I recently met with a friend who asked me to analyze his retirement account. His account is allocated similarly to most retirees which is 60% invested in stocks and 40% in bonds. He uses a passive buy-and-hold strategy.
I took his allocation and backtested it to see how it would have performed in the last major bear market which occurred in 2008. I did this because it allows me to explain how much risk he is taking in a very easy-to-understand way. I believe so much time has passed since the last major bear market that people have forgotten what a bear market looks and feels like.
In the chart below is the result of that backtest. The blue line is the performance of his allocation and the green line is the S&P 500 charted over the 2008 bear market.
The result is that his allocation dropped 40% and the S&P 500 fell 56%. So, the question that I posed to him was: Are you comfortable with riding out a 40% drawdown in your account? This is very important. Because if not he needs to reevaluate his allocation and strategy.
I believe most people have no idea how much risk they are taking. Now is the time to figure that out given that markets are weak.
If you are unsure of the amount of risk you are taking in your retirement accounts, reply to this email and I will run a similar backtest for you.
Craig Thompson, ChFC
Email: [email protected]
Phone: 619-709-0066
Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.
We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.
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