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Sather Financial Group

120 E Constitution St
Victoria, TX 77901

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The Myth Of Your Neighbors Portfolio

Recently, we met with long-time clients John and Claire. In their early 70’s, John was concerned about their investment returns and making sure they had enough to make it through retirement.

The problem begins when John visits his neighbor, Darryl.

Darryl is a funny guy. He likes to brag and intentionally antagonize John. Darryl proclaims that his investment portfolio is up 17% this year after jumping 25% last year.

This prompts a phone call from John to see why they are not doing as well.

Obviously, some people just love to brag. Take it for what it is worth. It is a statement--that has not been fact-checked. There has been no accounting of deposits, withdrawals or returns—not to mention differing goals.

Much like people who display their life on social media, they love to tell you the good stuff. They fail to mention they spent the day cleaning gutters, changing diapers and that the car won’t start. They boast about their recent home-run investment…while forgetting to acknowledge the other ten times they struck out.

Jealousy, envy and greed have been around since the beginning of time. Nothing will change that, it is simply human nature. All you can do is worry about things within your control.

In reviewing John and Claire’s portfolio they were up more than 12% for the year. We reminded them this was better than average performance. However, John immediately chimed in that Darryl always does much better.

Upon further discussion, John admitted he had never seen Darryl’s brokerage statements. He did not know how he had really done.

This allowed us to focus the conversation back upon John and Claire.

While in retirement, they used their portfolio to supplement their social security. We were using a conservative, yet reasonable, distribution rate of 3% per year paid out each month. Furthermore, the retiree’s portfolio was designed to serve multiple masters.

We set a years’ worth of distributions in high quality cash alternatives. This allowed them to earn interest income, while delivering liquidity and stability needed to pay bills.

The rest of the portfolio was about 60% high quality blue chip stocks and 40% fixed income. This balance in assets delivered growth opportunities to outpace taxes and inflation while producing income to fund future distributions.

This reminded John why their portfolio was designed as it was. However, he remained bothered that his neighbor might be getting better returns.

Fortunately, they had options. They could reduce liquidity and fixed income and put more assets into the stock market. John got visibly excited from the thought of new-found riches from a higher stock weighting.

Unfortunately, with greater stock market exposure comes volatility. We remind our clients that although the stock market has steadily increased the last eight years, it does not always do so. In fact, our mind plays tricks on us as we project the recent past into the distant future.

Knowing our mind plays tricks on us, all investors must know the stock market loses, on average, 14 points at some point, during the average year. Even worse, the stock market has lost as much as 37% in one year and as much as 60% over two years.

Although stocks can deliver good long-term returns, it’s a bumpy ride. This is even more important to understand when living out of your portfolio in retirement.

If volatile assets are over-weighted, and then we have a severe market sell-off, the odds of your portfolio surviving become significantly more difficult.

As we discussed this, Claire stated emphatically that she could not sleep at night if their portfolio incurred that level of volatility.

This was progress. John backed off and fortunately, listened to his wife.

The discussion emphasized several good points when managing a portfolio.

First, don’t listen to your neighbors. The only portfolio and goals that matter are your own.

Secondly, most portfolios require balance among differing asset classes. This allows growth and income while providing liquidity. It also means in a strong “bull” market, a balanced portfolio will rarely, if ever, outperform a portfolio that is 100% in stocks.

Lastly, investing is a marathon, not a sprint. This is especially true for retirees. Don’t be too aggressive with your portfolio as you no longer possess the ability to go back to work to rebuild your portfolio.

Dave Sather is a CERTIFIED FINANCIAL PLANNER and owner of Sather Financial Group. His column, Money Matters, publishes every other week.