Markets can’t save you if you don’t save yourself

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

With stocks and bonds both down around 15% in 2022, it looks like this year will be the sixth time in 95 years:

If we ended the year where things are today, it would be the third worst year for a 60/40 portfolio in almost 100 years.

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

“There is nowhere to hide” is common this year.

I have always been of the opinion that long-term returns are the only ones that matter. Anything can happen in the short term. Diversification only works for patients.

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

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

The Wall Street Journal He had a story this week detailing the struggle for a 60/40 portfolio this year and how it affects investors who have retired in recent years:

Eileen Pollock, a 70-year-old retiree living in Baltimore, has seen the value of her portfolio drop by hundreds of thousands of dollars with roughly a 60-40 mix. The former law clerk amassed more than $1 million in retirement accounts. To build up his savings, he left New York to live in a cheaper city and skipped vacations for many years.

“A million dollars sounds like a lot of money, but I realized it’s not,” he said. “I saw my money disappearing in large part.”

It’s been a great year for a diversified mix of stocks and bonds, but if you zoom out, the returns this year were lights out for the 60/40 portfolio.

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

Even if we include this year’s 15% loss in the 60/40, this strategy has given investors 8% per year over the past 10 years.

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

Bad years are no fun, but good decades make up for it.

Losing a large portion of your life savings is never a good time, but investors should realize that their portfolio values ​​would not be as high if it weren’t for the bull market that has brought about these difficult times.

It’s also true that you can’t bank on investment returns carrying all the weight in your financial plan. Sometimes the markets don’t cooperate.

And financial markets can only take you so far.

The magazine cited a study showing that many retirees are having to cut back on their standard of living in retirement because they didn’t save enough:

Approximately 51% of retirees live on less than half of their pre-retirement incomeAccording to Goldman Sachs Asset Management, which surveyed American retirees between the ages of 50 and 75 this summer. Almost half of the respondents took early retirement for reasons beyond their control, including ill health, job loss and the need to care for family members.. Only 7% of those who answered the survey said that they left the workforce because they managed to save enough money for retirement.

Most Americans said they would prefer to rely on guaranteed sources of income, like Social Security, to fund their retirement, rather than volatile market returns. But only 55% of retirees are able to do that, according to the company.

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 much better if we lived in a world where more people had easier access to a pension or regular income in retirement.

Unfortunately, most of us are stuck dealing with the financial markets, volatility and all, in order 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.

Financial markets can’t save you if you don’t save.

Further reading:
Worst years ever for the 60/40 portfolio

¹As usual, I’m using the S&P 500 for stocks and 10-year Treasuries for bonds. Data source here.

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