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Andrew Hallam

The Stock Market Secret That Retirees Need to Know

One of my good friends sold her house last year in California. The 69-year old plans to fund her retirement with the proceeds. After paying off her mortgage, she had about $500,000.

In April last year, we sat on the patio of her rented home overlooking Lake Chapala. She’s one of thousands of Americans living in a popular cluster of lakeside villages, just south of Guadalajara. The weather is perfect. The cost of living is low. But like so many other retirees, no matter where they live, she worries about her money.

“How should I invest this?” she asked. “I need income. But I want to make sure the money lasts as long as I will.”

I suggested a diversified portfolio of low-cost index funds: about 60 percent in stocks and 40 percent in bonds. It would allow her to withdraw an inflation-adjusted 4 percent per year. That means she could withdraw more money every year. No matter how the market performs, her money should last at least 30 years.

Here’s how it would work. Assume she sold 4 percent of her $500,000 portfolio in 2018. That would have given her $20,000 to spend. In 2019, she would sell slightly more. The U.S. inflation rate was 2.24 percent in 2018, so my friend would sell $20,440 in 2019. That’s because $20,440 is 2.24 percent more than $20,000. Every year that she’s retired, she would increase the amount she withdraws to reflect the previous year’s inflation rate.

Coupled with the annual $17,000 that she gets from Social Security, she would have plenty of money to live well in Mexico.

“This sounds great,” she said. “I’ll invest the money now.”

She invested it in April 2018. I caught up with her 7 months later. “I’m so glad you’ve started a good financial plan,” I said. But her response almost knocked me off my feet: “My money didn’t gain 4 percent. In fact, by the end of October, it had dropped from $500,000 to about $489,000. When I saw it drop, I decided to sell it all.”

Lake Chapala is an unusual place. I would guess about 99 percent of the Americans who live there are retired. Never before, have I been among such a high number of retirees. And they ask the same questions: “Are stocks going to drop further?” “Should I sell everything now?” “What effect will Trump, or Brexit have on stocks?” “Should I put everything in gold?”

In 2014, Business Insider reported a conversation between Bloomberg Radio’s Barry Ritholtz and James O'Shaughnessy of O'Shaughnessy Asset Management. O’Shaughnessy had recently hired a former Fidelity employee.

According to the employee, Fidelity had researched to see which of its clients earned the best returns. As O’Shaughnessy recalls, “They were the accounts of people who forgot they had an account at Fidelity." I don’t know if Fidelity really did such a study. They haven’t publicized it. But as each year passes, I’m more convinced it’s true.

Warren Buffett’s mentor, Benjamin Graham, said we should think of stocks as a manic-depressive man named Mr. Market. Graham said we shouldn’t let Mr. Market influence our moods.

I prefer to see Mr. Market as a psychotic seducer. He whips stocks around, hoping to trick people into selling when stocks have dropped hard. Those that watch Mr. Market closely might be most susceptible to his tricks. Take the 10-year period between 2004 and 2014. U.S. and international stocks plunged several times. Note the frightening table below.

Big Market Drops For U.S. And International Stocks


Time Period

U.S. Stock Performance


Time Period International Stock Performance
March 5, 2004 to July 13, 2004 -7.3%   May 5, 2006 to June 23, 2006 -12.25%
December 12, 2007 to March 14, 2008 -16.71%   July 13, 2007 to August 17, 2007 -11.57%
May 16, 2008 to March 6, 2009 -51.98%   October 12, 2007 to March 21, 2008 -16.51%
April 23, 2010 to July 2, 2010 -15.67%   May 30, 2008 to March 13, 2009 -53.7%
July 22, 2011 to August 19, 2011 -16.32%   April 29, 2011 to November 25, 2011 -26.06%

Source: U.S. stocks measured by Vanguard’s S&P 500 (VFINX); International stocks measured by Vanguard’s international stock market index (VGTSX)

Mr. Market works to drive investors crazy. Sadly, he convinces many people to sell when he forces markets down. That’s why it’s best to ignore market news. Don’t look at your portfolio statements more than once a year. Retirees should also stick to the 4 percent rule. Market fluctuations shouldn’t be relevant.

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Famed psychologists Daniel Kahneman and Amos Tversky studied how people feel about gains and losses. Based on their research, people dislike losses twice as much as they enjoy gains. That’s why my retired friend liquidated her portfolio in October last year. It’s why my other retired friend, Tim, keeps trying to time the market.

The market plunges between 2004 and 2014 certainly look horrific. But let’s assume my friend retired in 2004 with $500,000. Her portfolio had 40 percent in a U.S. stock index, 20 percent in an international bond index and 40 percent in a U.S. bond market index.

Assume she withdrew an inflation-adjusted 4 percent. As a result, she would have withdrawn more money every year. Sometimes, her portfolio would have risen. Other times, it would have fallen hard. But she would have been fine if she ignored market movements.

By December 31, 2018, she would have withdrawn $362,882 from her initial $500,000. Yet, she would have more money today than when she first retired. After nearly 15 years of annual withdrawals, she would have $683,134 by December 31, 2018.

That isn’t a typo. She would have started her retirement with $500,000. She would have withdrawn a total of $362,882 over 15 years. And despite the multiple market crashes over those 15 years, she would have more money today than she did when she first retired. But it would have worked only if she had kept her cool.

The 4% Rule In Action

Starting With $500,000

2004 – 2014


U.S. Inflation Rate

Amount Withdrawn Year-End Portfolio Value
2004 3.26% $20,651 (*see endnote) $533,689
2005 3.42% $21,356 $546,833%
2006 2.54% $21,899 $597,331
2007 4.08% $22,793 $622,735
2008 0.09% $22,814 $465,322
2009 2.72% $23,435 $540,528
2010 1.50% $23,785 $579,608
2011 2.96% $24,490 $557,987
2012 1.74% $24,916 $598,628
2013 1.50% $25,290 $665,789
2014 0.76% $25,482 $683,100
2015 0.73% 25,667 $653,075
2016 2.07% $26,200 $672,218
2017 2.11% $26,753 $748,209
2018 2.24% $27,351 $683,134
    Total Amount Withdrawn Portfolio's 2018 Year- End Value, Despite Those Withdrawals
    $362,882 $683,134

Source: Portfolio based on 40% U.S. stocks (VFINX); 20% international stocks (VGTSX); 40% U.S. bonds (VBMFX).  

 *Endnote: Portfoliovisualizer calculates the first withdrawal to include the inflation rate in 2014.  That’s why the initial withdrawal is $20,651 and not $20,000.

Mr. Market works to drive investors crazy. Sadly, he convinces many people to sell when he forces markets down. That’s why it’s best to ignore market news. Don’t look at your portfolio statements more than once a year. Retirees should also stick to the 4 percent rule. Market fluctuations shouldn’t be relevant.

 Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas

Internaxx Bank S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Internaxx Bank and Internaxx Bank accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Internaxx Bank.

Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.


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