Borrowing the term "New Normal" (NN) from Bill Gross, the following portfolio provides yield and inflation protection for retirees. The portfolio is defensive in its construction and the projected growth is modest, hence the NN name. Once more, using Geoff Considine's Quantext Portfolio Planner (QPP) for the Monte Carlo retirement analysis, we look at a portfolio made up of a core of ETFs and two stocks.
When putting together a portfolio, QPP goals are set. 1) The projected return is to be 1% point greater than the projected value for the S&P 500. The NN meets that challenge. 2) The projected standard deviation should be something below 15% and at 14.8%, this set of ETFs and stocks just meets that requirement. 3) Forty percent (40%) is the Diversification Metric goal and this portfolio just meets that standard.
A 48 month time frame was selected for this analysis so as to encompass most of the last bear market as well as the remarkable recovery.
The following slide lays out the assumptions for this analysis. For example, the investor is 55 years old, inflation is projected at 3.5%, $200,000 has already been saved and $6,000 is added to the portfolio each year. The retirement income from this portfolio is $50,000 in today's dollars.
And now for the scary news. Even with a strong array of investments, this investor is trapped in a time vice and there may not be a way out. With good genes, they stand a high probability of running out of money in retirement.
Quoting from Chapter 6 of William J. Bernstein's book, The Investor's Manifesto, "Each dollar you do not save at 25 will mean two inflation-adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial saving at 45, you are in serious trouble.
This investor is in serious trouble as there is a 50% chance they will run out of money by age 78. A good portfolio will not save you if you have not saved sufficiently for retirement.
As an aside, which of the investment in the NN portfolio has the best probability of performing well over the next six to twelve months? The "Delta Factor" table below identifies those ETFs and stock that stand the best chance of rewarding investors and there are those where caution is in order. For example, PCY has recently had such a great run the law of averages is working against that ETF.
There is no way to circumvent The Golden Rule of Investing. "Invest as much as you can as early as you can."