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Jeffrey Sweeney is an investment banker with years of experience in direct lending and corporate finance for small- to middle-market companies. He is the chairman and CEO of US Capital Partners, an innovator in small- to middle-market business lending. US Capital Partners has been providing prompt, innovative, and reliable financing solutions across the United States and abroad for more than a decade.

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Monday
May082017

Living Well in Retirement – Make Good Decisions Now

Let’s assume you have to pick one of the options below:
  1. 100% likelihood of running out of money ten years into retirement, or
  2. 70% chance of losing 30% of your money in the next five years but a good chance of not running out of money in retirement for at least twenty plus years.
If your answer to the question above was option B, you may be unusual.
 
We spoke with one of the largest mutual fund companies this week.  They report 75% of their fund flows are going into their short duration income fund -- a “cash” type holding. 
 
Last week, we conducted a survey of our readership to determine the probability of a major bear market (greater than 30% market decline) occurring in the next five years and how investors are preparing to handle this potential challenge.
 
Roughly 70% of the respondents indicated the chances of a major market decline in the next five years is 70% or greater.  The most popular choice for how to prepare for the next bear market was to hold cash which received 40% of the vote.
 
To relate holding cash to the options A and B above, assume an investor has a $500,000 portfolio.  The investor is able to invest for eight years before withdrawing money for retirement.  The withdrawal rate starts at $50,000.  The withdrawal rate is increased by 2% annually to keep pace with inflation.
 
 
The near zero return on cash can be earned with a high degree of certainty.  Because the investment return is nearly certain, one may forecast with confidence that our example investor will run out of funds ten years into retirement.
 
What if the example portfolio was invested with a 5% and 7% average annual return?  In the case of this example, the 5% return provides 20 years of fully funded retirement.
  
At a 7% return, the example investor now enjoys 40 years of fully funded retirement.
 
Is a 7% return from investing in equities a realistic assumption?  Imagine that it is 2007 and you decide to put all of your money into the S&P 500 and reinvest dividends.  In 2008, the market lost -37% of its value.  What was your average annual return over the next ten years?
 
Even if you had invested your portfolio at almost exactly the wrong time (a year before the Great Recession) you still would have made a 7% average annual return.  Since 1928 when the S&P 500 index began, the average annual return is approximately 9.5%.
 
We don’t know anyone who wants to run out of money during retirement.  We also do not know anyone who wants to potentially lose -30% of their life savings sometime during the next five years.
 
Holding cash is not the answer.  Having equity exposure has been a successful approach much of the time historically; but not always.  Our advice is to:
 
  1. Invest in equities and have a plan for avoiding major bear markets.  If you establish clear-cut rules about what conditions will make you sell, it is emotionally much easier to invest today. This newsletter and its Market Dashboard (below) may play a role in your rules-based, non-emotional sell threshold.  You may want to consider working with an advisor experienced in avoiding major bearish markets and participating in bullish markets.
  2. Invest in assets that are not directly tied to the stock market and have an attractive balance of return versus risk.  Many of these assets may be offered as “alternative” investments in real-estate or commercial lending.
 We invite you to call or email anytime if you have questions about how we can help you with your wealth management.  Please give us a call at (415) 249-6337 or email us at info@uscapitalwm.com to learn more.
 


Stock Market Dashboard
 





This commentary and a sampling of previous editions are available as PDFs:

5/5/2017: Living Well in Retirement – Make Good Decisions Now
4/28/2017: And the Survey Says...
4/21/2017: Low Fees and Diversification Do Not Protect from Major Loss
4/14/2017: "Housing IS the Business Cycle"
4/7/2017: Bond Risk Rising with Rates
3/31/2017:
 
Exclusive Stock Market, Higher 
3/3/2017: Velocity Pivot Good for Stocks
2/17/2017: Climbing A Wall of Worry
2/10/2017: Value Shopper - Europe on Sale
1/27/2017: Extraordinary Earnings Louder Than Trump
1/20/2017: It's Not All About Trump
12/30/2016: Predicting the Future -2017
12/2/2016: 
Trade What Is, Not What You Think It Should Be – 2017 Outlook

US Capital Partners

Pursuant to the provisions of Rule 206(4)-1 of the Investment Advisors Act of 1940, we advise all readers to recognize that they should not assume that recommendations made in the future will be profitable or will equal the performance of past recommendations. This publication is not a solicitation to buy or offer to sell any of the securities listed or reviewed herein. The contents of this letter have been compiled from original and published sources believed to be reliable, but are not guaranteed as to accuracy or completeness. Nicholas Atkeson and Andrew Houghton are also principals of US Capital Wealth Management, a registered investment advisor. Clients of US Capital Wealth Management and individuals associated with US Capital Wealth Management may have positions in and may from time to time make purchases or sales of securities mentioned herein.

THIS NEWSLETTER IS PROTECTED BY COPYRIGHT LAW. UNAUTHORIZED DISTRIBUTION AND/OR REPRODUCTION BY PHOTOCOPY OR ANY OTHER MEANS IS STRICTLY PROHIBITED AND PUNISHABLE BY A FINE OF UP TO $25,000.

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