Sometimes clients come in and say that they want a “conservative” investment portfolio. In most cases, they are inferring that “conservative” denotes a higher percentage of fixed income/bond investments. Let’s walk through the reasons for investing in the first instance and see if that changes your perspective.

Why We Invest

For most of the clients we work with, the primary purpose for investing is to maintain their lifestyle. And to sustain that lifestyle for what might be a timeframe of 30 years or longer. The challenge is not the first or second year of retirement but the 21st or 22nd year. Inflation erodes purchasing power (oranges and eggs, gasoline and electricity) quickly. Unless the investment portfolio is allocated to keep pace, each year in retirement may bring a declining living standard. The only thing that matters long term, from a financial sense, is purchasing power.

A glance at the long-term asset class returns provides some useful framework. We have detailed asset class returns for the past 88 years (1926-2013) which include a few dozen different “stress events” that caused angst for the financial markets. There will doubtless be other such stress events in the future, but this long swath of market history is instructive. Below are annual compounded rates of return for several asset classes:

 (Click on the image for a larger view)


The first column denotes the asset category returns without inflation adjustments. The second column subtracts the inflation rate (loss of purchasing power) from each of the annual returns.  The third column further subtracts an annual withdrawal of 4.5%. You can quickly see from the final column that the after inflation/after withdrawal number exceeds all of the fixed income returns. Therefore, you are bleeding purchasing power each and every year. Since the root of the word “conservative” is “conserve,” it does not appear fixed income meets that definition.

The long-term returns above may not be exactly what we experience in the future, but actual economic history is far more important than market forecasting about what might occur in the future. Ready for a real conversation?

1 Star2 Stars3 Stars4 Stars5 Stars (No Ratings Yet)