The Reality and Frustration of a Lower Return Environment for Investors

Many advisors cap recommended withdrawals from an investment portfolio at 4%; greater rates of withdrawal are considered risky.  How many investors retiring at this time have enough assets so that 4% is a livable income?

Financial industry economists and academicians are wrestling with data indicating that the first decade of this millennium will yield sub par returns and that this trend will continue into the foreseeable future.  Many advisors cap recommended withdrawals from an investment portfolio at 4%; greater rates of withdrawal are considered risky.  How many investors retiring at this time have enough assets so that 4% is a livable income?

The buy American crowd will need to get over it.  The economy is global – the design of a portfolio, whether ultra conservative or very aggressive must consider incorporating a significant allocation to global investments.  Data indicates that the American economy and American businesses will not generate enough return to support performance expectations.

Never has it been more important to focus on fees that an investor must pay.  In an environment of 10 to 12% returns, 1.2% or 2% fees are often not questioned.  However, in an environment of 7% returns, the combination of inflation, taxes and fees can take a significant toll on performance.

The answer is not hedge funds.  As they continue to implode, the investing public has backed away from utilizing considerable leverage to enhance performance. 

Rebalancing of portfolios has never been more important.  Maintaining your portfolio's diversification is one key to good performance returns.  Allowing a portfolio to become stagnant may lead to serious losses if singular or highly concentrated market trends supporting near term performance end abruptly.

Investors can handle their frustration in several ways:

• Make certain you are receiving advice from advisors with a good long term investment records.  Such advisors rarely reached for huge growth in portfolios, but have strategies for preserving capital.
• Pay attention to the investment choices inside your 401(k).  This is where the greatest problems lie for most investors.  They simply ignore their 401(k)s and because no rebalancing has occurred, market down turns kill performance.  Investors cannot afford to lose money in downturns.
• Stay invested with some risk.  Ignoring risk for "safe" investments such as CDs means you will not stay ahead of inflation and taxes.

Understand that we are all in this together.  There is no easy answer when the U.S. economy is in recession mode.  It is the time for prudence, caution, and paying attention to best practices in building a long-term portfolio.  Ask a professional for help.  You are going to need it.