Center of gravity stock market
The Center of Gravity for Retirees | Portfolio Solutions
However, it may not be the right starting point for someone living off their savings because the returns can be too volatile. I believe the center of gravity shifts when a person stops accumulating assets and starts taking income from their assets.
Stocks are claims on future earnings and deserve a higher risk premium than bonds that pay a known interest rate and return principal at maturity. Uncertainties surrounding future earnings make stock prices much more volatile than bonds and can result in bear markets that last several years. Investors who are working and accumulating assets can weather these periods of uncertainty and benefit from a higher allocation to stocks.
Investing is the balance between risk and return. A higher expected return infers higher risk.
People who are accumulating for retirement tend to gravitate toward riskier asset allocations to reap higher expected returns. Most risk tolerance questionnaires are designed for this purpose, to find the maximum risk level an investor can handle. The outcome is then used to determine an asset allocation that is at the maximum risk level.
The focus should be on the minimum amount of risk needed to achieve an income required in retirement.
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Their focus is on conserving wealth and generating income. This is a conservative mix that has enough equity to growth with inflation and enough fixed income to keep portfolio volatility at bay. This is the point on the efficient frontier that has earned the best risk-adjusted return as illustrated in Figure 2.
In mathematical terms, the portfolio has achieved more rise annualized return than run standard deviation. There was only one down period from The boxes around the two portfolio types illustrate the range of risk and return outcomes over all 5-year periods. I believe this experience represents a more tolerable situation for retirees who need to balance safety and income with some equity for future growth. As a matter of record, the market began to recover in March Others may decide to move a bit lower in stocks.
These adjustments are fully understandable and acceptable after a thorough assessment of safety needs, income, longevity and estate planning considerations in retirement. Bernstein January 22, — June 5, was a financial historian, economist, and educator who helped shape the beliefs of millions of investors with his timeless books and articles.
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