I know it’s tempting, but it does not pay to chase past performance.
This backtest was done using
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00:00 Intro
00:57 The Test
04:14 US
07:46 Global
13:26 Third Strategy…(read more)
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REVEALED: Best Investment During Inflation
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The S&P 500 index is often touted as the go-to investment for long-term growth and stability. However, a recent 108-year backtest on the S&P 500 has found that it may not be the best option for retirees or those close to retirement.
The study, conducted by financial researcher Robert Shiller, analyzed the performance of the S&P 500 from 1912 to 2020. The results were surprising, revealing that the index experienced several prolonged periods of negative real returns, especially for investors who were retired or close to retirement.
During the 108-year period, the S&P 500 showed significant volatility, with long stretches of negative returns. This volatility can be particularly detrimental for retirees who rely on their investments for income. When the market experiences prolonged downturns, retirees may have to sell off assets at a loss to fund their living expenses, which can significantly deplete their retirement savings.
This backtest result suggests that retirees should reconsider relying solely on the S&P 500 for their retirement income. Instead, they should consider diversifying their investment portfolio with a mix of assets that provide more stable and reliable returns, such as bonds, real estate, and dividend-paying stocks.
Additionally, retirees may want to explore alternative investment options that offer more consistent income, such as annuities or dividend-focused funds. These options can provide a steady stream of income regardless of market volatility, which is crucial for retirees who are no longer earning a regular paycheck.
It’s important to note that the S&P 500 can still be a valuable investment for younger investors with a longer time horizon. Over the long term, the index has historically provided solid returns, and its broad diversification can help mitigate risk. However, for retirees or those approaching retirement, the backtest results indicate that relying solely on the S&P 500 may not be the best strategy.
In conclusion, the recent 108-year backtest on the S&P 500 has raised important concerns about its suitability for retirees. While the index has the potential for long-term growth, its historical volatility and periods of negative returns make it a risky option for those who are no longer earning a regular income. Retirees should carefully consider their investment options and seek professional financial advice to ensure a stable and secure retirement income.
Towards the end, the white bars referring to “more diversified” represent which ETF?
I'm 54 and my wife and I are VERY worried about our future, gas and food prices rising daily. We have had our savings dwindle with the cost of living into the stratosphere, and we are finding it impossible to replace them. We can get by, but can't seem to get ahead. My condolences to anyone retiring in this crisis, 30 years nonstop just for a crooked system to take all you worked for…
Going back 108 years is not valid. The very nature of economies has drastically changed. Even going back 50 years is a farce. Fifty years ago, the USA was the production powerhouse of much of the world. We live in a far different economy today, than 50 years ago. The same is true of the UK a hundred years ago; it was still drawing a lot of wealth from its Colonies. But as the colonial period for the UK has drawn to a close, those economic sources are no longer valid.
It is only valid to look in more recent times (such as starting at the year 2000). The state of the various world economies "looks" more like the current economies today. Yes, there has been some drift, but it more nearly resembles it than comparisons from 50 or more years ago.
When the financial mechanisms for generating growth and wealth change, the performance of the world markets change. The changes are often drastic. How would you have rated the Chinese economy in the 1960s; how does it compare to today? The same for the USA and most Western nations.
Back-testing IS a powerful tool, but it must be performed against a "similar market" to be valid. Even today, I cannot play the market the same as 6 months ago. The market's nature changes quickly, and those relying upon it for income must equally change their strategies to keep their heads above water.
I can’t get thru this whole video. It seems to me this is an exercise in self flagellation. If the S&P has an historical annual return of 9%+ , then a draw down of your principal is moot. That is, unless you intend to draw more than 9%, which isn’t stated in the video Secondly, he doesn’t talk ( at least in the first 7 minutes) the possibility that you might want to leave something to your heirs.
Global portfolio in not attractive because foreign governments tax investors outside of the country most. So in usa, if we invest on global portfolio then return would be less due tax implications.
Considering S&P gets 40% of its profits from overseas/INTL I think we'll be safe w it being diversified
Very interesting video, I was thinking to invest fully in S&P 500, but now I do not think so.
Munger and Buffet never talk about sequence of return risks . This is a lucid and valuable analysis you’re giving. The growing federal deficit and interest expense and the magnificent seven are warnings . The S&P is headed for years of lower performance .
Where ha the £500,000 come from in the first place. I am 71 and do not have £500,000 lying around and wondering what to do with it?
Predicting market movements is extremely difficult in reality. It requires the investor to be right twice: Essentially why individuals engage service of experts who provide proper strategies to navigate the markets
Are there any videos in how I can build myself a global portfolio?
What if someone wants to DCA for the next 30-40 years ?
In Latin American countries, you can achieve investment returns of 16% per year paid monthly, with a 2 to 1 mortgage guarantee
Typical British propaganda. Nice try Brit. We know you wish you were us. I'm buying global stock just so I can sell it.
With respect, I would rather take my advice from Warren Buffett than you based on his track record.
It would be great o fyyou could try do the same with some quality dividend etf as well.. This would add to the argument of the relevance of the (schd could be a good go?)
Another excellent video, James. One of the clearest explanations I've seen of why timing is everything when you retire and how a few years of poor performance can make all the difference. A great explanation of the difference between average returns and how volatility in those returns really does make a difference when you've retired.
If the average return is 11% why would he run out of money if he had been withdrawing 4%
Hi James. Big fan. Would love to see a more in depth look at a buy and hold factor investing portfolio. I know you use dimensional funds but it’s my understanding these aren’t available to non clients. I currently have the Invest Engine Managed which allocates 30% to factors.
iShares MSCI World Small Cap WLDS (6%)
iShares MSCI World Minimum Volatility MINV (6%)
Xtrackers MSCI World Momentum XDEM (6%)
Xtrackers MSCI World Value XDEV (6%)
Xtrackers MSCI World Quality XDEC (6%)
I’ve been told (on Rational Reminder forums) the ‘sleeve’ approach to factor exposure isn’t very ‘meaningful’ factor exposure so I’m considering switching to Trade212 and going with JPLG plus ZPRV/X instead. Anyhow, would love to hear your view on sleeve vs multi factor etfs and how to build a folio in more detail.
I would simply re calculate a scenario every year that gave a ninety percent success rate and adjust my spending accordingly. A dynamic spending plan that would give you more to start, and give you more clarity, and also possibly more spending, most years.
00:02 Questioning the wisdom of investing in the S&P 500, especially for retirees
01:56 Diversify retirement portfolio beyond S&P 500 for sustainable income
03:55 Backtest results show varying success rates for S&P 500 investments during retirement.
05:50 The 4% rule may be too conservative, aiming for 85-95% success rate could be better
07:48 A globally diversified portfolio outperforms the US Stock Market in retirement scenarios.
09:59 Withdrawal rate and portfolio performance impact retirement sustainability.
11:55 Diversify globally for lower volatility and higher income in retirement.
13:51 Small cap value stocks have outperformed the S&P 500 over the long run.
Thanks James. Great content as always. Would be great to hear more about possible dynamic withdrawal stratagies, as I suspect that could have a massive impact on success outcomes for fairly small changes to early retirement incomes.
thanks James, really interesting !!
Looks like you're attracting scammers in your comments, James! Someone purporting to be you wants me to whatsapp them! I've reported it and it seems to have disappeared.
Great video. Thank you for sharing a non-exclusive US perspective. Is there a simple singular ETF that would cover this?
Very useful information as always and essential viewing for those nearing or just started their retirement journey. Perhaps a mention of dynamic withdrawal guardrails could have been added as an additional method for sustainable withdrawals.
As you have highlighted, investment fund and/or bonds selection for appropriate diversification is important since index funds will contain all listed companies and will therefore contain trash as well as winners.
Is the VWRP a good world index fund?
Being dependent on investments alone for retirement is often bad planning. Occupational pension opportunities should be fully utilised throughout working life, and State Pension investment should be optimised too. Investments can then be the ‘icing on the cake’ , or passed on to future generations
Since subscribing to your channel James, I am constantly reminded to consider my future retirement actions…
This is great information. Thank you
I love that chart @ 12:40 really. It shows the intensity of the Japanese Asset Price Bubble in a way I’ve never really thought of.
Well done. Next level, simply explained, and very impactful. Cheers!
I advise a lot of clients in the US and the pull of the S&P500 is real. Great video, highlighting why that might not be the best option to meet a clients retirement income goals!
Another fantastic video James.
I’m all ears on these investments but I think I’m like a vast majority and ploughing everything into the pension… could you do a video aimed solely at maximising the pension please, even after watching lots of these vids I’m still struggling to understand the best options and considering outside pension investing is confusing.
What is the best option? Hopefully a subject for another great video.
What a great video, 60/40 all world equity bonds – would that be a global bonds fund or just GBP?
So what exactly is the 3rd strategy? its not clearly articulated here. Is it the DFA small cap value US fund on its own, or is it some other multi fund DFA portfolio. I would appreciate the clarity @jamesshack
James – what is the asset allocation % for your "Global" strategy ?