We’ve seen a trend among do-it-yourself investors—they have been spoiled by recent history. Over the last 10 years through March 31, 2022, the S&P 500 Index averaged a return of 14.61%, while U.S. investment-grade bonds averaged 2.14%, and inflation was a mere 2.32%. We have seen this lead to some unrealistic assumptions among those who manage their own investments. It’s not surprising to hear the average retail investor panicking in our current environment that has a market in correction territory and rampant inflation that has not been seen in 40 years.
Many do-it-yourselfers do their research; however, that often results in them relying on generic retirement rules like, “expect a 4% withdrawal rate of your portfolio,” or generic asset allocations like 60% stocks and 40% bonds. For the most part, these rules of thumb are not bad, and as financial advisers, we appreciate the effort—they are just not customized to the client. Without a customized plan, investors could be missing out on growth opportunities by having too much allocated to bonds or incur much more risk than necessary by having too much of their wealth exposed to the volatility of the stock market causing them to make knee-jerk reactions when market conditions change.
We believe investors need to trust their portfolio in good times and bad. Volatile market conditions are not the time to make radical allocation changes. We also believe that your spending is the most important figure in your overall plan, as we’ve seen investors with a $2 million retirement portfolio who need to return to work because of lack of discipline in their annual spending. Likewise, we’ve seen investors able to retire with $300,000 in their portfolio and live comfortably. Once we determine your annual spending and any income sources such as Social Security or a pension, we can then back into an appropriate allocation and total of how much you need in your overall portfolio to sustain your lifestyle in retirement.
We start with your annual spending and place 10 years’ worth of spending needs in fixed-income investments, usually bonds, that are held to maturity. By holding your fixed-income investments until maturity, you know exactly what they are worth, so you are not as affected by interest rate fluctuations. This is the basis of the Henssler Ten Year Rule. The goal is to eliminate the need to sell stocks during a down market. By having 10 years of spending needs covered, an investor should be able to wait out a downturn before needing to sell equity investments.
Remaining assets are invested for growth in the stock market in a portfolio of high-quality common stocks. While modeling your stock portfolio after an index is common among the DIY crowd, we find that can also increase the risk. An investment adviser who actively manages the portfolio based on economic cycle, stock financial strength, and valuations on Growth and/or Value Style investments according to price ratios can often capture the upside while managing the risk to the downside.
Catch-all theories do not account for the type or amount of assets an investor owns, the investor’s time horizon, or spending and cash flow situation. When there is a bull market, everyone generally wins; however, it’s the market’s rough patches that separate the savvy investor from the crowd.
If you have questions on how the Henssler Ten Year Rule works for your situation, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the May 21, 2022 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
