An Absolute MUST READ for Retirees

Dear Reader,

Complacency is the biggest threat to your retirement.

An attitude of ‘she’ll be right mate’ could see things go horribly wrong.

Why and how?

Firstly, the ‘why’.

Unless you firmly believe share markets will NEVER again suffer a correction, then you must realise the record-breaking US share market is living on borrowed time.

This is THE longest bull market in history.

What’s the second longest?

The 1920s, the period prior to the Great Depression.

The third longest?

The 1990s, the period prior to the dotcom bust.

Money Morning

Source: Twitter

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Sooner or later this market is going to snap back.

There are no ifs, buts or maybes about this…unless of course you are in the ‘it’s different this time’ camp.

If you’re punting your retirement on that failed theory, then you’ve placed a losing bet.

What history indicates is that the longer the bull market, the more severe the bear market.

The only unknown in this equation is…when?

No one can tell you with any accuracy as to ‘when’ the news headlines are going to scream ‘Wall Street crashes’.

But we know from history, that one day you will wake up to that news.

The problem with a long running bull market is people forget. With each passing day, month and year the previous crash becomes a distant memory.

We become convinced in the permanence of the trend. But nothing lasts forever…especially long running bull markets.

Why will markets fall? Because they always have and always will. Believing otherwise is a triumph of hope over experience.

That’s the why, here’s…

How things will go horribly wrong

According to Super Guide (emphasis is mine):

Around 80% of Australians with superannuation accounts have their money invested in the default option, which is where you are placed if you do not choose an investment option. Default options are usually ‘balanced’ or ‘growth’ investment options and normally have around 60%-80% in growth assets such as shares and property.

The majority of people — including pending and existing retirees — have their superannuation (retirement capital) invested in ‘balanced’ or ‘growth’ funds.

Where do these funds invest?

Money Morning

Source: Super Guide

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For the sake of being ‘conservative’, let’s assume the popular default choice is the balanced option…with only 60% exposure to shares.

With the longest bull run in history poised to fall — sooner or later — that 60% exposure is going to suffer a fall.

How much hurt can investors in balanced funds expect?

Hussman Strategic Advisors produces an estimated (blue line) versus the actual (red line) the annual return (over a 12-year period) from the traditional ‘balanced’ portfolio — 60% shares/30% fixed interest/10% cash.

The red line (what the actual performance was) invariably follows the lead of the blue line (what was estimated).

While not a perfect overlay, the forecasting model boasts an impressive 93% accuracy.

Money Morning

Source: Hussman Strategic Advisors

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The blue line — forecasting the annual return expected from 2019 to 2031 — currently indicates a return of almost ZERO percent per annum for the next 12 years.

Given the accuracy of previous estimates, the prospect of earning NEXT TO NOTHING over the next 12 years should send a chill down any pending or existing retirees’ spine.

There are a number of ways a market can go nowhere fast over a 10–12 year period.

Here’s a couple of recent examples…

The Dow Jones from 2000 to 2010…down, up, down, up.

Started at 11,000 points and finished at 11,000 points.

End result…ZERO% per annum for a decade.

Money Morning

Source: Macro Trends

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And there’s the ASX 200 index from 2007 to 2019…one big down followed by a long slow recovery.

The end result? ZERO% per annum for 12 years.

Money Morning

Source: Trading Economics

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How the market works its way to ZERO% per annum is an unknown. But you can be assured, it won’t occur with a nice flat line.

It’s going to be a very jagged journey…starting with a down.

Even if you hold your nerve and stay the distance in the ‘balanced’ fund, getting back to break even is going to be extremely difficult.

In my book How much Bull can Investors Bear? there’s an example of a retiree who, in 2007, decided to invest the majority of their capital in a well-diversified ‘balanced’ fund.

Here’s how the exercise panned out…

You place your trust in a responsible planner. They recognise the market’s looking a bit toppy in 2007. To offset the prospect of any downturn in the market, they follow the theory — as set out in the textbooks — on how to construct a prudent, account based pension portfolio.

The textbook says to place four years’ worth of drawdowns in cash and the balance in ‘growth’ assets. This way you can draw off the cash balance while the ‘growth’ assets are quarantined for at least four years. In theory, this is sufficient time for the growth assets to recover from any market setbacks.

Our example is based on the retiree having $500,000 to invest and requiring a $25,000 per annum drawdown.

For the purpose of the exercise, I’ve used performance data supplied by SuperRatings.

Money Morning

Source: Super Ratings

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The table below shows the outcome if we apply the above performance figures to our $500,000 investment — $100,000 in cash (four-year buffer) and $400,000 in balanced fund — and assume a drawdown of $25,000 per annum (not indexed) for living expenses.

(Note: the $100,000 cash buffer plus interest earned exhausts the cash buffer after 4.5 years. Therefore, halfway through year five we need to draw on the balanced fund to pay our retiree their income.)

Year Start Amount of Balanced Fund Performance Balance Less Annual drawdown End of year balance of Balanced Fund
2007/08 $400,000 Minus 6.95% $372,200 NIL $372,200
2008/09 $372,200 Minus 12.9% $324,186 NIL $324,186
2009/10 $324,186 10.4% $357,902 NIL $357,902
2010/11 $357,902 9.2% $390,828 NIL $390,828
2011/12 $390,828 0.5% $392,783 $12,500 $380,283
2012/13 $380,283 15.6% $439,607 $25,000 $414,607
2013/14 $414,607 12.8% $467,677 $25,000 $442,677
2014/15 $442,677 9.8% $486,059 $25,000 $461,059
2015/16 $461,059 3.0% $474,890 $25,000 $449,890
2016/17 $449,890 10.8% $498,478 $25,000 $473,478
2017/18 $473,478 9.2% $517,038 $25,000 $492,038
2018/19 $492,038 7.0% $526,480 $25,000 $501,480


After 12 financial years, you are finally back to your starting capital.

Bearing in mind, this calculation does not take into consideration any indexation of the annual drawdown.

If we applied indexation at (say) 2% per annum, on a simple maths basis the numbers would be around 24% lower.

Also, the result does not factor in the loss of buying power between $500k in 2007 and $500k in 2019.

And there are no planner’s fees deducted from these figures. That would be at least another 0.5% per annum.

If we were to apply these two factors (CPI and planner fees), the initial two negative years have not been offset by 10 positive years.

That’s pretty phenomenal.

Which begs the next question, how long do you think a run of 10 positive years can continue without the market clawing back some of these gains?

And when that clawback comes, how heavy will the losses be on the average balanced portfolio?

Which means the $500k invested in the ‘balanced’ fund will once again be on the slippery slope.

These numbers debunk the theory of growth assets maintaining the buying power of your capital.

All it took to put our hypothetical retiree on this slippery slope was the disruption to markets in 2008/09.

In theory (there’s that word again), the four-year cash buffer is the solution to the short-term volatility problem.

However, from the bitter experience of working through the 1987 crash, the Tech Wreck and the GFC, I can tell you the theory does not always work.

To demonstrate just how slippery the slope can become, let’s say (hypothetically) the run of 10 positive years are now followed by two negative years…with similar returns of 07/08 (minus 6.4%) and 08/09 (minus 12.7%).

Year Start Amount of Balanced Fund Performance Balance Less Annual Drawdown End of year balance of Balanced Fund
19/20 $501,480 Minus 6.4% $477,809 $25,000 $452,809
20/21 $452,809 Minus 12.7% $395,302 $25,000 $370,302

A couple of negative years and you’re sliding right back down the greasy capital pole.

For the record, in the scheme of market losses, neither of these negative annual returns are particularly catastrophic…but look at the outcome.

The portfolio falls from $501k to $370k in two years…a 26% loss.

If the above scenario (or something similar) does unfold in the near term, an investor will be sitting there thinking: ‘I did everything right’.

  1. Had a four-year cash buffer. Tick.
  2. Had growth assets for the long term. Tick.
  3. Invested in a professionally managed balanced (diversified) portfolio. Tick.

It wasn’t meant to be this way.

Why Australia’s ‘miracle’ economy is a farce – get your free report here now.

How retirement plans can go horribly wrong…

After all, the investment industry ‘assured’ me that, over the long term, share markets go up and I need growth assets. That’s how retirement plans can go horribly wrong.

A couple of down years can completely derail a perfect laid out future.

When you are in the midst of a market panic, will you hold your nerve or will you panic and sell?

It’s easy to say with hindsight ‘stay the course’. But that was then, what about the future?

Can the Fed ride to the rescue again? And if it does, can Wall Street reproduce another record breaking bull market?

If they can’t, then there’s virtually no chance of ever making your retirement capital whole again…irrespective of how long you remain invested in the ‘balanced’ fund.

As a final reminder, those dark blue jagged peaks (bull markets) are all followed by light blue valleys of varying depths (bear markets).

Money Morning

Source: Twitter

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If ever there was a time in history to ‘time’ your exposure to growth assets, this is it…unless of course you think the longest bull market ever, can defy history.

To get your free report, ’28 Years of Growth: The Aussie Economy’s Miracle Ride’, click here. 


Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion