The Pudding* Report, 2020

(*the proof is in the pudding)

What can I say? After a year of fear and death from a new disease that morphs to spread faster – not to mention the first assault on our Capitol since the Brits burned it in 1814 – investors are better off, not broke.

That goes in spades for simple, humble Couch Potato investors. We invested, we spent, and we were still better off at the end of the year.

2020: The Year of Lost Cocktail Conversations

What we lost in cocktail conversations we couldn’t have had anyway, we gained in net worth.

Yes, it’s time for the annual Couch Potato Portfolio Report. But this year I have given it a new name. While most investment reports are filled with percentages and other abstractions, the newer Couch Potato Reports tell the results of investing – and withdrawing – in dollars.

Proof of the pudding.

Doing that, they offer evidence that simple, low-cost Couch Potato investing will pay the bills, adjusted for inflation, for a long, long time.

Probably longer than most of us will have bills to pay.

The View from 30 Years of Retirement

Suppose, for instance, that you had retired 30 years ago, in January 1991, at age 65. An original investment of $100,000 would now be $569,683, in spite of an annual spending distribution that started at $4,432. (That would be $4,300 adjusted for the first year’s inflation.)  By the end of 2020, at age 95, the distribution had risen to $8,363.

So, your spending kept up with inflation, but you ended the period with a withdrawal rate of only 1.5 percent. My bet is that well before 30 years had gone by you would have decided you could dare to spend more money.

It’s a burden, but someone has to do it.

1991 Was a Great Year to Retire

How did this happen? This 30-year period provided the highest net return after withdrawal spending of the seven periods examined.  It turns out 1991 was a good year to retire. If retirement years were ranked like wines, 1991 would be a 97 or 98.

While you had more years of net losses – five — they were spread out over 30 years with 25 years of gains.

But what about a really nasty period for investments? That would be the beginning of this century, retiring in 2001.  In that period the net return, after spending, was only 1.24 percent a year. And you had four years of losses with only 16 years of gains. So, you ended the period with a mere $127,946.

Scary, right?

But it isn’t.

Here’s why. After the passage of 20 years you would be 85 years old.

If you were still alive.

Here’s what the actuarial tables tell us. For a couple, there would only be a 19 percent chance that both were still alive. Only 37 percent of men survive. Only 51 percent of woman.

But even if both are still alive, a Monte Carlo analysis of the portfolio is encouraging. As a Couch Potato, you will never “break the bank at Monte Carlo” and become super rich, but a probabilistic analysis shows you can continue playing.

If the portfolio still makes inflation-adjusted distributions, there is a 100 percent chance the portfolio will last 10 years to age 95 and a 98.9 percent chance it would last 15 years to age 100.

My bet? If you feel remorse, it won’t be about inadequate investment returns. It will be about not spending more money when you had the opportunity.

Can I prove that? No.

But the last 20 years have been a terrible time for retirement investors. Historically, I’d compare it to the 20 years that followed the first OPEC oil embargo, 1973 through 1992. In that period, the stock market had five years of decline. Equally bad, inflation raged, starting the period at 8.71 percent, peaking at 13.29 percent in 1979 and ending the period at 2.90 percent.

So what happened?

A nearly identical portfolio had an ending value of $143,688, a net return of 1.83 percent.  It adjusted for, and endured, whopping inflation.

Could you have done better with professional management?

Maybe. But, as I’ve shown many times, the odds are wildly against it.

Related columns:

Scott Burns, “Show Me the Money,” 12/5/2020 https://scottburns.com/show-me-the-money/

Scott Burns, “It’s 2020. Are You Broke Yet? Not Hardly https://scottburns.com/its-2020-are-you-broke-yet-not-hardly/

Scott Burns, “The Simplicity Manifesto,” 3/31/2019 https://scottburns.com/the-simplicity-manifesto/

Scott Burns, “The Longevity of the Couch Potato Portfolio,” 2/9/2019    https://scottburns.com/the-longevity-of-the-couch-potato-portfolio/

Scott Burns, “Living (Well) with the Couch Potato Portfolio, 7/15/2018   https://scottburns.com/living-well-with-the-basic-couch-potato/

Scott Burns, “On the Importance of Being a Dull Investor,” 9/29/1991  https://scottburns.com/on-the-importance-of-being-a-dull-investor/

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.

Photo: Pexabay.com

(c) Scott Burns, 2021