The 4 x 14 Portfolio For Retirement Savers and Retirees


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A hassle-free, well-balanced investment strategy for IRA investors, 401k and 403b savers, and retirees who need retirement income.

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The 4 x 14 Portfolio For Retirement Savers and Retirees

  1. 1. A Hassle-Free, Well-Balanced Investment Strategy for: IRA Investors 401k and 403b Savers Retirees Who Need Retirement Income
  2. 2. The 4 x 14 Retirement Portfolio™ The 4 × 14 Retirement Portfolio™ One of the most important decisions to make as a retirement investor is the mix ofdifferent types of assets (also known as “asset allocation”) in your retirement accounts. Thepurpose of this short paper is to introduce an innovative strategic asset blend called the 4 × 14Portfolio™. In simple terms, this well-balanced portfolio invests in 4 major asset categories: stocks,fixed income (bonds, CDs, money market funds), real estate (including income-producingproperty like shopping centers and office complexes) and natural resources (commodities,timber, steel, aluminum, etc.). The following figure shows an approximate breakdown for eachof the 4 major asset classes, which are then subdivided into a total of 14 sub-classes, hence thename of the model: the 4 × 14 Portfolio™. Long-term investing in multiple asset classes can result in higher growth rates and lowerdownside potential, if the individual sub-asset class returns are not overly tied together. For©2012 Integrity Financial Planning. All rights reserved. 2
  3. 3. The 4 x 14 Retirement Portfolio™example, rising inflation rates may lead to poor investment results for the fixed income class,but at the same time may result in better performance for natural resources as commodityprices rise with inflation. The goal of the 4 × 14 Portfolio™ is to efficiently mix together many sub-asset classesthat are not locked together arm-in-arm. For any given period of time, some of the sub-assetclasses will generally be up, and some will be down. Hopefully over time the “ups” will begreater than the “downs.” Looking at actual historical index results over the last decade or soprovides some insights into past performance. But of course, past performance is no guaranteeof future results.The 4 × 14 Portfolio: Upside Growth, Some Downside Protection The following graphic shows the actual historical performance of the 4 × 14 Portfolio™based on index returns, assuming a $100,000 investment in January 2000 with annualrebalancing. This performance could be replicated with a selection of investment vehicles suchas index mutual funds and exchange-traded funds; their costs might lower the portfolio’sperformance shown here by about ½ of 1%. Nonetheless, this diagram illustrates how the 4 ×14 Portfolio™ would have performed through two bear markets, in 2001-2002 and 2008.©2012 Integrity Financial Planning. All rights reserved. 3
  4. 4. The 4 x 14 Retirement Portfolio™ Note the portfolio held up well in the 2001-2002 bear market for stocks, but it did fall by28% in the 2008 bear market for nearly all asset classes. In that year, only the fixed incomeasset class enjoyed positive returns. Fortunately the 4 × 14 Portfolio™ more than recoveredwithin the next three years, surpassing its previous high-water mark in 2007. For the entire 12-year period, the portfolio generated a 7.32% compound annual return—not bad, considering itwent through two bear markets and two recessions.Does Diversification Always Work? The following image demonstrates why it is nearly always wise to have your retirementsavings “eggs” in more than one basket. This illustration shows how four different portfolios,based on actual historical index performance, would have fared over the 12-year period from2000 to 2011. The all-stock portfolio (Russell 1000) had the poorest overall performance, leading tothe oft-quoted but truly misnamed “lost decade” for investors. Note that the 1/3rd USStocks/Bonds/Real Estate portfolio generated the best returns in the first half of the decade,only to be eclipsed by the 4 × 14 Portfolio™ by the end of 2011. In the 2008 bear market, the50/50 US Stocks/Bonds portfolio incurred the least amount of principal damage.©2012 Integrity Financial Planning. All rights reserved. 4
  5. 5. The 4 x 14 Retirement Portfolio™ For the 12-year period, the compound annual rates of return were: 0.96% for the all-stock portfolio; 4.31% for the 50/50 portfolio; 6.98% for the three-asset class portfolio; and7.32% for the 4 × 14 Portfolio™. The next diagram compares the 2011 ending values for eachportfolio.How Would the 4 × 14 Portfolio™ Fare for a Retiree Taking Withdrawals? The prior examples all assume a retirement investor is in saving mode. Asdemonstrated, investing in multiple asset classes generally led to superior long-termperformance. But does diversification also make sense when withdrawals are being made fromsavings? The following chart indicates a multi-asset mix like that found in the 4 × 14 Portfolio™also makes sense for retirees who need to generate income from their retirement savings. Thisexample covers the same 12-year period from 2000 to 2011, starting with a $100,000investment, annual year-end rebalancing (for calculation simplicity) and a 5% withdrawal madeat the end of each year (also for simplicity’s sake). No adjustment is made for inflation to thewithdrawal rate, as several of the sub-asset classes are considered good long-term inflationhedges capable of keeping up with or even exceeding the rate of inflation. In real life, all of©2012 Integrity Financial Planning. All rights reserved. 5
  6. 6. The 4 x 14 Retirement Portfolio™these variables (when to rebalance, withdrawal percentage rates, etc.) should be adjusted for aretiree’s unique situation. Over the 12-year period, the 4 × 14 Portfolio™ generated more than $74,000 inwithdrawals and ended 2011 with a principal balance $26,000 greater than the initialinvestment. And this performance occurred in spite of two bear markets. Nonetheless, thewithdrawal amount did fall by 31% in 2008 at the height of the bear market/recession, thoughin dollar terms it was roughly the same as the first year in the entire period. Clearly, no portfolio works perfectly in every investment environment. Fortunately thewithdrawal amount grew quickly after 2008, reaching over $6,600 by 2011. For the 12 years,the 4 × 14 Portfolio™ in withdrawal mode generated a 1.96% compound annual growth rate. This distribution-mode example points out very clearly the impact of taking withdrawalsfrom a portfolio versus simply “buying and holding” as a saver. In saving mode, the 4 × 14Portfolio™ was worth about $233,000 by the end of 2011. In distribution mode, the portfoliowas worth $107,000 less over the same time period, though it did generate over $74,000 worthof withdrawals. Retirees who are taking income from their retirement savings would be wise to©2012 Integrity Financial Planning. All rights reserved. 6
  7. 7. The 4 x 14 Retirement Portfolio™employ a multi-asset mix in their portfolios. The following figure illustrates the wisdom of thisapproach. Once again, the single-asset all-stock portfolio performed the worst and generated thesmallest withdrawal amount in 2011. By adding more asset classes, the more diversifiedportfolios generated higher-ending principal balances and greater withdrawal amounts. Thesimple truth is, diversification does indeed make sense for retirees taking distributions fromtheir retirement portfolios as well as workers saving for retirement.If you would like further information about building the 4 × 14 Portfolio™ for your retirementaccounts, or other strategies to maximize your retirement readiness, please contact MikeWilson of Integrity Financial Planning at 260-829-6319. You can also reach Mike online or via e-mail at©2012 Integrity Financial Planning. All rights reserved. 7