Facts Evidence Based Investing

Evidence-Based Investing in Retirement: 3 Facts and 3 Principles

Investing during Phase 2 of your financial life, when you’re no longer dependent on a paycheck from work, is much more challenging. 

During Phase 1, your focus is simple: earn a solid rate of return

In Phase 2, in addition to that, you have a lot more responsibilities to consider:

  1. Withdrawals: You now have to strategize where you will withdraw the cash flow you need.  
  2. Tax consequences: You have many more tax consequences to consider and plan for: Required Minimum Distributions from your IRA (RMD), capital gains, and dividends.
  3. Increased Stakes: Without that paycheck from work, your Retirement Bucket of Investments has to last because you have nothing else to fall back on.

When you’ve reached this stage in your life when you’re now depending on your Retirement Bucket of investments to support you as opposed to your paycheck from work, earning market returns is no longer a luxury.  It’s a necessity.

If you don’t have an evidence-based investmentsystem” in place after you transition to retirement, which governs your decisions, the odds of earning market returns decrease, and odds of running out of money increase.     

Unfortunately, as the results show, the overwhelming majority of Americans don’t have a system.

Dalbar QAIB

Every year, financial research firm DALBAR performs a Quantitative Analysis of Investor Behavior (QAIB). Here’s what the 2020 DALBAR QAIB Report reveals:

  • 9.96%: The average annual return of the S&P 500 broad stock market Index over the last 30 years from 1990 through 2019 was 9.96% per year (including dividends reinvested)
  • 5.04%: Over the exact same 30 year period, the average annual return of the “average” stock fund investor (i.e. a person) was only 5.04% per year.

Stop and think about all of this for a moment. Over the last 30 years, the actual returns received by investors was only half of what “the market” provided. That’s truly sad.

The obvious question is why has the average investor earned only half of what markets generate?

Given these statistics, we know that markets are not the problem because these figures demonstrate that markets have performed very well.  It must be something else: 

  • Fees: The fees they paid account for part of the problem.
  • Strategy: The biggest contributor is a lack of strategy, and this is the direct result of not having an evidence-based investment system grounded in 3 Facts and 3 Principles.

3 Investing Facts

1. Markets Work:  Since the end of World War II, 1945-2019, the S&P 500 Stock Market Index has earned:

  • 11.2% per year (with dividends reinvested),
  • 7.3% per year greater than inflation

Bottom Line: Stocks have generated inflation fighting long-term returns.

2. Markets are Volatile: Over the same timeframe from 1945-2019, there have been 93 market pullbacks of 5% or more:

  • 59 of the 93 were between -5% and -10% with an average drop of 7%. 
  • 22 of the 93 pullbacks were between -10% and -20%, with an average of price drop of 14%.
  • 9 of 93 were between -20% and -40%, with an average of price drop of 26%. 
  • 3 of the pullbacks were over -40% (including the dot.com crash in 2000-2002 and the Great Recession Financial Crisis between 2008-2009),

Bottom Line: the market’s long-term climb has included many falls.

3. Markets Recover:

  • Of the 59 pullbacks between -5% and -10%, it took an average of only two months to recover back to the original price before the drop.
  • Of the 22 between -10% and -20%, it took an average of only 4 months to recover back to the original price before the drop.
  • Of the 9 between -20% and -40%, it took an average of 14 months to recover back to the original price before the drop.
  • In 90 of the 93 market pullbacks since World War II, 87% have recovered in 4 months or less and 97% have recovered in 14 months or less. 

Bottom Line: All stock market drops have been temporary, and most have been brief.


1. Time Matters

  • Investing is a long-term solution to a long-term problem which is keeping your purchasing power well above inflation.
  • In the short term, stock market prices fluctuate a ton. They always have and they always will.

Bottom Line: Have a workable strategy to deal with short-term volatility so you can capture the higher expected returns markets have earned.

2. Costs Matter

  • Just 1% in additional fees costs a $1million Retirement Bucket of Investments earning 8% per year a staggering $2.2 Million in extra fees over 30 years (your joint life expectancy).

Bottom Line:  Pay careful attention to fees, especially in annuities, actively managed mutual funds, and hedge funds.

3. Allocation Matters

  • To justify high fees, many Wall Street firms sell superior research and market-beating returns. 
  • The evidence, however, paints a very different picture.  According to extensive research by Nobel prize winning economist Eugene Fama and Dartmouth Professor Ken French, 95% of historical stock returns dating all the way back to 1928 can be attributed to only 3 factors:
    • Exposure to stocks in general vs. treasuries and other fixed income instruments
    • Exp to smaller vs. larger companies
    • Exposure to value vs. growth stocks
    • Only 5% of historical returns can be attributed to something outside of these three factors like superior selection and/or market timing. 

Bottom Line: Allocation matters much more than superior stock selection.

In order to earn the market returns you need in order to make your Retirement Bucket™ last while it supports your desired lifestyle, employ an evidence-based investment system grounded in these three facts and three principles.

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