Market Update: What is Your Retirement Benchmark?

Occasionally I advise a client who is determined to compare his portfolio performance to a benchmark. A puzzled look washes over him when I say I don’t pay much attention to benchmarks. Then comes the usual response: “How am I supposed to tell if you’re doing a good job?” 

Benchmarks of Success

I understand how this client feels. I have been on both sides of this debate over the years. Benchmarks do serve a purpose, especially in institutional settings with more targeted outcomes. The benchmark of success for most individuals, however, is not beating an index each year; rather, it is to not run out of money in retirement. Comparing short-term performance numbers to an arbitrary benchmark tells little of the value provided by a financial adviser. True value is in knowing how your portfolio is structured to navigate various market environments, understanding how much risk you’re taking, and having a long-term process that adapts to changing situations—even if your returns fall short of a given benchmark for a particular period.

Currently, portfolio longevity deserves more attention than usual with the S&P 500 approaching valuations (in terms of the price-to-earnings ratio) last seen during the dot-com bubble. The high valuations of that era led to a 50% correction and a decade of no net returns. Taking distributions from a portfolio in that environment will turn the best-made retirement projections into scratch paper. In this case, if I told my client his portfolio was only down 45% compared to 50% for the benchmark, he would not have said I was doing a good job.

Managing Risk

The graph above highlights the extremity of current stock market valuations. Every valuation metric gives slightly different results, but they all imply that returns over the next decade will be lower than historical averages. Some sectors within the stock market-such as financials and international stocks-are more attractive than others, but none of them are inexpensive relative to historical standards. The situation is exacerbated by an equally unattractive bond market characterized by low yields and rising interest rates.

Knowing this, you can prepare accordingly. If your financial reserves are sparse, consider lifestyle changes such as spending less, delaying retirement, or working part-time. In 2000, many highly educated professionals had recently retired based on elevated account balances and overly aggressive retirement projections. Then the stock market collapsed. The subsequent decline in asset values was life-altering and forced them to consider reentering the workforce. 

Benefits of Proper Asset Management and Financial Planning

Situations like this can be avoided when proper asset management and financial planning come together. For example, ensuring that you have adequate liquidity reserves as part of a comprehensive retirement income plan will allow you to navigate sharp market corrections more comfortably. While 2020 provided a similar environment to that of 2000, the short duration of the bear market made it more of a reminder than an actual crisis—except for those that panicked and got out. Last year also presented an excellent opportunity to harvest losses in your portfolio, reducing future tax liabilities. Benefits like this do not show up in a benchmark comparison.

Using investment benchmarks as an accountability tool may seem apt, but they have little to do with ensuring your retirement goes as planned financially. Having a well-communicated, disciplined process made 2020 a gratifying year for our Filbrandt team. The many kind words from our clients let us know that we were adding value and contributing to the lives of others. Now that is a benchmark worth using!