The question we hear most often from retirees is “How do I make my money last?” We believe that holding a widely diversified portfolio of stocks and bonds is the key to maximizing your money’s longevity.  The example below shows what would have happened to an hypothetical investor retiring back in 1972 with $100,000.  It assumes the investor withdraws 6%, or $6,000, from his/her portfolio each year and increases the withdrawal annually to keep up with inflation.

The results show that an investor with an undiversified portfolio of large U.S. stocks, as represented by the S&P 500, would have run out of money by 2004.   Contrastingly, an investor holding stocks from several asset classes of stocks representing 60% of their portfolio, along with 40% bonds, would have seen their $100,000 grow to more than $1.6 million during the same period.   The graph below illustrates:

 Source: Developed from historical back tested mutual fund performance of Diminsional Fund Advisors, Inc.

 Note: Reflects higher compound return of MPM portfolio (12.6%) versus 100% S&P 500 stock portfolio (11.2%) and lower volatility of MPM portfolio (Stan. Dev 10.5%) versus 100% S&P 500 stock portfolio (17.2%) during period examined.   Note that some data has been back tested.  Back tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for information purposes to indicate historical performance had the index portfolios been available over the relevant period. MPM has only offered the referenced portfolio since 1995.

 How can such a striking difference be possible?  The answer lies in the construction of the diversified portfolio.  Asset classes are combined in such a way that when one asset class is in a temporary lull, the other classes often perform better and smooth out overall portfolio performance.  The all important by-product is that it prevents retirees from having to withdraw funds from a single asset class portfolio while it experiencing a market decline.