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Retirement Investing At The Summit – Investing When Equity Markets Are At All Time Highs

By Jack Towarnicky

Wow! Recently, it was my privilege to experience a presentation by Grady M. Smith, CFA, Vice President & Senior Portfolio Manager, Dimensional.

The combination of 2018 stock market highs and recent stock market volatility has workers/retirement investors asking questions. Particularly, what should I be doing now? Grady was well prepared to educate this ignorant investor. Despite 40 years of investing retirement assets, more than a decade of experience in an ERISA 3(38) fiduciary role, and despite graduate degrees in management (including portfolio management courses) and employee benefits law, I was surprised to see just how many biases and fundamental misunderstandings I had concerning investing1.

Volatility is Not Predictive!

With respect to market highs and volatility, I learned that:

  • For the past 28 years (1990-2017), if you look at daily stock market changes/returns (using the S&P 500 as a proxy), only 33 of the ~6,300 trading days had gains or declines of 5% or more. In fact, if you graph it, daily returns over that period form a traditional bell curve. But, as Grady noted, people don’t experience the nice pattern of a Bell curve. Instead, each change, up or down, has an outsized impact on investor psyche. Investors experience each event! 
  • For the past 90 or so years (1927 – 2016), volatility in the current month is not predictive of returns in the next month (using the Fama/French US Total Market Index). The average monthly return is substantially the same regardless of whether the prior month had high volatility or low volatility! 
  • For the past 90 or so years (1927 – 2017), there is no statistically significant difference in annualized compound returns (whether measured after 1 year, 3 years or 5 years) following either a 10% market decline or a 10% market increase (using the S&P 500 index total returns as a proxy). 
  • An investor exercising perfect market timing would have grown an initial investment of $100 in October 1962 to $146,495,809 by December 2014. However, after adjusting for the cost of achieving that perfect market timing strategy (using puts), the $100 initial investment would have grown to only $6,086. Yes, perfect market timing is possible – at a cost. Note that this perfect market timing strategy achieves a return that is less than an investment in the S&P 500 index ($18,273) and less than the return of a 60% S&P 500 index/40% T-bill portfolio ($7,215). 

So, over time, volatility does not provide a reliable signal to investors to change their investment allocation. And, over time, adjusted for costs, perfect market timing doesn’t deliver a superior result.

Timing Matters

I already knew that2. However, many workers/retirement investors, maybe even a majority of those who are approaching a retirement decision, are so focused on investment returns that they miss the risks of an outsized equity allocation. For example, Grady confirmed that because many 2010 target date funds had significant equity allocations, the actual average decline was 32 percent (the average decline of 2010 target date funds in the Morningstar Universe during the period 10/31/07 – 2/28/09). A worker who, as of March 1, 2009 had planned to retire in 2010, who planned to use a 401k account balance to generate retirement income, and who had selected a 2010 target date fund, was impacted by that decline.

And Grady confirmed that when the goal is income in retirement, a successful worker/retirement investor must manage all of the risks that can erode future income potential – including market volatility, interest rate risk, and inflation rate risk. Similar to decision-making by defined benefit plan fiduciaries, the worker/retirement investor whose goal is income in retirement should focus on liability driven investment strategies. Other strategies may be appropriate for workers who have sufficient retirement income from other sources.

Grady encouraged us (as participants and plan sponsors) to address those risks with a purposeful asset allocation – using a glidepath and risk management tools that are not “to” or “through,” but throughout life (while employed and after retirement) – managing relevant risks in both accumulation and decumulation strategies.

I learned a lot; and I have a lot left to learn.

1M. Pompian, J. Longo, The Future of Wealth Management: Incorporating Behavioral Finance into Your Practice, 2005.  “…  the task of creating and delivering investment solutions to private clients cultivates both a keen awareness of “less than rational” decision-making and a potential interest in the branch of economics— behavioral finance—that provides insights into irrational investor behavior. Developing proper guidelines for applying biases to asset allocation decisions … requires answering a central question: when should advisors attempt to moderate the way clients naturally behave to counteract the effects of behavioral biases…”  Identified biases include:  loss aversion (the tendency to feel the pain of losses more than the pleasure of gain), anchoring and adjustment (the tendency to believe that current market levels are “right” by unevenly weighting recent experience), selective memory (the tendency to recall only events consistent with one’s understanding of the past), overconfidence (the tendency to overestimate one’s investment savvy), self-control (the tendency to spend today rather than save for tomorrow), regret (the tendency to feel deep disappointment for having made incorrect decisions), and availability bias (the tendency to believe that what is easily recalled is more likely). Accessed 11/9/18 at:  

2R. Surz, J. Towarnicky, Target Date Model Portfolios, DC Insights Magazine, PSCA, Fall 2018.  “Using a plan’s core lineup to create target date models can provide lower cost and higher transparency.”  See also:  J. Towarnicky, Default Is Not Mine — I Only Live Here:  Considerations regarding target-date funds as the plan QDIA, DC Insights Magazine, PSCA, Winter 2017.  Accessed 11/9/18 at: ; See also:  J. Towarnicky, S&P STRIDE Target Date Funds: Making STRIDEs in Evaluating the Performance of Retirement Solutions, 10/31/17, Accessed 11/9/18 at: 

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