When 50% beats 100%

 

Okay, I know this is a strange headline. How can 50% beat 100%? Can there ever really be a time when 50% is better than 100%? Well when it comes to the stock market, 50% can be dramatically better than 100%.

Let me explain…

The problem with the stock market is not how well it does in any one year, but rather how long the stock market can take to recover from a loss that can occur over a few bad years. Many investors forget that it took the S&P 500 FIVE YEARS to make back the money that was lost between 2007 – 2008. For retirees or those approaching retirement, this can be devastating. When you invest in the stock market you get to share in 100% of the gains, but unfortunately you get to share in 100% of the losses as well.

After extensive analysis on market returns over the past 16 years, I discovered a metric that was truly fascinating. Here’s what it is:

If an investor would have simply earned half (50%) of the upside return of the S&P 500 from 2000 – 2016 and never experienced a loss, and instead just earned 0% in years where the market was negative, that investor would have significantly outperformed the S&P 500.*

Look at the actual data below:

You’ll notice that from 2000 – 2002 the S&P 500 lost more than 40% of its value in those 3 years and then in 2008 the market lost another 38% of its value. These types of market swings can make it very tough to retire. In comparison, if an investor would have earned 0% in those 4 years instead of losing and then just earned half (50%) of the up market return in all other years, the investor would have significantly outperformed the market.

How much would the 50% investor have outperformed? By just earning 0% in down years, your return would have been 77% higher than the price return of the S&P 500. The market return was 2.69% from 2000 – 2016 compared to 4.77% for the 50% return investor. The difference is striking.

The most incredible take away from the data: The 50% investor never experienced a loss over that 16 year period. 

BUT… looking at the rate of return alone doesn’t paint the full picture. What about withdrawals? If an investor was making retirement withdrawals, would the 50% portfolio still beat the 100% portfolio?

The results are even more shocking:

Let’s say an investor retired with $1,000,000 in 2000 and withdrew $40,000 a year, which amounts to 4% of the portfolio, how would the investor end up after 16 years in both scenarios?

After 16 years in the market, the 100% S&P 500 investor’s $1,000,000 turned into $366,622 while the 50% investor’s $1,000,000 ended with $1,057,988. The 50% investor made over $640,000 in withdrawals over those 16 years and ended with more than his original $1,000,000. The difference in value between the two portfolios is over $691,000.

After running the analysis on these numbers I was blown away. How could the results be so different? This analysis proves how effective retirement portfolios can be when they avoid taking large losses in the market. 

You may be asking yourself, “Is it possible to design a retirement portfolio that earns 50% of the upside of the stock market in positive years while simply earning 0% in negative years?”

Here is the good news: Yes! There are retirement portfolio options called guaranteed insurance contracts that can allow you to earn 50% of the upside of the S&P 500 while insuring and protecting your portfolio from market losses in negative years.

There are over 30 different insurers that offer guaranteed insurance contracts, but only a few offer the 50% upside participation option. A few of these insurers have been insuring contract holders for more than 100 years and have A+ ratings.

If you are in retirement or approaching retirement I encourage you to take a few minutes to talk with me to see if a guaranteed insurance contract may be right for your retirement portfolio.  We can help you design a plan that helps you earn interest in positive years while preserving your portfolio value in years where the market is negative.

You can give me a call at 404.890.5606 or contact me here and we can set up a time to talk.

All the best!

David A. Nicholas

 

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