In our investigation of the performance of 100% equity portfolios, we found that retiring in 1929, 1930, and 2000 looked a bit grim.
100% Equities, the final frontier
In our quest to better understand how a portfolio of 100% equities performs during we retirement, we started by looking…
Sometimes we get so focused on these backtested scenarios that we lose sight of what it would really would have been like for an investor & potential retiree at the time.
Anyone considering early retirement or financial independence obviously has a lot of flexibility over when they retire. I totally understand that many people do not. They get hurt on the job and can’t really work again. They get laid off and age discrimination means they can’t find another job. Their entire industry collapses and, at age 58, retraining and starting at the bottom of the wage ladder seems impossible. Not everyone has a choice about when they retire. But some do. Especially the kind of person who’s reading this.
So if you had that flexibility…what would 1929 have really looked like?
We always say “if you retired in 1929 with $1,000,000…your retirement would have looked like X, Y, Z.” But how does someone with 100% equities end up with $1,000,000 in 1929? How much money did they have in 1928? And 1927?
- 1928: At the start of 1928 they would have had only $682,000 in their portfolio. They’d be well over a quarter million dollars away from their “number”.
- 1927: At the start of 1927 they would have had only $500,000 in their portfolio. They’d be barely half the way to their “number”.
Realistically, I don’t think many people would have been planning to retire in 1929 under those circumstances. Would there be some people blinded by amazing returns who moved up their retirement substantially? Sure. So let’s not be one of those people.
Basically, the late 1920s had a huge, massive, crazy run up in stock prices. If we extend our thought exercise even further back we can see this…
Back in 1924 your portfolio was only $286,000. You would have estimated another 14 years until retirement — that’s using average historical returns for stocks. That is, you would have estimated that you’d be retiring in 1938.
Just 24 months later and your portfolio has gone up nearly 60%. Now you’re estimating that you will be able to retire in 1935.
Fast forward another 24 months — to 1928 — and your portfolio is up another 50%. Overall, it has more than doubled in 4 years. Now you’re estimating that you’ll be able to retire 1932.
Your retirement date has pulled in by half a decade in just 4 years.
So here it is. The start of 1928. You think you’ll be able to retire in 1932. But the stock market is so good that year that you have hit your “number” after just 12 months.
I think a lot people would not retire in 1929 under those circumstances.
The stock market crashed on October 24, 1929.
Do you think anyone would really retire just 60 days later?
The market dropped around 40% between October 1929 and January 1930. To have a $1,000,000 portfolio in 1930, you would have had nearly a $1,500,000 portfolio just 2 months earlier.
I don’t think anyone would have retired after losing $500,000.
We see the same story for the year 2000.
In 1995, your portfolio just $285,000 and you thought you’d be able to retire sometime in 2008.
Two years later your portfolio had gone up 70% and you now thought you’d be able to retire in sometime in 2005.
By the time 2000 comes around…your portfolio has nearly quadrupled in 5 years. You are thinking about retiring nearly a decade sooner than expected.
Would you really follow through on that?
What’s more by April 6, 2000, the crash had begun and articles like this one in Time were becoming more common…which would have given further pause to anyone considering retirement right then.
All of this isn’t to say that a 100% equity portfolio is risk-free. But you can do the same kind of analysis with a 60/40 portfolio — though the numbers are (slightly) less dramatic.
While looking at worst case scenarios like 1929 or 2000 are good for helping us calibrate what might happen, I think we also have to keep in mind the broader context.
One lesson clearly seems to be: if your portfolio has run up dramatically in just three or four years…you probably shouldn’t be considering a dramatically earlier retirement.
What would have happened to our 100% equity portfolio if our hypothetical retiree who had considered retiring in 1929 with $1,000,000 got cold feet? Originally they thought they would be able to retire in 1938. They think the recent run up isn’t sustainable. So they decide to stick with their original plan: keep working until 1938.
Even without any more contributions, by 1937 their portfolio is back past $1,000,000. Maybe they decide to risk it and retire one year earlier than originally planned. Turns out they were unlucky again because there was a big crash in 1937. But they still come out pretty okay compared to the 60/40 portfolio.
Let’s pretend something similar happens with our hypothetical 2000 retiree. They get cold feet. Originally they thought they’d be able to retire in 2009. So they wait…the market crashes. But by 2007 it has recovered and they’re back above $1,000,000. So maybe they decide to be a little risky and retire two years earlier than expected.
Again, we know they were unlucky. They retire in 2007 and in 2008 things get crazy.
But…they actually do pretty okay compared to a 60/40 portfolio. There’s only a single year where they withdraw less than $40,000 and the relative performance is also pretty close.
We can see that we can reduce a lot (but not all!!!) of the risk of a 100% equity portfolio by having flexibility on when exactly we retire.
Also, we need to take all of these 1929 & 2000 backtests with a grain of salt. Remember the context of the huge run ups that led to them.
Finally, ya know, don’t get greedy. Even if you have a job you hate and can’t wait to quit it ASAP.