ARBOR: Up, up and away or a busted market balloon?

Staff Writer
The Destin Log
Margaret R. McDowell

“Would you like to ride in my beautiful balloon?” — “Up, Up and Away” by Jimmy Webb

More folks nearing or in retirement are shifting their focus from relative returns to absolute returns when judging the effectiveness of their investments. 

Assume your portfolio returned 6 percent last year and the S&P 500 returned 3 percent.  By comparison, your relative return was good. The problem with that thinking is that some years the S&P doesn’t finish with positive returns, so simply beating the benchmark index may not accomplish your aims.

Say your portfolio outperformed the S&P by 20 percent in 2008, when the market was down 37 percent. By comparison, you did well. But it’s difficult to feel good about your investments being down 17 percent on the year. For example, if you lost 50 percent in 2008, you needed to earn 100 percent in 2009 just to get back to square one. Investors nearing or in retirement just can’t afford another large setback and the lost investing time associated with it. The sequence-of- return risk dictates that large losses entering retirement or in early retirement years are much more devastating than similar losses sustained later on.

For the 17-year period between 1966 and 1982, the S&P’s total return was 0 percent. An investor who retired in 1966 and beat the S&P over 17 years by 1 percent a year through 1982 did not even keep up with inflation, much less meet any retirement goals.

The return you need in order to meet those income goals is the number that may be more important. How the S&P performs may not actually be a concern, and this is a sea change in thinking for investors who have always focused on high returns during their younger working years. But with the onset of retirement, the risk factor becomes much more prominent, and should probably play a larger role in the types of investments one chooses. An investor nearing retirement wants to get as close to his/her magic annual necessary return number, while minimizing the risk involved in reaching that return.

One method many investors and advisors use is to work backwards. By that we mean you start with the return that you must have to meet your income goals. Then, you choose the least risky investments available that are likely to produce those returns

It’s easy to become overly comfortable about one’s investments when markets move steadily upward, but it’s easy to forget that the U.S. economy only experienced 1.9 percent GDP growth in 2013.  For many investors, the goal is to reach the desired income or return level with the least amount of risk, especially if the investor is nearing retirement. Of course, each investor is unique, and one’s age, goals and risk tolerance all impact investment choices.

Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, (850-608-6121 —, a “fee-only” and fiduciary registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.