLANNER™ professional for help with your specific situation. Or, give us a call, CarsonAllaria Wealth Management at 618-288-9505 and we’ll be happy to help.

Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. No portion of the article shall be construed as a solicitation to buy or sell any specific security, investment product, or particular investment strategy. In addition, this article shall not constitute personalized investment, tax or legal advice. Information contained in this article may have been derived from third-party sources that CAWM believes to be reliable; however CAWM does not control such information and does not guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources.