The market can’t save you if you don’t save

A portfolio of 60/40 US stocks and US bonds has ended the year down double digits just 5 times in the past 94 years through the end of 2021.1

With stocks and bonds both down about 15% each in 2022 so far, it looks like this year will be the 6th in 95 years:

If we finish the year where things are today, it will be the third worst year for the 60/40 portfolio in nearly 100 years.

The only year it fell more than this occurred in the 1930s. In 1931, the 60/40 portfolio dropped 27.3%. Then in 1937, the diversified portfolio fell by 20.7%.

“There’s nowhere to hide” is a common refrain this year.

I have always been of the mindset that long-term return is the only more important. Anything can happen in the short term. Diversification works only for those who are patient.

It’s also understandable why many investors are frustrated with this year’s performance, especially retirees.

It can be scary if you experience bad returns at the wrong time.

The Wall Street Journal has a story this week that details the 60/40 portfolio’s struggles this year and how it’s affected investors who have retired in recent years:

Eileen Pollock, a 70-year-old retiree who lives in Baltimore, has seen the value of her portfolio, with a roughly 60-40 mix, drop by hundreds of thousands of dollars. The former legal secretary has amassed more than a million dollars in her retirement account. To build savings, he left New York to live in a cheaper city and took vacations for years.

“A million dollars seems like a lot of money, but I realize it’s not,” she says. “I saw my money disappear piece by piece.”

This year has been terrible for a diversified mix of stocks and bonds but if we zoom in, the returns coming into this year lights out for the 60/40 portfolio.

In the 3, 5 and 10 years ending in 2021, a portfolio of 60/40 US stocks and bonds rose 63%, 81% and 184% respectively.2

Even if we include a loss of 15% or more this year in the 60/40, the past 10 years have given investors 8% per year in this strategy.

The good has far outweighed the bad, which is usually how it works in the financial market.

Bad years aren’t fun but good decades tend to be more than that.

Losing a large chunk of your life savings is not a good time but investors should be aware that the value of their portfolio would not be so high if it weren’t for the bull market that caused these difficult times.

It is also true that you cannot finance the return of investments that carry all the weight in your financial plan. Sometimes the market just doesn’t cooperate.

And the financial markets can only take you so far.

The Journal outlined a study that shows many retirees have to cut their standard of living in retirement because they don’t save enough:

Roughly 51% of retirees live on less than half of their preretirement annual incomeAccording to Goldman Sachs Asset Management, which this summer conducted a survey of American retirees between the ages of 50 and 75. Almost half of respondents retired early for reasons beyond their control, including poor health, job loss and the need to care for family members.. Only 7% of survey respondents said they left the workforce because they had managed to save enough money for retirement.

Most Americans say they’d rather rely on a guaranteed source of income, such as Social Security, to fund their retirement—rather than a return from a volatile market. But only 55% of retirees can do so, the company found.

It doesn’t matter how high or low your investment returns are if you don’t save enough in the first place.

It would be better if we lived in a world where more people had pensions or easier access to a regular income stream in retirement.

Unfortunately, most of us are stuck with financial market conditions, volatility and all, to improve our standard of living in the long run.

But the important thing to remember is that it doesn’t matter how you invest your money if you don’t save enough in the first place.

The financial market can’t save you if you don’t save.

Further reading:
Past Years For 60/40 Portfolios

1As always, I use the S&P 500 for stocks and the 10-year treasury for bonds. Data sources Here you go.

2I’m sure no one actually has a portfolio of 60% US stocks and 40% US bonds but oh well.

Leave a Reply

Your email address will not be published. Required fields are marked *