Whether you need help growing your wealth or protecting it, the evidence-driven approach involves designing your portfolio so that each investment has unique characteristics and will react differently to economic, political, and societal influences. This is part of the diversification process, and it’s one way to use science rather than guesswork.
A financial future structured using empirical evidence instead of guesswork
Tilt stocks to improve your outcome. Use stocks to grow the portfolio. Every portfolio designed with this approach starts by investing in companies, both big and small, around the globe. In addition, research has shown that investing more in companies that share certain characteristics, such as being smaller, of higher quality, and less expensive, can change the risks of your portfolio, also increasing your potential for higher returns. This is called tilting the portfolio.
Pinpoint bonds that offset stock market risk. The main purpose of bonds is to protect the wealth you’ve worked hard to accumulate. The impact of including high-quality bonds in your portfolio can be significant, leading to a smoother ride and providing the cushion your portfolio needs to endure poor stock market performance.
Add Alternatives to Improve Your Portfolio. Alternatives are simply investments that have unique sets of risk compared to traditional stocks or bonds. Those who practice the evidence-driven approach remain skeptical of most alternative strategies, but a small collection of alternatives can offer truly unique sources of risk and return. Adding alternatives can cushion your portfolio from stock market fluctuations while offering a greater chance for growth compared to high-quality bonds. Even a small allocation to alternatives can soften the portfolio from stock market declines.
Often times many investors have performed similar to the benchmarks for the last 20+ years without recognizing the market has pulled them along. However, using academics and historical data we can show you that when investors switch to the distribution phase at retirement there is a significant negative consequence which most are unaware of.
Using the same portfolios over the same time period (2000-2019), let’s consider a newly retired 65-year-old couple with a $500,000 portfolio. At the start of every year, they withdraw 5% of the initial value ($25,000 of initial $500,000 starting value). This withdrawal is increased 3% each year to help the couple’s income keep pace with inflation.
By 2019, the 65% stocks/35% bonds portfolio would be worth $215,721 (and this is after withdrawing $671,759 in income).
Meanwhile, the S&P 500 portfolio ran out of money.
IMPACT OF A 5% WITHDRAWAL
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