#221 – Defending Core Investment Principles

Jeff Lloyd [00:01:10]:
It’s like, Wes, look at this article. Not a lot of depth through it. I really don’t even know what they’re trying to accomplish with this article, but you got to read it.

Wes Moss [00:01:17]:
They are taking major shots at two of the most fundamentally important financial rules of thumb and strategies that you can think of. There’s a Mount Rushmore of financial theories that help people get to a successful retirement. Two of them are what this article is saying that may just not work anymore. So that’s one is the balanced portfolio that might not work anymore, and two is the 4% rule. We call it the 4% plus rule. They say the 4% rule doesn’t work. May not work in the future either. So we take great issue with that one.

Wes Moss [00:01:55]:
I like that they’re questioning it. I think that’s totally fair to do. But they don’t really offer up anything of why this won’t work in the future, except for, hey, the stock market might not be all that great moving forward, and the bond market might not be all that great moving forward. And that’s it. You can always say that. So imagine. And that’s why I think it’s an important topic here to revisit. Imagine if a time honored strategy puts you into financial ruin.

Wes Moss [00:02:24]:
Just imagine what a new unproven gimmick would do if you’re listening to the retire sooner podcast. You’ve probably been saving for retirement for five years, ten years, 20, maybe 30 years, and you’ve been doing this over and over. It’s not just a marathon it’s an ultra marathon of how long it takes to do this, and you’re ready to embark on your retire sooner journey. You’ve been fighting the good fight, saving, investing, doing all this planning, and you’re not banking on some new age retirement theory that hasn’t been proven. You’re looking and saying, I’m looking at what’s worked over the course of the last half century, or really century of economic history that’s been passed down through generations. You’ve got your balanced stock bond portfolio, maybe 60, maybe 70% stocks, the rest in something a little bit more conservative. And you’ve planned for years that your portfolio can hold up under the 4% withdrawal rule, which is, again, 4% plus inflation. And you have a very low probability of ever running out of money.

Wes Moss [00:03:23]:
It’s how we can, we studied, how do you max out what you’re pulling out from retirement portfolio without running out? Jeff Lloyd, I think you came up with that. And these strategies, these rules of, and again, they are rules of thumb, so they don’t work perfectly all the time or every year or linearly, but over time, they certainly have really helped many people get to where they’re headed for their retire sooner journey. To me, these are like John Bogle from Vanguard. They’re two of the main ingredients in the, in the John Bogle apple pie. That’s how important these things are. Now suddenly the financial world starts whispering that none of these ingredients are just, they don’t work anymore. You don’t want to use apples anymore. They used to be good for 100 years.

Wes Moss [00:04:12]:
They’re not good anymore. Okay? What’s worked for an entire century, it’s just kaput. Just forget about it. Doesn’t work anymore. So if that doesn’t discourage you and have your hands, my hands are up in the air right now. If that doesn’t discourage you, then I don’t know what does. So that’s what’s happening here with this uplifting personal financial article, personal finance piece I just found in the Wall Street Journal. The author declares the death of the balanced portfolio and the death of the 4% roll, complete with a graveyard scene.

Wes Moss [00:04:48]:
So you open this thing, and this is where you can’t not click on it. They’ve got a tombstone in the tombstone etched 60 40 balance portfolio. Then they’ve got a mummy with a skeleton hand coming out of the ground, holding in the skeleton’s hand an envelope that says, your retirement. Jeff Floyd it couldn’t even be.

Jeff Lloyd [00:05:08]:
It’s a cryptic saying. It’s a scary headline. You know, you’re talking about financial ruin. You’re reading that headline, and then you see that kind of gruesome picture that’s depicting your retirement in a graveyard being.

Wes Moss [00:05:23]:
Held by a zombie. Wait, what is the walkie? The walking dead.

Jeff Lloyd [00:05:27]:
The Walking Dead.

Wes Moss [00:05:28]:
The Walking Dead is coming for your retirement would have been just as good of a title. So the problem is that while devoid of any real reasoning except that the world of investing just might simply fall short of economic history and just. It used to be good, but it’s not going to be good anymore. I think what it does, or articles like this is, and again, I’m fine on questioning all of these things, we should question them. But if people read this, it scares you. You think, wait a minute, like the Wall Street Journal just said that all these things have been banking on, they just, they’re not gonna, they might not work anymore. And it’s not that they say they might not work anymore. It says that it puts you at risk of financial ruinous.

Wes Moss [00:06:11]:
It’s not just that they say they could just not be as good in the future. It says no financial ruin. So I think that’s scary, and therein lies. I think what the problem is is that if you scare people that retirement is impossible. And denouncing the 4% rule makes retirement. That’s already really hard, makes it almost impossible. If you can barely use any of your money, they suggest that you should only use 2.25%. But it serves to have particularly younger folks just stop before they even get started, quit before we even start the race.

Wes Moss [00:06:49]:
And I think that’s the last thing we need. The idea that these foundational strategies are suddenly just broken. It’s not just negative. I think it can be destructive for those of us that are fighting for our retirement security and our economic freedom. So, yes, Jeff Floyd, as we both know, but market’s unpredictable. We were just talking to producer Mallory. How many times have we seen big upheavals in just the last couple of years?

Jeff Lloyd [00:07:20]:
Look, if you just kind of want to think recently, look, we’ll go back four years to Covid. You saw the market down 30 plus.

Wes Moss [00:07:27]:
Percent in a month.

Jeff Lloyd [00:07:28]:
2022, it was down 20 plus percent. Even go back to 2018, it was down close to 20%. So that’s three pretty violent swings in the stock market in the last six years.

Wes Moss [00:07:43]:
So, yes, markets are unpredictable. That’s not a shocker. And 2022 was not a banner year for the 60 40 portfolio. And that’s largely because we got to a very interesting inflection point where rates were at zero and they finally went back to a more of a normal level. And by the way, they’re back to a slightly more normal level that we’ve seen over the last 20 years. But I don’t think it means that you throw out 100 years worth of financial wisdom. In fact, Vanguard defended, and smartly so the balance portfolio back in 2022 is titled. They wrote a white paper called that like the Phoenix, the 60 40 portfolio will rise again.

Wes Moss [00:08:24]:
And soon after that, they turned out to be very much right. By Feb. By February of 2024, the traditional balance portfolio had largely recovered its losses from 2022. And I think just panic rarely works in our favor. Really, almost panic rarely works in life, but certainly not in investing. And putting a gravestone on some really fundamentally important rules that millions of Americans use to get through the retirement ultra marathon, I think it could just do some damage. Vanguard’s chief economist is Roger Aleaga Diaz. He’s also the head of portfolio construction back in 2022.

Wes Moss [00:09:03]:
Said this, he said, periodically, pundits declare the death of the 60 40 stock bond portfolio. Their voices have grown louder lately amid declines in both stock prices and bond prices. But we’ve been here before. Based on history, balanced portfolios are apt to prove the naysayers wrong again. He was right.

Jeff Lloyd [00:09:25]:
And I think the important part of that quote was based on history. He’s not just basing it on some new thing. It’s based on 100 plus years of data.

Wes Moss [00:09:38]:
Right? This is not a gift. This is not a new gimmick. This is not a new age strategy. Balanced portfolios and measured withdrawal rates that account for inflation. These are the two rules under attack, the 60 40 portfolio and the 4% rule. They’ve been the backbone of retirement for millions of Americans for many, many decades. Are they perfect? No. Are they smooth escalator rides to the place we want to go? No.

Wes Moss [00:10:07]:
But to say they’re suddenly useless, that’s a bit like swearing off cookies. One of the batch. You know what it’s swearing off? Apple pies. I have one apple pie. All apple pies are bad from now on. I had one apple pie. Stop making apple pies. They’re no good.

Wes Moss [00:10:23]:
But if we let fear and negativity drive the entire conversation, then we discourage people from even trying to plan for retirement to begin with. Dead on arrival. Speaking of the way they depicted this dead on arrival, the reality is that we call them a rule of thumb for a reason. It’s not expected to work in a straight line, and they’re gonna be adjustments. So you gotta, both of these rules require adjusting all the time. Not dramatic adjustments, but they require adjustments as needed. They’ll always be needed. But I think the fundamentals are still very strong.

Wes Moss [00:11:02]:
If you’ve ever done a Jane Fonda workout, or if you remember as a kid, Rocky running the steps. And if Michael Keaton is still mister mom to you, and guess what? It’s officially time to do some retirement planning. It’s Wes moss from money matters. Weren’t those the good old days? Well, with a little bit of retirement planning, there are plenty of good days ahead. Schedule an appointment with our team today@yourwealth.com. dot that’s your, yourwealth.com dot. Again, this is according to the Vanguard White paper, since 1976, investors have, this is a quote, have never encountered a three year span of losses in both stocks and bonds. Remember, the balance portfolio is meant to have two very complementary asset classes.

Wes Moss [00:11:54]:
One’s risky, but has a higher return historically, over time, one is much sleepier. That provides some income and stability over time. Put them together, and now you start to have the apple pie we’re looking for. Here’s from the same vanguard white paper. The goal of the 60 40 portfolio is to achieve long term annualized returns of roughly 7%. This is coming from the vanguard white paper. This is meant to be achieved over time and on average, and not each and every year. The annualized return to the 60 40 stock bond portfolio from January 1, 1926 through December 31 of 2021 was 8.8%.

Wes Moss [00:12:40]:
So before you start thinking that retirement planning is hopeless, remember this. A little perspective, I think, goes a long way. Sky isn’t falling. It’s just always a little cloudy. To say that balanced portfolio is not going to work moving forward. You essentially have to say stocks are going to stop working moving forward, and bonds are going to stop working moving forward. That’s essentially what you have to assume. The reasons they cited in the article were that the Shiller P E ratio is high and the national debt is high, and Social Security might be running out.

Wes Moss [00:13:16]:
That was it. Those were the three reasons why the balance portfolio might not work into the future.

Jeff Lloyd [00:13:24]:
Those were the reasons they were attacking. Two of the Mount Rushmore financial principles have been used for 100 years.

Wes Moss [00:13:32]:
Hey, the national debt is high. The national debt has been high for a very long time.

Jeff Lloyd [00:13:35]:
It’s been like that for a while.

Wes Moss [00:13:37]:
And people have been saying Social Security is going to run out for a very long time. And yes, there have been some bumps in the road. So you go back to 2022 bonds were actually down in 2022 and it made for the first really rough 60 40 balanced portfolio since 1974. And because there was a bad year, this article is just saying that bonds just won’t be the shock absorber they once were. I don’t think that’s necessarily true. But what is true? Do bonds really make a balanced portfolio safer? I think the answer is still yes, or at least less choppy in the overall portfolio. Less choppy in a stock market pullback. Were bonds better investing when rates were at six or 7% or even 5% versus 4%? Sure.

Wes Moss [00:14:28]:
But do bonds today moving forward, provide no shock absorption? No way. At the very least, bonds, I think, allow investors to have the maximum amount of stock exposure for your own risk tolerance and help you with your investor psyche. And again, could stocks stop working? Could the army of american productivity go on strike? Possible. It’s always possible. We could economically just go over a cliff tomorrow and everybody goes on strike and we just say AI is taking over and the computers are going to do all the work and what’s the point? And productivity stops. And sure, that sounds like it’d be a problem, and that’s possible, but it’s not even remotely probable the way I look at it. So to say that the market will just stop working over the next long cycle, 10, 20, 30 years, it’s just to say that our whole system is going to end up collapsing and again, could happen. I just don’t think it does.

Jeff Lloyd [00:15:34]:
It makes for a good headline. But like you said, it’s not very probable. And there wasn’t a lot of substance of why it went and there were no alternatives they were offering of, well, don’t use this balanced 60 40 approach. Use this. Or don’t do the 4% rule. Use this. There was none of that.

Wes Moss [00:15:57]:
Well, technically they do on the 4% rule. Here’s what it is, and this is, I think, what got me really, I think when you first emailed me this, you said, please do not read while driving.

Jeff Lloyd [00:16:06]:
That’s what I said. I hope you don’t read this while driving. I don’t want you jerking that car off the side of the road after reading this.

Wes Moss [00:16:13]:
All right, so here’s my favorite. A recent academic paper says that if you want a 95% chance of avoiding financial ruin, and it’s the language here, and again, look, they’re writing and they’re trying to bring an eyeball. So I don’t blame them for this, but if you want to avoid complete catastrophe, you can withdraw just 2.26% per year.

Jeff Lloyd [00:16:35]:
2.26. That’s their Goldilocks number, 2.27, not 2.252.26. That’s just.

Wes Moss [00:16:44]:
It would have been better if it was just a round number to remember, like two and a quarter. I’m calling it two and a quarter percent per year. That means only about twenty two k per million dollars saved per year. In retirement you have 2 million, you get a whopping forty four k a year for $2 million worth of savings. Essentially chops the 4% rule in half. The retired student team has run these numbers and they’ve re run these numbers, and we’ve rerun the numbers on how a balanced portfolio, which, by the way, is at the cornerstone of the 4% rule. 4% rule, doesn’t work with a super high level of confidence. If you’re all in stock or all in bond, it doesn’t work with the extremes, it really works with the balance.

Wes Moss [00:17:33]:
And here it is using a 60 40% portfolio that gets rebalanced every year. In our study, we’re simply, let’s say, let’s look at just the 4% level plus inflation each year off of our initial base number that we start with in retirement. Using that balance points to a 99% level of success. And success means not running out of money for at least 30 years. The five worst outcomes for that balanced portfolio are at worst 30 years. So it didn’t last more than 30, but it did actually last 30. That is three decades. You start at 60.

Wes Moss [00:18:11]:
It lasts you in a worst case scenario until you are 90. Then the next worst outcomes were 31 years, 37, 38 and 39 years. Those were the worst outcomes because many of the outcomes, depending on when you start your retirement date over the course of economic history. We went back to the 1920s and we said, let’s start retirement in any given month from starting 100 years ago. And the worst case scenario is when we had super high inflation and we had low stock market returns, and that collided having money run out just like that in 30 years. That was the worst case scenario. Heres the counter to the balance. If you look at a 4% withdrawal rate and you use 100% stocks, it works again.

Wes Moss [00:18:56]:
Most of the time, it still gives you a really high probability of success. Its 97% of scenarios lasted 30 plus years. But the thing to be concerned about is that 3% of the time are pretty bad. In those instances, because of the way the timing worked out, you start needing money. Inflation is going up pretty rapidly and stays high for a long time, like it was in the 1970s and early eighties. And also, you didn’t have a good stock market. Again, there’s some periods of time in the seventies, so money only lasted in 3% of scenarios. It did run out more quickly, 26 years, 17 years and 16 years.

Wes Moss [00:19:35]:
And that is a little concerning. So if we want a higher level of peace of mind, and not everybody needs this, but if you’re looking for a higher level peace of mind, then at least over the course of economic history, you’re wanting to look at a balanced portfolio also utilizing the 4% rule. Jeff, I want to hear the vanguard chief economist who said that periodically people announced the death of the balance portfolio, or the 4% is similar to the 4% rule. You pulled some headlines.

Jeff Lloyd [00:20:06]:
Well, I love the headline of this article was a time honored strategy puts your retirement at risk of financial ruin.

Wes Moss [00:20:13]:
That’s today. That’s the article we’re exploring today.

Jeff Lloyd [00:20:17]:
And it’s basically a time honored tradition of bashing the 4% rule. And I did a little bit of digging on some previous headlines over the years that were bashing the 4% rule we had in March of 2013. Say goodbye to the 4% rule.

Wes Moss [00:20:33]:
Okay.

Jeff Lloyd [00:20:34]:
January 2015 how much can you safely spend in retirement? And you go in and you read and they say 2.35% to 3.51%.

Wes Moss [00:20:44]:
2.35 is better than the two and a quarter.

Jeff Lloyd [00:20:47]:
2.262.26 February 2018 forget the 4% rule. Rethinking common retirement beliefs. And then recently, in November 2021, the 4% retirement rule is in doubt. Will your nest egg last? And those are, you know what? I love reading those articles. I love reading this article because it gives us a chance to rerun the numbers, recheck, look at it again.

Wes Moss [00:21:16]:
And I think that’s a healthy exercise.

Jeff Lloyd [00:21:19]:
And I think it’s a healthy exercise for us.

Wes Moss [00:21:20]:
We’re doing it here on the retire sooner podcast. So bottom line, although it’s always good to test the rules, I think it’s hard to take any given day or week or month, and then the environment we’re in and say that, hey, today changes or nullifies a rule of thumb that’s meant to work over multi decades. Hey, things are weird today. So the rule that’s supposed to last for 50 years doesn’t work anymore, that doesn’t match up, doesn’t align. So in our opinion here on the retired senior podcast, yep, 4% rule is not dead. And the balance between risk assets and safety assets all in one portfolio, I think that still stands the test of time, or at least Jeff Lloyd versus any other alternative, which you mentioned or any other alternative that we can find. So don’t let scary headlines scare you out of the journey.

Mallory Boggs [00:22:23]:
Hey y’all. This is Mallory with the retire sooner team. Please be sure to rate and subscribe to this podcast and share it with a friend. If you have any questions, you can find us@westmoss.com dot. That’s wesmoss.com. you can also follow us on Instagram and YouTube. You’ll find us under the handle Retire Sooner podcast. And now for our show’s disclosure.

Mallory Boggs [00:22:43]:
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Mallory Boggs [00:23:24]:
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