Own the Racetrack

Last week, the investment quilt taught us that chasing returns is a great way to slice your long-term return in half.   Buying and selling based on last year's… last month's… last week's returns is a surefire way to buy high and sell low.

And so we buy and hold…. and then hold some more. 

But what do we buy and then hold?   A diversified portfolio.

The "Asset Alloc." in the white boxes stand for Asset Allocation - aka a diversified portfolio.   Notice how it's never the best and never the worst.  A diversified portfolio loves the middle way (points if you picked up that zen reference.)

And because we know it will be in the middle over time, there's no anxiety about what to do.   We don't need to worry if NOW is the best time to buy or sell something.   

We don’t' need to worry if we picked the right horse because we own the whole race track. 

Investment Quilt.png

The Investment Quilt

Colors!  Pretty!!!

Investment Quilt.png

Each colored square is an ingredient in your investment stew.  If you're a client of The Financial Zen Group, most of these ingredients are in your portfolio.

The ingredients are sorted from top to bottom.  The best performing ingredients are at the top.  The worst are at the bottom. 

Look at the first column, for example.  In 2003 "EM Equity" aka Emerging Markets was the best ingredient.  It had a 56.3% return in 2003.   

The worst ingredient in 2003 was cash.   Cash only earned you 1%.

Make sense?

One of the many things the "Investment Quilt" teaches us is that past performance is a lousy indicator of future results.  Therefore you should not "chase returns" by getting in and out of the market based on what it just did. 

Follow emerging markets from year to year. 

It's either the best or the worst.  And it's usually the worst right after it was the best. 

If Wall Street has fooled you into thinking market timing works, then you'll probably invest after it was the best, just in time for it to be the worst.   And then sell it after it was the worst, right before it's the best. 

In other words, buying and selling at exactly the wrong times.  Studies confirm this happens consistently.  The average investor gets half of the market returns because they are always buying and selling at the wrong time. 

The solution?  Never sell.  Buy and hold and then hold some more.  We know the market's long-term return is 10%.  That's pretty darn good.  Why would you mess with that? 

Run for the Hills...Again!

Editor's Note (doesn't that sound fancy?):  The universe really wanted to drive this lesson home.  As if on cue, between writing this last week and publishing it this week the market bounced back nearly 3% in just two days. 

The market dropped 6% last week.  EEEEKKKK!!!!!

Hope your bomb shelter's stocked up on shotgun shells and canned goods because we are running for the hills…again!

Surely we should worry this time, right? 

Only the smartest people read my newsletters, so I know you already know the answer.  Of course not.

Pictures are fun.  Below is a picture of market returns since 1980.  The gray bar is the total return for the year.  The red dot is the lowest point it reached that year.

S&P 500 Market Returns.png

Look at 1980.  At some point between January 1, 1980 and December 31, 1980, the market was down 17%.   Oh  noooooooo!!!!!

But wait.  

By the stroke of midnight on New Year's Eve, it was up 26% for the year!  Woohoo! 

It bounced back 43% from the lows that year.  That's one helluva year!  

All those people who dove into their bomb shelters when it was down 17% actually had nothing to worry about.   

And I bet you dollars to donuts before they dove for cover, they sold all their investments "before it got worse."  

Then I'll double down and bet they missed out on some - if not all - of the recovery because they were too scared to "get back in."  

So not only did they not bring in the New Year with 26% more money than they had a year before, but they were probably down 17% because they sold everything at the bottom and never got back in. 

As our Commander-in-Chief would say - SAD!

The lesson is simple.  Whatever is happening at this moment has ZERO predictive power over what will happen in the next moment.  

I'm sure when the market was down 17% in 1980 no one was saying "I bet it recovers 43% and finishes the year up 26%."  NO. ONE.

So what should we do?  Go to work.  Spend time with our friends and family.  Enjoy our lives. 

After all, we've seen this movie before.  We know how it ends.  If you're patient and give it enough time, it always has a happy ending.

Speculating vs. Investing

If you are saving 20% of your income and investing it in a boring, long-term, buy-and-hold portfolio that's well diversified with a professional-level asset allocation - then you can feel good about speculating on some "fun stuff." 

  • Love real estate and enjoy being a landlord?  Cool!  Go get yourself an investment property.
  • Obsessed with finding the next Facebook?  Nice!   Go invest in some Pre-IPO companies.
  • Think you've got a knack for currency trading?  Awesome!   Go-to-town arbitraging dollars for euros.
  • Feel like you your poker skills are second-to-none?  Sweet!  Go hit the high-stakes tables at Vegas.

But only - and I repeat ONLY - after you have your investment foundation built - saving 20% in a well-diversified, low-cost, index portfolio.

Don't let Wall St. (or your neighbor) sucker you into thinking speculating is investing.   If you can't predict your return, then you are speculating.  And if you are speculating, one of those unpredictable returns is -100%. 

Run for the Hills!

The markets FINALLY took a breather last Friday and Monday.  That presents a teachable moment, so let's also take a breather from our IRA Contributions series.

The markets had their biggest point loss EVER on Monday.  AAAHHHHH!!!!!  (On a percentage basis, it didn't even crack the top 10, but I digress.)

Should we run for the hills?

First - pat yourself on the back.  If you're a Financial Zen client, you deserve kudos.   I did not receive one single email, phone call or text about the markets.  That tells me that you are smarter than the average investor, and don't lose your head over a couple down days (even big down days) in the market.

Second - some perspective.  If you didn't know what happened the last two days and I told you you're up 26% over 15 months, would you be stoked?  I bet you would be.  Focusing on the long-term positive is a great way to deal with the short-term negative (and the negative is always short-term).

Third - should you worry?  If you were foolish enough to invest next month's mortgage payment in the stock market, then yes.  (If that's you, do yourself a favor and schedule an appointment with The Financial Zen Group.)  

If you’re a Financial Zen client, you don't have next month's mortgage payment in the market.  In fact, the ONLY money you have in the market is long-term...which means you don't have to worry.

So the last two days?  Meh.   It gave the financial news media something to blab about, so good for them.  Otherwise, who cares?  

Oh and the market snapped back 600 points Tuesday, proving once again that short-term market movements are impossible to predict.  Mr. Market loves to make fools out of people staring into crystal balls.

An Early Christmas / Hanukah Present

I've got a $609 holiday gift to give every single one of you.  Read on to claim it. 

Earlier this year, I ponied up for very expensive concert tickets to the Red Hot Chili Peppers.  They're on my bucket list, so I decided it was worth it just this one time. 

I missed the initial sale, so I went on StubHub and found they were 3x the face amount.  I held off, expecting prices to come down.  They didn't.   I ended up paying $100 more than the already expensive 3x face amount. 

The lesson was there.  I wasn't listening. 

5 months later the Foo Fighters announced dates.   They are also on my bucket list.  (What are the chances?  My concert bucket list only has 3 bands on it.)

Having watched ticket prices steadily rise for the Chili Peppers, I bought 3 extra tickets so I could sell them at a profit 6 months later. 

Last week I sold the tickets.  At a loss.  A $509 loss.   They didn't go up and I was out half a grand. 

This time I listened to the lesson.  Don't make decisions based on short-term predictions.

Of course, the irony is I preach incessantly about not speculating on short-term price movement.  How many thousands of times have you heard me say not to try and time the market?  That you can't predict the future and should never make investment decisions based on your or anyone else's crystal ball.

So yeah.  My mom was wrong.  I'm not perfect after all. 

But the good news is I get to give all of you a $609 Christmas/Hanukah present! 


Portfolio Magic

After reading this, you will know more about investing than every caller that's ever called into Jim Cramer's show.

What we've learned so far….

Over the last 90 years, the average annual return for the S&P 500 is 9.8%.  

Rolling returns less than 90 years vary.   The longer you are invested, the smaller the variability becomes.

The 1-year rolling return varies between -47% to 61% per year.
The 20-year rolling return varies between 6.5% to 20% per year.

So the longer you are invested, the more predictable your return becomes.  But long-term investing is not the only way to do this.

The other way is diversification.

"Don't keep all your eggs in one basket."  Diversification is usually thought of a way to reduce risk.  However, it's also the way we get more predictable, consistent returns. 

For example, consider two investments with identical return profiles.

Investment A:   9.8% average annual return / 20 year rolling returns between 6.5% and 20%
Investment B:   9.8% average annual return / 20 year rolling returns between 6.5% and 20%

The magic happens when you put them together.  When you combine them, the new return profile looks like this:

Portfolio A & B:  9.8% average annual return / 20 year rolling returns between 8% and 17%

You retain the expected long-term return of 9.8%, but you reduce the variability of possible outcomes.

And now you understand Modern Portfolio Theory.  Jim Cramer's callers ain't got nuthin' on you!

What Should You Expect?


That's the average annual return of the S&P 500 over the last 90 years.

Is that the return you should expect to get in your portfolio?   Yes, but only if you have 90 years to invest.

Personally, I don't have that long.  

But I've got 20 years. 

So should I expect 9.8% average annual return over 20 years?


Remember from last week that the best annualized return over 20 years was 20% and the worst was 6.5%.

That means over the next 20 years it's very reasonable to expect an average annual return somewhere between 6.5% and 20%. 

But the longer you are invested, the more that gap will close in on 9.8%.

And diversification will also shrink that gap.  More on that next week.

Disclaimer: The performance numbers reflect an investment in only the S&P 500 and should not be considered investment advice.  Please consult your financial professional before investing.  Past performance is no guarantee of future results.

This Picture Is Worth a Thousand Lessons

The picture below will help you understand long-term investing more than anything else you'll lay your eyes on. 

It shows the best and worst of the S&P 500 (aka the "stock market") from January 1973 to December 2016... based on rolling returns.

What's a rolling return?  It's easiest to explain through example. 

The 5-year rolling returns from 1973 to 2016 include 5 years from :

1973 - 1977
1974 - 1978
1975 - 1979…..rinse and repeat until…
2012 - 2016 

Pretty simple, right?

So the graph below shows the best 5 years and the worst 5 years.  And then does the same for 1, 3, 10, 15 & 20 year rolling returns. 

(For the nerds - it's actually broken down by month - as in 1/1973 - 12/1973, then 2/1973 - 1/1974, etc.)

And these are ANNUAL returns.  For example, during the best 15 year period, you made 20% every single year.  Not just 20% over 20 years.

Why is this the most important graph you'll ever see?  Because the WORST 15 year return was a  positive 6.5%  annual return.

Patience and long-term investing rewards you with more money.

Untitled picture.png

Did You Know?

Did you know…

That the Dow Jones Industrial Average is only comprised of 30 companies?  Check out the list below.

There are over 5,500 publicly traded companies in the U.S.  

Decide for yourself if the Dow is a good barometer for the stock market. 

The S&P 500 is - shocker - comprised of 500(ish) companies.  That's why the pros use the S&P for the stock market's barometer.

Only the financial media quote the Dow.  And they usually track each other closely, so it's a non-issue.

Over the last year, however, the Dow is up 25% and the S&P 500 is up "only" 18%.

7% is not a small difference. 

Over the coming weeks, you'll see more headlines (and tweets) proclaiming "The market is up 25%!"

Now you know they SHOULD READ "the 30 stocks in the Dow are up 25%." 

The market is up 18%. 


The Dow 30
American Express
Cisco Systems
General Electric
Goldman Sachs
Home Depot
Johnson & Johnson
JPMorgan Chase
3M Company
Procter & Gamble
The Travelers
United Technologies
Walt Disney

Have You Done Your Homework?

I was prepared to finish this week's blog on tips to save money (by far the most popular request). 

But then I came across a blog post from Seth Godin and what he wrote is so simple, yet so profound and applicable that I had to stop the presses and share. 

Feels Risky

The gulf between "risky" and "feels risky" is huge. And it's getting bigger.

It turns out that value creation lives in this gap. The things that most people won't do (because it feels risky) are in fact not risky at all.

If your compass for forward motion involves avoiding things that feel risky, it pays to get significantly better informed about what actually is risky.

When I was a wee-pup financial advisor, it was nerve-racking investing clients' money.   What if the market tanked right after you put it in?  It "felt risky". 

So I tried to be "smart" about it and invest when the market had clearly pulled back.   The problem is sometimes the market doesn't pullback for very long stretches (like the last 9 months). 

With experience and an unquenchable thirst for knowledge, I eventually learned what is actually risky is being out of the market, not potentially stumbling out of the blocks.  It's a long race, and a bad start is inconsequential.  The true risk is delaying your start.   

That's just an example of how Seth's post applies to me.  Until I had the wisdom and experience, I was making decisions based on what "felt risky". 

"Risky" vs. "feels risky" isn't just relevant to financial planning. 

It's really about making the time get educated so you make decisions from a place of strength and knowledge, not emotions and guesswork.

So ask yourself the next time you make a decision (financial or otherwise), are you making it based on the due diligence you conducted and a confident amount of knowledge - or is your decision based on hearsay, your neighbor's advice and that newspaper article you read last week? 

'Merica - Heck Yeah!

Having just celebrated Independence Day (hopefully with hotdogs and light beer and fireworks), I thought I'd write a patriotic post this week.

It's a quotation from Warren Buffett's 2016 Letter to Shareholders (If it looks familiar, it's because you've seen it before!)

One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.

You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.

Early Americans, we should emphasize, were neither smarter nor more hard working than those people who toiled century after century before them. But those venturesome pioneers crafted a system that unleashed human potential, and their successors built upon it.

Why You Should Never Bet on Red

Claire loves the action of the roulette table.  The marble bouncing around the wheel.  The people yelling and screaming. The chips clinking onto the table.    She preferrs winning often to winning a lot, so she only bets on black or red.  

About an hour into the action, she noticed the roulette ball kept landing on black.  So she started betting only on black.  And won.  A lot. 

Curious, she asked the dealer if there was something funny going on.   To her surprise, the dealer explained the casino had deliberately rigged the marble to land on black 70% of the time.  He said it was a new marketing gimmick to get people into the casino.

Claire, being brilliant, bet on black into the wee hours of the night.  She came with $200 and left with over $10,000.  

Monday morning she called her Financial Planner to tell him the good news.  After exclamations of shock and joy, Craig said "And now you get it."

"Get what?" she asked.

"Get investing.  You have two options - red or black.  The marble lands on black 70% of the time and on red only 30%.  Given those probabilities why would anyone - EVER - bet on red?  Betting on red means you have a 70% chance of losing"

"Exactly," Claire replied.  "That's why I only bet on black.  But what does that have to do with my investment portfolio?"

Craig explained.  "Just like betting on red or black, you have two options: either you're invested or you're not. 

"Historically, in any given year, there's a 70% probability the stock market will go up and a 30% probability it will go down.    Put another way, if you're NOT invested you have a 70% chance of losing money. 

"And like roulette, it's completely random.  There's no way to predict if it will go up or down.  If there was, then everyone would do it."

 "Ah! That's right!" Claire exclaimed.  "I do remember you telling me that.  And that's why we buy and hold our portfolio even in the worst of times.  Maybe it "lands on red" a few times in a row, but you know it won't last for long."

"Exactly!", Craig enthusiastically replied. "Now treat yourself to something nice with half your winnings and put the rest into your retirement savings.  If you need me I'll be in Vegas at the roulette wheel!"

Is this a fantasy land Craig and Claire live in?   Nope.  This is exactly what's happened since we started tracking the markets at the turn of the 20th century.

Some recent evidence is below.    The bars are actual annual returns of the S&P 500 from 1980 to today.    27 out of the last 36 years have seen positive returns. 

Also note the red dots.  They are the intra-year low.  For instance, in 1980 the market finished 26% higher than it started.  But at some point, it was down 17%.  

The takeaway is simple:  Don't bet on red.  Stay invested.  Always.

(One caveat: Retirement.  Your short-term living expenses should NOT be in the stock market. That's why we keep 7-15 years of living expenses set aside.  Everything else stays in). 

Who's Selling to You?

When you buy a stock, who are you buying it from?  And I don't mean the company that executes your transaction (Schwab, E*Trade, Fidelity).  I mean who is the person that is actually selling you the stock you purchase? 

It's easy to forget in today's faceless world of online investing.  But stocks aren't bought from the "ether" of the market.  Someone, somewhere is literally selling that stock to you.

And you will never know who that person is.  Is it Joe, your neighbor?  Or Suzy, your coworker?  Maybe it's Mary, your mother-in-law? 

If it was 1950, then it probably WAS one of these people.  Back then 90% of all stock market trading was done by "retail" investors, i.e. you, your friends, coworkers and family. 

Back then if you really did your homework it was entirely possible you knew something Joe, your neighbor didn't.  And when Joe sells you his shares of AT&T, it's to your advantage because Joe just doesn't know any better. 

How likely is that to happen today?  In 1950 90% of trading was done by these "retail" investors.  Guess how much that has changed.  80%?  70%?   

10% !

Yes, only 10% of trading today is done by you, your friends, coworkers and family. 

Who's the other 90%?  The other 90% of trading is done by institutions - mutual funds, hedge funds, endowments, pension plans. 

The other 90% has teams of people with PhD's in finance. 

Their entire job, 5 days a week, 12 hours a day is to analyze stocks to figure out which ones to buy or sell. 

They are the brightest of the bright.  They went to Harvard and Yale and Stanford. 

They get paid obnoxious salaries because what they do is obnoxiously valuable to their firms. 

And when you buy your stock, there's a 90% chance that it's one of institutional investors who is selling it to you. 

So next time before you click "buy", ask yourself "What does the person selling it to me know that I don't?" 

I don't know either.  And that's why I don't bet on stocks.

Can You Name a Famous Investor?

Name a famous investor.  Got one?

Think about that for a second.  Why would you - presumably someone who doesn't work in finance - know any famous investors?   There's only two possible reasons - either they are really, really good - or they are really, really bad.

If you have a bad one in mind, like a Bernie Madoff, try to think of a good one.  We're not about to talk of financial scams and the rotten souls that run them.

So who did you think of?   Was it one of these people?

Warren Buffet? 
Jack Bogle?
Charles Munger?
Peter Templeton? 
William Bernstein?

All of these people are famously GOOD investors.   And do you know what these people have in common?  They are all long-term investors.  But don't take my word for it. 

Warren Buffet:  "Our favorite holding period is forever."

Jack Bogle: "Ask yourself: Am I an investor, or am I a speculator? An investor is a person who owns business and holds it forever and enjoys the returns that U.S. businesses have earned since the beginning of time. Speculation is betting on price. Speculation has no place in the portfolio or the kit of the typical investor."

Charles Munger: "It's waiting that helps you as an investor, and a lot of people just can't stand to wait. If you didn't get the deferred-gratification gene, you've got to work very hard to overcome that.”

Peter Templeton: "The best time to invest is when you have money. This is because history suggests it is not timing the markets that matters, it is time."

William Bernstein: "Do the math. Expect catastrophes. Whatever happens, stay the course."

See the pattern?

If you thought of someone else, I'd wager if you looked into it, you'd find out they are long-term focused as well. 

They are successful because they are focused on the long-term.  They don't buy and sell based on what their crystal ball is predicting for the markets in the next 6 months.  In fact, they don't even OWN a crystal ball. 

They are in it for the long haul.  They don't change their strategy when things get tough.  And they have been rewarded. 

Oh SNAP! (Another Tragic IPO Story)

Please tell me you put my entire portfolio in SNAP this morning.
— Anonymous Client 3/2/2017

On March 2, Snapchat IPO'd. In its first day of trading it was up 40%. 

My client was joking because all of my clients know I'm not a stock picker.  People give me their "Serious Money" to manage. I let them handle their "Funny Money" which is where stock picking belongs.  But that's not the subject of this blog post. 

IPO-hype is rampant, especially in the Bay Area.  When new high-profile IPO's are scheduled people ask how to get in (hint: you can't).  

But is that enthusiasm justified?  Below are 10 high profile IPO's over the last 7 years.  

Lending Club

Guess how many of these have been good investments. 


That's right.  Out of these 10 high-demand IPO's only two of them have given investors a positive return.  Facebook and Alibaba.  Everyone else took a bath.

The bloodbath is actually worse when you consider that Joe and Jane Public didn't purchase these stocks at their IPO price.  The only way to get "in" on an IPO is to either a) work for the company going public or b) be a highly affluent investor. 

So unless Joe and Jane work at SNAP they purchased shares after it started trading.  The opening price for SNAP was $24.   If Joe and Jane bought into the hype of SNAP the first day, they are down 4%.

The lessons here are simple:

  1. If you work for a company that goes public, divest your company stock as soon as you can and diversify. 
  2. Don't buy IPO's.   The odds of picking the winner are not in your favor.  

Where Was the Marching Band?

9 years ago we were in the middle of the worst market downturn since 1931.   We had no idea when the pain would stop.

All we did know is that from its peak in October 2007, the Dow Jones had lost 7,617 points over 17 months - that's 53%!  

Retirees who weren't invested properly were dusting off their work shoes.   College students were looking toward a future of massive student loans and no job with which to pay them.  Worst of all, even the one thing we thought we could all count on - our ever-increasing home value - sank.

That was the reality we were living with when we woke up on Monday, March 9, 2009.  It was a relatively quiet day in the market.  The Dow was only down 80 points.  Trading volume was low. After the previous 17 months of panic, it felt like a pretty uneventful day.

No one knew that unassuming morning would mark the end of our misery. 

A week later the Dow was up over 10%.

A month later the Dow was up over 20%.

3 months later the Dow was up over 30%.

And a year later on March 9, 2010, the Dow closed at 10,654.   That's over 40% in a year. 

What's the lesson?   Market recoveries aren't announced with a marching band.   It happens when you least expect it.  

Inspiration from Warren Buffett

Think of the most famous investor you know. 

I'd bet my financial planning practice you thought of Warren Buffett.  And with good reason.  He's universally touted as the most successful investor in history among both financial professionals and non-professionals alike. 

Every year he writes a letter to the shareholders of Berkshire Hathaway.  It's something  investment professionals pore over when it comes out.   I don't have any statistics to back it up, but I bet it's the most widely read Letter to Shareholders of any CEO of any company in the world.

This year's letter was just released last weekend.  Here's a couple quotations you'll find particularly inspiring.  

One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.

You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.

Early Americans, we should emphasize, were neither smarter nor more hard working than those people who toiled century after century before them. But those venturesome pioneers crafted a system that unleashed human potential, and their successors built upon it.

This economic creation will deliver increasing wealth to our progeny far into the future. Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.
— 2016 Berkshire Hathaway Letter to Shareholders
American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.

The years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.

During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.
— 2016 Berkshire Hathaway Letter to Shareholders

When Negative Returns Matter

True or False:  In retirement you invest the same way you did before retirement, but with less risk. 

(Don't you love my pop quizzes?)

The answer is 100% FALSE!

Last week we verified with simple math that the timing of returns doesn’t matter if you're not withdrawing funds.

If you're withdrawing funds (like in retirement), then you absolutely have to worry about the sequence of returns.  In fact, it's such a big risk it has a name - Sequence of Returns Risk.  (Not a very creative name, is it?)

Let's take a look at our hypothetical portfolios again.  This time we'll add a zero to make it a real life example.    And let's assume you are also withdrawing $50,000 each year to live off of.

Getting the negative return first means you're $25,000 poorer by Year 2.  Uh oh!  

And that's just one year of bad returns.  Imagine if you retired in 2000 and you experienced 3 YEARS worth of negative returns immediately after retiring.  

If you were still investing your money like you did before you retired, you probably had to go back to work and are STILL working. (I know unforunate souls who went through this, but only came to me for help after it was too late.)  

So what's a retiree to do?  More on that next week!  (Yeah cliffhangers!)