A Balanced Portfolio Destroyed My Parents' Retirement

The balanced, diversified portfolios advertised by big firms aren't as secure and reliable as one might assume.

Mike explains how a balanced portfolio destroyed his parents' retirement.

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Mike:
When he went to the, his advisor, his advisor gave him the same advice you get today. If today you go to, you know, one of these big firms, they're all gonna tell you basically the same thing. They're gonna say, here's what you should do. You should take that $300,000 and you should have a diversified portfolio where approximately the numbers may change a little bit, but approx, ultimately 60% is in some diversified mix of stocks. And the other 40% is in a diversified mix of fi, which stands for fixed income or bonds. That's what the industry told my parents. It's the same thing. They tell them today. It's like, if hello to them today, they're gonna tell you something pretty darn close to that. Here's what happened to my parents. Remember they retired January 1st, 1999. And do you know what the stock market earned in 1999? It was like 20%, right?
Mike:
Mike:
Right. That's when like tech companies going under left and right doc then NASDAQ lost 75% of its value in like a year and a year and a half then 2001. Anyone remember nine? Yeah. What kind of impact did that have on the stock market? And then 2002, we had a recession in those three years, the stock market was down, you know, anywhere from 45% to 75%, the market got crushed right over, not fast. It was over three years. We started wondering if the market was ever gonna go up again. What was happening to my parents? Because remember what were they doing each of these years? It was like, well, we're, we're at three 20. Well, we gotta take out 12 K we gotta take out 12 K and we gotta take out 12 K right? We gotta take out $36,000 over those years. And we were having a loss loss loss. How much money do you think they had left over four years in retirement because remember the first year, 1999 was good year. Now we're four years into retirement. Now think about this. My dad worked for 30 some years at state farm. It took him over 30 you years just to get to this 300,000 number up here. How much did he have? Four years in retirement?

[RoseBalerus]

One thing that's really important to consider when it comes to planning for retirement is the impact of inflation on your savings.

[Boulder]

As repeatedly said here… the savings amount is part of this problem along with unfortunate timing of retirement. But to spend 8 minutes trashing the 60/40 fund offering NO possible solutions… just wish I had the last 8 minutes of my life back. I learned decades ago not to present a problem without a solution, too. No solution offered here, only problems.

[Boulder]

Sorry to hear about your parent’s portfolio. Sequence of return risk back during that time period is what got them in trouble. If they’d retired a decade later they may have been ok. However, 300k is not a lot to retire on so any lengthy downturn would have likely spelled trouble for them. Also, find it interesting you bash the 60/40 portfolio, but offer NOTHING to listeners as to what you suggest might be a better option. That would have been very helpful.

[bobdrawbaugh]

With all due respect it wasn’t the Balanced portfolio that was the problem. A more appropriate title would have been, “How poor planning destroyed my parents retirement.”

[jesusesmentira]

Sounds like poor planning on their part for not taking into account SORR (Sequence of Return Risk). That's why when I exited the workforce in 2020 I made sure I had a cash cushion of five years of income. to make sure I can ride out any storm without touching my equities.

[London_Thomas]

Spent the entire video waiting to hear alternatives to the balanced portfolio. Never came though.

[hermanramos]

This is quite educational. It's crucial for newcomers to keep in mind that the financial markets are highly irrational in the short run. You should constantly be ready for the unexpected. That is how chance operates. Because of the inherent risks in the market, I always favor long-term investments.

[billphister]

This is a lesson worth learning. But, I'm curious what the alternative is. Are you suggesting an extremely conservative portfolio, which has very limited stock exposure? Or, did you have something else in mind?

For me, this is more than an academic question. I retired last year, at 57. I pretty much have a balanced portfolio, although it is a bit heavier in cash, and less in bonds, than most.

[jcm]

They technically didn't lose the money; their investment was down but unless they cashed out at that time (and many did) most of the money would have been recouped. That said, your video does highlight the necessity of having an amount of cash to draw on in those circumstances.

[Joseph_]

The clear solutions that come to mind are tilting to small cap value / momentum factors and running a trend following overlay, ideally including a multi-asset momentum strategy that dynamically allocates to real assets

What are your thoughts?

[Bugginout]

300, 000 in 1999 would have made you about 60k and if you were mixed in a 70/30 you would have made about 42k
That aside i also retired right after that and had 400k in 1998
But if you had 320k and took 12, 000 a year thru 2011 you would have 235, 000 left which at that point you would have about 500k today,
Even increasing withdrawl amounts every 3 years by inflation you would have been fine with 58k still there almost 30 years later.

[johngill]

4% plus inflation describes works historically Including 1999

It's scary your a professional

[MrXR]

You have no idea how to create a retirement plan, and became a victim of one of many bad financial planners that are out there. There are many financial planners that are looking after their own retirement and not your retirement.

[JayMomoa-]

My portfolio of 200k is not increasing any more than 5% and we seem to be facing a massive crash now. I cant tell where the market is headed, perhaps I should just sell off and avoid the panic, or are there specific ways I can mitigate risk and benefit from a crash?

[toantruong]

I think 60/40 plus cash to weather the storm in downside is fine. The issue is Sequence of Return. Your parents retire at a bad time when the market is down. If I were them I would use cash for those 3/4 years and do in-kind conversion to Roth a little each year and not selling those shares. I’m still learning and would love to learn more about this. Thanks for your video clip.

[michaeleldridge]

what were the funds they were in and how big were the fees on those accounts? probably active investing and charging 1%. because when i put the index's, total bond market and total stock market, into portfolio visualizer the numbers were not that bad. Were they caught up in the tech bubble?

I get $243K as the lowest number in 2003

Thanks

[CB-vgwq]

Okay. I too have to comment on this video.
I am sorry your parents went through a difficult, financial experience in retirement.
My parents retired the same year. They have 5 years of cash cushion to weather out a bad market turn down. The cash cushion was the same as your parents- $12, 000/ year. They paid all monthly bills with their 2 -S.S. checks and my Dad's very small pension($600/month). When the market was down, they never pulled any money out of their portfolio unless there was a required minimum distribution. 
They had a balanced portfolio.
Something not discussed in this video, my parents owned their small home (1200 sq feet) and owned their 2 small cars.- A Key factor.
Also a key factor. No mortgages. Also, no credit card balances.


Another key factor, they did not take s.s. until full retirement age. That meant they received about 25% more than if they took retirement at the earliest possible year. Since S.S. is inflation adjusted, that helped.
My parents had a fun, joyful retirement. In the lean years (when the market was down). They did not do as much.
On the good years, they traveled to Europe.
My parents proved you can have a great retirement. You can, too.
BUT, you can not have a mortgage, no credit card debit, No car payment and 5 years cash cushion to weather out the market.

[DavesShop]

outstanding message keep up the great work

[danielhurley]

Michael - - The S&P 500 lost a cumulative 38% of value in 2000/01/02 (do the math), but it was up 28% in '03 and up another 11% in '04. You should have spent the last 1-2 minutes of this video saying what your parents SHOULD have done. Should they have shifted ALL of their money to "fixed income" sometime during the "downturn" (which was actually the worst for the S&P 500 in '02)? If so, they would have missed the HUGE recoveries in '03 and '04. This would have been a "classic mistake" made by many investors who try to "time the market."

[martinlutherkingjr.]

Ok so wtf is a significantly better alternative?