Why I'll Still Invest For Total Returns Even After I Retire

Oct. 27, 2021 1:32 AM ETALB, AMZN, AZO, CCL, CUK, CUKPF, EOG, META, INTC, KO, MCD, SPY, STOR, VLO254 Comments


  • Investing for total returns before one retires is fairly uncontroversial. It only makes sense to have one's goal be to get the best returns possible.
  • There are a few objections to total return investing during retirement that are reasonable, though, like sequence of return risk.
  • In this article, I explain why I plan to keep investing for total returns during retirement, and I'll share some strategies to help deal with common fears investors have.
  • I do much more than just articles at The Cyclical Investor’s Club: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
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I am a 46-year-old total return investor. What that means in its simplest form is that I try to place my money in investments with the best risk/reward over the medium-term in order to maximize my portfolio's reward over the long-term. In terms of reward, I want the best capital gains + dividends, minus taxes, fees, expenses, time, and transaction cost investments I can consistently identify. Importantly, I define risk, not as volatility, but instead as underperformance compared to broad market indices or loss of capital over the medium-to-long term of 5-10 years at the portfolio level. In other words, I want to maximize the amount of money I make via my investments before I retire.

As far as I'm concerned, this is the most rational approach for investing during one's working years, and I have yet to hear a compelling argument against it. It almost goes without saying that maximizing medium-term returns relative to risk should lead to good long-term returns and be an investor's basic goal when building a retirement portfolio. The question of whether total return investing is the best approach during retirement, when funds are being drawn down, is more debatable. In this article, I'm going to explain my reasoning for planning to continue my total return investing approach even after I retire.

By far the most common challenge I hear against total return investing during retirement is sequence of return risk, so let's examine that objection first.

Sequence of Return Risk

According to Investopedia:

Sequence risk is the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor. This can have a significant impact on a retiree who depends on the income from a lifetime of investing and is no longer contributing new capital that could offset losses.

Basically what this means is that if you retire near a market peak and start withdrawing funds, if the peak is high enough, the drawdown in asset values low enough, and the recovery of asset values slow enough, you could run out of money in retirement if your withdrawal rate is too high.

In reality, if you have adequate money going into retirement, lot of things have to go wrong for you to run out of money during retirement because of sequence of return risk, and so the probability of this risk actually causing one to run out of cash in retirement is low. The worst time other than 1929 to retire with bad sequence of return risk was in the year 2000. The market would have been negative for much of the following decade for someone who retired in January of 2000, and if one's money needed to be withdrawn for retirement during this time, returns would have been even worse. Yet even during the worst historical retirement time in history, if a person would have withdrawn $4,000 per year from an initial portfolio of $100,000 invested in the S&P 500 index, and adjusted for inflation, they still wouldn't have run out of money by 2021.

Source: Portfolio Visualizer

Before adjusting for inflation, a portfolio 100% invested in the S&P 500 index ETF (SPY) could have paid out $4,000 per year and still have a balance of $48,588 in 2021. After adjusting for inflation, it would have a current value of $29,892. Assuming the person was 65 years old when they retired, they would be 86 or 87 now, and they would have survived the worst period for sequence of return risk in modern history. If a person would have retired during any other year during this period, returns would have been much better. Historically speaking, the odds are that you have around a 1 in 15 chance (give or take) of retiring during a very risky period as we had in the year 2000. So, we are already dealing with a low probability set-up if we use the year 2000 retirement period as our stress-test example, which is what I will do throughout this article.

There are several important takeaways from the facts shared above. The first is that as long as a person doesn't withdrawal more than 4% of their original portfolio balance per year, they will probably have enough money to last during retirement even if they retire at the worst possible time and do not own any cash or bonds in their retirement account. The second, and perhaps more important, is that it's really important to build up enough money in your retirement account during the accumulation phase of one's life before they retire so that they don't require more than a 4% withdrawal rate during retirement. This means maximizing total returns during the accumulation phase is extremely important.

Thus far, we have a very clear case for investing for total returns during the accumulation phase, even if it means a 100% equity allocation, and that as long as a person has accumulated enough wealth, a 4% withdrawal rate will be adequate for them during retirement even using a simple S&P 500 index ETF. So far, there is no rational reason for an investor to seek out higher yields via dividends, or to seek out lower volatility via long-duration fixed income. This begs the question of why so many investors appear to be attracted to both yield-seeking (like dividend growth and high-yield investing) and volatility-reducing strategies (like a 60/40 portfolio) in retirement.

I hypothesize that there are four key reasons. The first reason is that most retail investors who are saving for retirement do not know very much about the market or how to analyze individual stocks. The second reason is that many people have inadequate savings for retirement. The third reason is that market losses tend to cause more anxiety and psychological pain than market gains cause pleasure and security. And the fourth reason is that some retirees have plenty saved for retirement, and do not have ambitious spending goals during retirement so they are perfectly happy maintaining whatever their current state of affairs is and not spending time maximizing returns or thinking about volatility.

Let's examine the fourth reason first.

Retirees with more than enough

Between income from social security and other pension benefits, stock and other investments, combined with low spending habits, some retirees don't need to go through the trouble of maximizing their retirement investments. These retirees can put their money in something like a traditional 60/40 portfolio, pay almost no attention to their investments at all, and be perfectly secure in their retirement knowing that they will always have enough money to meet their wants and needs.

I truly commend these retirees and wish them the best. And I certainly hope that I have so much money in retirement I have the option of becoming one of them someday. But, the chances of that happening are probably fairly low for me, and many other future retirees that don't have excessive savings. I have many things that I want to experience and accomplish in life before (and hopefully during) retirement that will cost money. And I plan to tailor the number of these things I'm able to do with my income and savings so that it will be unlikely I'll have large amounts of excess savings as I enter my retirement years. It's possible my income will be high enough or I will delay retirement long enough, that I'll have excess savings, and if that happens and I'm quite old and would rather not deal with analyzing stocks when I'm in my 70s or 80s, it's possible I'll just put my money in a 60/40 portfolio at that point and forget about it, but I think this is a rather a low-probability scenario in my case.

I'm counting on neither excessive income nor excessive frugality on my part over the next two decades before I reach retirement age, so, it's unlikely that, at least during my early retirement years, I'll fall into this category. At the very least, I'm not counting on it. So, while this might work for some, and that's great for them. It's not for me. And most Americans will not fall into this category during retirement (if anything, most have too little saved for retirement).

Worry of excessive loss

This is a very interesting topic because it is mostly psychological in nature, and to the degree that it is not, it is largely driven by lifestyle and personal finance. There are many people who place a high value on status, status symbols, and owning expensive things. Ultimately what this leads to is a marriage between one's perceived self-worth and the value of one's investment portfolio (along with other things). This creates a situation where if the market price of an investment portfolio rises, a person feels better about themselves, and when the portfolio falls significantly, the same person feels worse. The financial media and consumer society are very good at amplifying these emotions and it causes people to buy more expensive things and to trade more in the market, creating a quest for higher and higher returns that has no ceiling. So, these feelings can create a sort of irrational greed in the marketplace.

But, these same feelings can also create irrational levels of fear as well. This fear of loss can cause retirees, in particular, to pass up rewarding investment opportunities because they don't appear to be conservative enough and might experience above-average price volatility. For these investors, the risk of even paper losses is just too painful to bear.

I don't have a good solution for these investors other than to point out their fear is probably irrational and there will be an opportunity cost over time if they fail to make investments that have a good reward profile because they weight the risks higher than they really are or can't stomach the price volatility. That said, one approach that might work, and one that I currently use, and intend to keep using in retirement, is what I call the Buffett approach.

Buffett has suggested a 90% stock 10% cash position for his eventual widow's retirement portfolio. The idea is that during deep market downturns when stocks might be trading lower than their long-term fair value, the person could withdraw money from the cash portion of the portfolio instead of from the stock portion. I view the strategy the same way I view an emergency fund. One thing we need to adjust for, though, is that instead of using a percentage of a portfolio to hold in cash, we instead use the time frame one would like to have reserve cash last for. In Buffett's 90/10 case, assuming a 4% withdrawal rate, we would have about 2.5 years' worth of cash reserved. That amount of reserve cash seems about right to me, and should help dampen the psychological blow of a volatile down market. But it might also improve returns. Let's examine that hypothesis.

Let's assume we start in the year 2000 again, but this time we use our 2 years' worth of reserve cash in 2001 and 2002 after the market has fallen considerably off its high. So, in this case, we start with $92,000 in SPY and $8,000 in cash instead of $100,000 all in SPY. To make things simple, I'll assume the cash earns nothing. We will draw from the investment money $4,000 in the year 2000, then from cash each year in 2001 and 2002, and then back from our investment money from 2003 to 2021.

Following this strategy, by the end of the year 2000, adjusted for inflation, our investment pile would have shrunk to $76,328. From 2001-2002, we would have refrained from making withdrawals from the investment account, and would have started 2003 with $50,802 in our investment account adjusting for inflation near the bottom of the cycle. From 2003 to 2021 adjusting for inflation and continuing the $4,000 annual withdrawal rate, we would still have $41,074 in 2021. This is about 30% more than the portfolio that did not have emergency cash set aside and stayed in SPY the entire period. So, setting aside some "emergency" cash is a good idea if one wants to protect against both the psychological problem and the sequence of return risk problem. Depending on one's personal psychology, 2 or 3 years' worth of emergency cash seems appropriate. If we go much higher than 3 years, then it's likely it will be a significant drag on long-term return potential (especially if one doesn't retire directly at the top of a market cycle).

In addition to having a couple of years of reserve cash, there are other personal finance steps that retirees can take. My plan is to have the mortgage on my house paid off before I reach retirement age and not to carry any other debt or leverage into retirement. Combine that with a couple of years' worth of emergency money, and a -50% drawdown in the market is relatively easy to stomach. To me, these seem like much more reasonable steps to take than adopting a 60/40 approach to avoid volatility or trying to day trade or chase high yield to make excess returns.

Inadequate retirement savings

While I don't have a mirror into each investor's retirement account, I interact with many investors on a daily basis, and I get the sense that many investors chasing yield are doing so because of inadequate retirement savings. Excluding unlucky events that can happen in one's life that might cause one to not have enough retirement, and excluding personal issues like divorce, the two main causes for inadequate retirement savings are not saving enough money and not getting a high enough return on those savings during one's working years.

Investing for total return during one's working years as I do is, almost by definition, the best goal to have during this time. Long-term results will mostly be based on one's investing talent provided the investor is aiming at the proper goal of maximizing long-term returns. What is good about this is that if a person acquires investing knowledge and practice in the decades leading up to retirement, those same skills, if applied the same way, should produce even better results while in retirement. So total return investing has the double benefit of being able to produce good-to-great returns both before and during retirement, provided the investor has emergency money and a conservative personal financial balance sheet. There is no need to learn a new investing style for retirement, and there can be a seamless transition from pre-retirement investing to retirement investing due to the fact they are basically the same thing. Because of this, I don't think it makes sense to become any more aggressive or defensive, or to chase yield during retirement.

My key point here is that investors working and saving for retirement now should be doing what they can to maximize returns while keeping taxes and fees and trading costs to a minimum. For some investors that might mean investing in a few index funds, and for others, it might mean selecting every individual stock themselves. Where an investor falls on that spectrum will be determined by investing talent and how fast they learn about investing. But they should be trying to get the best long-term total return possible during their working years so they have enough money for retirement.

Lack of investing knowledge or talent

Investing for total return is very difficult to do without knowledge, at least a little bit of talent, and the right temperament. The majority of people don't possess the knowledge, and even fewer possess the talent and temperament it takes to successfully achieve better-than-average total returns. For most people, this means that they will need to save more for retirement than they otherwise would have if they could successfully invest for superior long-term total returns. Or, they will have to live a more modest lifestyle after they retire.

While a clueless investor can achieve average market returns while paying low fees and taxes by using simple index funds in a tax-sheltered or tax-deferred account, they cannot achieve better-than-average returns over the long-term doing so. They either have to pay higher fees for a manager, or become better investors themselves by increasing their knowledge, building on their talents, and developing the right temperament it takes to produce better than average long-term returns. There aren't any well-known ETFs that can do that for them.

In short, getting consistently better returns takes time and practice. I would estimate, that within 5-10 years, however, an average investor could become above average if they put the time in. Many retired investors, however, simply don't want to put that time in, and I've found they have difficultly thinking about the long-term when they don't know if they will be around for the long term. Therefore, they are attracted to quicker-feedback investments like high dividend yields or options strategies that produce relatively quick income. Brand name stocks that feel safe retirees also seem to find attractive because they have certainty of the quality of the business, mostly based on familiarity. The actual long-term returns of stocks like McDonald's (MCD) or Coca-Cola (KO) at today's prices aren't likely to be very good because they have very slow earnings growth and very high valuations. And these are just stock cases. Vast numbers of retirees own long-duration bonds that are almost certain to lose money in real terms. But, hey, they are "safe", and reduce volatility, so why not have 20-40% of your retirement portfolio in them?

The point I'm getting at here is that learning to perform a very basic long-term (5-10 year) stock analysis based on the earnings of less-cyclical businesses will go a very long way when it comes to reducing fear of volatility, avoiding low medium-and-long-term returns, and reducing trading fees and expenses. When an investor understands what they are buying, they are far less likely to need low-volatility and high-yield assets. And instead, they can focus on achieving better long-term total returns, which is what most of us really need. A moderate amount of investing knowledge can go a very long way.

Here is what I do to improve returns

Given the challenges outlined above for investing for total returns during retirement, what is it investors can do to address these challenges? While it's hard to speak for every investor, I can share what it is I'm doing to address these challenges now, and perhaps readers may find some of them useful, even in retirement.

1: I define the stocks I can reasonably analyze

Of all the stocks in publicly traded world markets, I only feel confident that I can analyze perhaps 10% of them well enough to make reasonably accurate predictions about their medium-term future. But that's okay. That gives me a stock universe of perhaps 1,000 stocks from which to find something that has a high probability of producing good returns. By ignoring most of the stuff I don't have high confidence in, it allows me to deal with volatility better because I understand the stocks I'm buying and the time-frame I'm buying them for.

2: I organize the stocks into categories for different types of analysis

Currently, I have four different types of analysis that I do depending on what type of stock I'm dealing with, but I have to know what type of stock I'm dealing with before I can analyze it. Make sure the analytical technique one is using is appropriate for the type of investment one is making. For example, the type of approach I use for a highly cyclical stock like Valero (VLO) is very different than what I use for a secular growth stock like AutoZone (AZO), which is very different from a REIT like STORE Capital (STOR), which is different from a fast-growth stock like Amazon (AMZN). There is no one-size-fits-all analysis for every type of business.

3: I have a minimum quality threshold in order to help avoid losers

While I have some more cyclical stocks that I prefer not to hold through downcycles, I never buy a stock if I think the business can't survive and bounce back from a recession or flash crash. While holding through unexpected downcycles isn't fun, I was able to hold stock like EOG Resources (EOG) and Albemarle (ALB) through the 2020 recession even though they dropped -50% to -60% from the time I bought them, and come out the other side with good returns. I was able to do that because I knew the businesses were high enough quality to make it to the other side even though I didn't know when I bought them in 2019 that a recession in 2020 was coming.

I avoided buying stocks like Carnival Cruise Line (CCL) and various airlines during the 2020 downturn even though they were cheap and the potential upside was pretty big because this particular recession reduced the quality of those businesses significantly and permanent impairment was possible. I never want to have bankruptcy be a realistic possibility even if the upside in the rosy scenario is quite large.

4: I wait for good prices that have a high probability of producing good returns

I always try to buy with a margin of safety. Just last week, two of my holdings, Facebook (FB) and Intel (INTC) had some really bad down days. But because I bought both stocks with a margin of safety, they are still producing positive returns for me, even if they are trailing the index.

5: I understand various market cycles

I spend a lot time studying market cycles. I don't think a person needs to have precision when it comes to market cycles, but they probably need to at least roughly understand where we stand in various business and credit cycles. That knowledge can keep a person from buying the stocks of businesses near the top of cycles so they can avoid the worst part of downcycles.

6: I sell extremely overvalued stocks and cyclical stocks that are making new highs.

While I will hold stocks for years and years if the valuation remains reasonable, if I have a stock that gets extremely overvalued, I take profits. And when cyclical stocks start making new cyclical highs, I typically place trailing stops on them in order to preserve profits. These two actions tend to prevent big drawdowns and underperformance even if often I don't time the tops perfectly and stock prices keep rising after I sell.

7: I analyze as wide of a swath of stocks as I can

A few years ago I had a pretty tight focus on high-quality, highly cyclical stocks. But, while I try to limit myself to what I can analyze well, I also am constantly trying to expand the types of stocks I can analyze well. So, whereas in 2017 I may have had 200-300 stocks in my circle of competence, because I kept studying, learning, and researching, now I have expanded that universe to perhaps 1,000 high-quality stocks that fall within my circle of competence. The more stocks a person can analyze well, the higher quality portfolio they will have.

8: I have an unconcentrated portfolio

Having an unconcentrated portfolio has become unfashionable in recent times, but I've found there are many benefits and few drawbacks. The biggest benefit of an unconcentrated portfolio is that it reduces the role of luck and specific stock risk. One of the things I constantly monitor is how my investing strategies are working so that I learn if need to make adjustments to them. Since I own anywhere from 50-100 positions at any given time, when I examine results, I typically have useful sample sizes that actually tell me something about the overall strategy. If an investor owns fewer than 20 stocks, then it's possible a big portion of the returns are a result of luck (especially if they are using multiple strategies as I do). It can be difficult to make adjustments without good information.

Holding many stocks from multiple strategies also helps reduce single stock risk a lot. If I own 10 bank stocks that each have initial portfolio weightings of 1%, if there is a scandal or some other trouble that hurts one of them, it is just a small portion of my portfolio. If I had picked one bank stock to own with a 10% weighting, however, and I get unlucky and something bad happens to that specific bank, it could be devastating to the portfolio.

Often one hears the statistical argument that you can't beat the market if you own too many stocks. But these arguments rely on an assumption of a random sampling. If a person owns 80 of the best stocks in the S&P 500 and avoids the worst 80 stocks in the index over the next 10 years, they will dramatically outperform the index. They just have to be reasonably good at picking stocks. Vanguard has over 4,000 stocks in their total stock market index ETF. 100 stocks is only 2.5% of the index. Again, if you mostly buy the top 10% of future performers, you'll dramatically outperform the index even if you own 100 stocks.

Given modern technology and software, tracking stocks is easier than ever. So, whereas 30 years ago, there simply may not have been enough time to manage a bigger portfolio, for medium and long-term investors who typically hold stocks for several years, managing a large portfolio takes much less time today.

Often I hear from dividend investors that they will have income in retirement without having to sell stocks to get it. Frankly, I don't see the benefit of that. I typically turn over about 10-11% of my individual stocks in the portfolio each year, either from taking profits in winners or selling underperformers to replace them with something else. That's more than sufficient to provide income during retirement even with a 6-7% annual withdrawal rate, much less the typical 4% withdrawal rate. When you have something like 80 positions to choose from, there is almost always something worth selling.


Total return investing is clearly a superior goal to have during one's working years, but it's also very attractive during retirement, too. The biggest risk involving sequence of return risk is relatively easy to mitigate by simply holding 2-3 years' worth of emergency cash. Once that risk is mitigated, total return investing is a much more attractive strategy than a 60/40 or yield-chasing strategy. Really, the only reason to stop total return investing is if one doesn't want to put the work in to do it. In that case, an S&P 500 index fund can probably do the trick instead of picking individual stocks.

At any rate, I think total return investing hasn't gotten nearly the attention it deserves in recent years, even though most investors would probably be served better by it than they are by alternative strategies.

If you have found my strategies interesting, useful, or profitable, consider supporting my continued research by joining the Cyclical Investor's Club. It's only $30/month, and it's where I share my latest research and exclusive small-and-midcap ideas. Two-week trials are free.

This article was written by

Cory Cramer profile picture
One-of-kind research using historical cycles to identify tops and bottoms

My analysis focuses on the cyclical nature of individual companies and of markets in general. I've developed a unique approach to estimating the fair value of cyclical stocks, and that approach allows me to more accurately buy near the bottom of the cycle.

My academic background is in political science and I hold a Bachelor's Degree and a Master's Degree in political theory from Iowa State University. I was awarded a Graduate Research Excellence Award in 2015 for my research on conservatism.

Disclosure: I/we have a beneficial long position in the shares of FB, INTC, AMZN, AZO, VLO, STOR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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