Strike Three: The Next Bear Market Ends The Game
The comments below are an edited and abridged synopsis of an article by Lance Roberts
After two major bear markets since the turn of the century, baby boomers are unprepared for retirement. Dependency on social welfare is at record highs, individuals are working longer into retirement than at any other point in history, and after a decade-long bull market, many investors have only recently gotten back to where they were 10 years ago.
Given that valuations are once again pushing 30x earnings, Roberts reviews the expectations that individuals facing retirement should consider:
Expectations for future returns and withdrawal rates should be adjusted down due to current valuation levels; the potential for front-loaded returns in the future is unlikely; personal life expectancy plays a role in future outcomes; the effect of taxation must be considered; inflation expectations must be considered; drawdowns from portfolios during declining markets accelerates the principal bleed, so plans should be made during up years to safeguard capital for reduced portfolio withdrawals during adverse market conditions; the yield chase and low interest rates over the last 10 years has created a risky environment for investors, so caution is advised; expectations for compounded annual rates of return should be dismissed in lieu of variable rates of return based on current valuation levels; chasing an arbitrary index that is 100% invested in the equity market requires investors to take on more risk than they realize.
Two bear markets have left many further away from retirement than they ever imagined. The next one will destroy those goals entirely.
Investing for retirement should be done conservatively and cautiously, with the goal of outpacing inflation, not the market, over time. Trying to beat a random, arbitrary index that has nothing in common with your financial goals, objectives, and most importantly, your life span, usually ends badly.