Investment performance: Before and after retirement

Talking about investment performance during a major recession may seem out of place. But whether there is a recession or not, many of you are facing retirement as the next decision. Anticipating the correct investment performance may be crucial to that decision.

Investment timing and timing the markets are two factors that all investors should understand. I personally do not believe ‘market timers’ can provide consistent results. They believe they know when to be in the market and when to be out. It is even harder to benefit from market timing when mutual funds are used since the price in or out is always the value at the close of the day. So a major move up is still missed since a purchase receives the price after the move. The same is true when the markets are falling. Therefore, selling at 10 a.m. does not lessen the loss since the price for the sold mutual funds will still be the price at 4 p.m.

Investment timing is just one of those good or bad luck stories. Those who retired late in 1999 had the hard luck of three very bad performance years immediately following their retirement. I am sure the retirement assets of many were severely impacted by three down years, and changes had to be made to their retirement plans. But the opposite could be said for someone retiring in 1995 or early 2003. The years following those dates provided predominately satisfactory returns.

If you cannot time the markets and your timing is now, whether you like it or not, then what rate of return can be expected? First, the years following a recession tend to be better than average. While investments may have taken a hit in value during the last 12 to 16 months, properly positioning them in the near term may provide the foundation for better than average results once the recession ends and the recovery begins.

The recession and recovery aside, many investors believe they should achieve similar investment results during retirement as they did prior to retirement. It is this assumption that wrecks more retirement plans than any other in my opinion. Those expecting to have slightly lower returns because they are investing more conservatively may actually incur even lower returns than expected. When it comes to performance, every investor is different since how, when, starting value, additions, and distributions are never the same. But, here is a rule of thumb that if applied and achieved may prevent costly mistakes and if you do better will only improve your retirement.

There are three stages of investing for retirement: accumulation, plateau, and distribution. Generally, the best performance is achieved in the accumulation phase with the plateau the second best followed by the distribution phase. This is true when the periods considered have resulted in positive returns. Clearly, there are exceptions to this rule, and when investment strategies are changed this may also vary the results. But to plan the retirement years, it is best not to expect the same returns as were achieved in the earlier phases.

The accumulation phase is the period of time where additions are still being added to the portfolios. In this phase, many investors often continue to hold investments during down markets permitting them to recover with the markets. But with regular and consistent additions, discounted purchases are made during market lows. These purchases add performance to the account since these purchases are gaining in value rather than recovering lost value. A portfolio worth $10 but falls to $7 and then recovers to $10 had a zero performance. But a portfolio worth $10 but falls to $7 and a share is purchased at $7, and then recovers to the original $10 share price now has a value of $20, thus making $3. It is these consistent additions to the portfolio that in the long term add value and positive performance results.

During the plateau stage, there are no additions or distributions, and thus the returns are not enhanced with additional purchases during market declines. Lastly is the distribution or retirement phase. Due to the need and distribution of income to meet living expenses, retirement portfolios now see regular reductions in value. Often, these reductions take place when a sell is least likely to be desired. But to meet living expenses, distributions still need to take place. It is these sells during down markets that reduce the performance and overall value of a portfolio.

To avoid a financial train wreck, it is best to anticipate a very modest investment return during retirement, 4 to 5%. Living within this expectation will avoid many difficulties. Achieving better than expected returns; priceless!

For help with managing investments contact me at Quality Financial Concepts or one of the other Certified Financial Planners our area. To continue a personal quest for education you can also view our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other tools all available for free.

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