Let’s face it, the basic Couch Potato portfolio, a 50/50 mixture of U.S. stocks and bonds, won’t get you very far in cocktail party conversations.
It’s dull.
It’s dirt simple.
And the only way it can display your innate superiority as a human is kind of crass. You’ll generally end up with more money than your friends who take trendy and expensive professional advice.
So the Margarita portfolio may be a way to improve your social life without harming your financial life. It’s a bit more complicated, having three parts instead of two. And it brings in the world outside the United States, giving you an air of worldly knowledge, even if you’ve lived your entire life in, say, Beaumont or Crystal City.
It also lets you add an important word to your cocktail party conversation: diversification. If you read the gurus, diversification is about as important to investors as infallibility is to the Pope. Yes, it’s a big deal.
Fortunately, it isn’t difficult to add this important element to your retirement nest egg. If you can make a margarita, you can make and manage the Margarita portfolio. Just as the beloved drink is made with equal parts lime juice, triple sec and tequila, the margarita portfolio is made with equal parts U.S. stock market, International Stocks, and US fixed income.
It’s that easy. Stir and enjoy in your hammock. Or pool. Or while watching TV. Yes, this is something you can do at home, in your spare time.
There’s only one catch. While the Margarita portfolio is interesting and diversified, it may not be an improvement on the basic Couch Potato. The evidence over recent investment periods is, well, mixed.
Suppose, for instance, that you had decided to retire 25 years ago. Or 20, 15, 10, 5 or 3 years ago. How would you have done?
The table below shows the dollar results, year-by-year, for the 25, 20, 15, 10, 5 and 3 years ending December 31, 2017. The bottom row, 2018, shows the balance of the portfolio at the end of May. The results figure you invested $100,000, waited a year, and started with an initial withdrawal of $4,000 adjust for a year of inflation. After that, you adjusted for inflation each year.
How did you do? Like the Couch Potato portfolio, the first thing to notice is that every finishing portfolio value is greater than the original $100,000 investment. Both portfolios suffered in the same years. Both portfolios declined in value for three years in 2000, 2001, and 2002. And both portfolios recovered after the financial crisis in 2008.
| Principal Remaining | ||||||
|
Year |
25 years |
20 years |
15 years |
10 years |
5 years |
3 years |
|
1993 |
$112,563 |
|||||
|
1994 |
$110,889 |
|||||
|
1995 |
$127,970 |
|||||
|
1996 |
$135,886 |
|||||
|
1997 |
$149,253 |
|||||
|
1998 |
$168,131 |
$111,679 |
||||
|
1999 |
$192,765 |
$127,020 |
||||
|
2000 |
$178,667 |
$116,647 |
||||
|
2001 |
$160,458 |
$103,629 |
||||
|
2002 |
$140,778 |
$89,727 |
||||
|
2003 |
$170,792 |
$107,597 |
$120,935 |
|||
|
2004 |
$186,686 |
$116,270 |
$131,780 |
|||
|
2005 |
$195,936 |
$120,606 |
$137,873 |
|||
|
2006 |
$220,343 |
$134,127 |
$154,589 |
|||
|
2007 |
$234,886 |
$141,375 |
$164,302 |
|||
|
2008 |
$170,103 |
$100,736 |
$118,483 |
$70,938 |
||
|
2009 |
$204,173 |
$119,163 |
$141,679 |
$83,573 |
||
|
2010 |
$221,462 |
$127,424 |
$153,117 |
$89,005 |
||
|
2011 |
$210,850 |
$119,381 |
$145,188 |
$82,998 |
||
|
2012 |
$231,211 |
$128,880 |
$158,588 |
$89,188 |
||
|
2013 |
$259,788 |
$142,692 |
$177,542 |
$98,308 |
$111,141 |
|
|
2014 |
$265,277 |
$143,520 |
$180,625 |
$98,418 |
$112,230 |
|
|
2015 |
$255,303 |
$135,865 |
$173,144 |
$92,687 |
$106,711 |
$94,724 |
|
2016 |
$265,147 |
$138,739 |
$179,097 |
$94,133 |
$109,464 |
$96,789 |
|
2017 |
$303,638 |
$156,402 |
$204,339 |
$105,571 |
$123,929 |
$109,177 |
|
2018 |
$302,826 |
$155,984 |
$203,793 |
$105,289 |
$123,597 |
$108,885 |
|
1993 |
1998 |
2003 |
2008 |
2013 |
2017 |
|
But there is a difference. The Couch Potato portfolio did better in four of the six investment periods. See the data in the table below.
| 25 years | 20 years | 15 years | 10 years | 5 years | 3 years | |
| Margarita |
$302,826 |
$155,984 |
$203,793 |
$105,289 |
$123,597 |
$108,885 |
| Couch Potato |
$334,437 |
$159,320 |
$176,320 |
$128,487 |
$128,797 |
$107,802 |
| $ Difference |
$31,611 |
$3,336 |
($27,473) |
$23,198 |
$5,200 |
($1,083) |
| % Difference |
9.45% |
2.09% |
-15.58% |
18.05% |
4.04% |
-1.00% |
(Data source: http://www.portfoliovisualizer.com)
Does this mean the Couch Potato portfolio is better than the Margarita portfolio? Maybe. Maybe not. As I write this, U.S. stocks are priced at far higher levels than International stocks, so it isn’t difficult to imagine a future “regression to the mean” in which investors pay less for a dollar of U.S. earnings, more for a dollar of international earnings, or both.
The important observation here is about portfolio survival. If you had retired 20 years ago, in 1998, you would have retired into the teeth of the technology bust that led to three years of losses. That’s what financial types call “sequence of returns risk”— the misfortune you suffer if your retirement begins with a bear market. You had another big bummer of a year in 2008, one of the worst years in history.
But so what? As you can see, you could have gone through the entire period, made your inflation adjusted withdrawals, and still had more money at the end than at the beginning. You could have done that with either portfolio.
So there you are, 20 years into retirement, with more money than when you started. Not a great fortune, to be sure, but a long way from being broke. If you started at age 65, you’re now 85— if you are still alive.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
(c) Scott Burns, 2018