Why Your Asset Allocation is Probably Wrong
It’s 9:00 AM. The S&P 500 Futures are indicated as being down by 0.3% today. My mood quickly changes from upbeat to sour. I may very well lose money today too.
And I hate losing money.
The problem that most people have with the stock market is not that they are losing money but the fear that they might lose money. This potential for loss is what drives them.
Although I hate losing money, I have nonetheless been fully invested in the stock market for most of the past three decades. I don’t know if that amount of volatility-risk is right for you, but here’s why I do it.
Risk and Reward
First things first. How much gain and loss are we actually talking about? Well, the S&P 500 has returned 7.59% annually over the past 20 years, but that return has come at the cost of some seriously volatile years. At three separate points over that period, the index had an annual return of negative 11.9% or greater. And “greater” includes none other than 2008’s dramatic decline of 37%.
So, given that, why do I still keep all my investments in stocks?
I do it because I believe that not having enough money to last through retirement is a greater risk than the volatility of returns.
Twenty years ago, one could buy a 20-year U.S. Treasury Bond yielding around 7.0%.
Today, a 20-year U.S. Treasury Bond yields 2.7%. I’m pretty sure the S&P 500 can beat that return over the next 20 years -- but with some volatility. It may even beat that return by a lot.
So, the question is whether earning more than 2.7% is worth the risk?
To answer that question, we must first talk about what is perhaps the most important investing concept of all --- compound interest.
Compound interest is the interest you make on the interest you have earned. Compound interest is why a dollar earning 10% a year doubles in value to two dollars in seven years, not ten years, as one might intuitively assume.
What I find most compelling about compound interest is that small differences in rates of return can make a huge difference over time.
For example, $1,000,000 invested at 3% doubles in value every 24 years. But the same $1,000,000 invested at 5% doubles in value every 14 years.
That’s the difference between two million dollars in Year 24, with the 3% rate of return, versus three million dollars in Year 24, with the 5% rate of return.
A million-dollar difference. Just think about that for a moment.
Deciding on the right asset allocation is never easy, but it’s always important to know what you might be giving up when committing to bonds in our current low interest-rate environment.
Don’t let a software program’s idea of risk force you to retire with less than you need.
For me, that’s a far greater risk than the stock market’s volatility.
About the Author
Manny Weintraub, CFA, is the President of Integre Asset Management, a New York-based registered investment adviser, which combines large-scale institutional experience and expertise with boutique-quality customer care. A former Managing Director of Neuberger Berman, where he co-managed more than $1.5 billion in U.S. equity assets, Manny is an experienced portfolio manager and contrarian investor. A graduate of the University of Pennsylvania, he serves on the boards of Columbia Grammar and Preparatory School, The Atlantic Theater, and North Country School. To learn more about Integre, please visit www.integream.com.
Integre Asset Management Disclaimer – 5/18/2017 Past performance may not be indicative of future results and every investment program has the potential for loss as well as profits. This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security or fund interest or any financial instrument. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information. All information is current as of the date of this material and is subject to change without notice. The views expressed in this presentation are subject to change based on market and other conditions. Any views or opinions expressed may not reflect those of the firm as a whole. Additional information can be provided upon request.
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