A friend of mine was surprised when I shared this table adjusting the return of 401k balances for inflation over the last 4 years.
It shows that despite the relative strength in the stock market, real returns for 401k balances are DOWN about 9%. “That’s not right!” he said – “the S&P 500 is an an all-time high. It’s up almost 50% since the last inauguration”.
While it’s certainly true that Wall Street has run bullish over the last 4 years – up about 50% – roughly HALF of that gain was driven by inflation. While nominal returns for the S&P 500 are featured visibly on the news every night – real returns (inflation adjusted) haven’t been that strong.
Second, most people carry a significant mix of stocks and bonds – and the bond market has been a mess, down -13% over the last 4 years.
Whether you are 80/20, 70/30, or 60/40 – you have a big anchor in your portfolio. As I noted recently, the bond market is actually bigger than the stock market and higher interest rates – ostensibly to fight the inflation – have cratered bond returns.
Related: A Tale of Two Markets
Still, my friend wasn’t convinced – he said, “my 401k is still UP, even when you adjust for inflation & bonds”. I reminded him that he was still working and making contributions to his 401k. Including the extra $7.5K “catch-up” allowed for workers over 50 years old. Over the last 4 years, that’s an extra almost $100K he has contributed.
I don’t intend this as a political piece. It’s just a cautionary tale of the need to look a little deeper at your portfolio from time to time and think about what is really driving its performance.
How exposed to inflation & bonds has your retirement portfolio been over the last 4 years? I’d say ours is mixed about 10% cash, 30% bonds, and 70% equities.
Image: Pixabay
MrFireStation 
I like your allocation of 110%!
We tend to keep our portfolio at 70% securities and 30% cash/bonds. Our financial advisor likes to push bonds for our age group 62 and 69, but I remind him that our investment horizon is the lifetime of our grandchildren, anything beyond that is tough to fathom. He does point out that the bond portion of the portfolio has helped lessen the loss during downturns and he is correct, while we have missed some upside, the loss on paper during downturns in the market was less than the averages thanks to bonds.
We have to remember to rebalance regularly.
I think that 401K, 457 and IRA plans are heavily invested in bonds due to fear. People hate losing money and hear the news when the market drops and thus go in to “safe” fixed income investments. What they don’t realize is that the so called “safe” investments are anything but. Don’t discount the influence of unions and investment choices. There are many unions who influence retirement vehicles and encourage/force the employers to contract with certain investment groups offering fixed income products and in return the investment groups through a lot of support, $$$$$ towards those unions….yes it happens.
By the way, how is your water damage issue in Florida going?
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Oops. … I guess we are 10% cash, 25% bonds; and 65% stocks. I think that’s 100% now! 🙂
I really like the concept that your investment horizon is your kids / grandkids lifetimes. I’m 58, so maybe we are not quite there, but need to start thinking that way. Agree we might have pushed to much into bonds, especially since we have a lot of real estate outside this retirement portfolio too.
Our floor is TBD. Handyman Carlos looked at it and thinks he can sand/stain it when it dries. It’s still very wet. Came through the window sill of the cheap windows that weren’t kept clean. It’s not widespread and also mostly behind furniture – so not noticeable. He said he would not replace the whole floor – and he’s pretty fussy. Thanks for asking.
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I think the 40% bond portion of portfolios is an obsolete idea because of the massive deficits that the Federal Government has been running. Volcker was able to break the back of inflation during the Reagan Administration by cranking up the interest rates to 17.6%. Since the early 80s, Bonds were in a long term bull market as interest rates dropped from 17.6% to practically zero.
The idea behind 60 – 40 is that when stocks are going down, bonds should go up. When interest rates go up, long term bonds go down. During 2022 both long bonds and stocks had a terrible year.
Here is a table that I made that calculates the S&P 500 return before and after inflation during the Bidumb Administration.
Year S&P Ret Inflation After Inflation
YTD 22.0% 2.8% 18.5%
2023 26.1% 4.1% 20.9%
2022 -18.2% 8.0% -24.8%
2021 28.5% 4.7% 22.5%
Total 61.6% 18.3% 32.1%
Annual 13.7% 5.2% 7.7%
Vanguard’s Wellington Fund is the oldest mutual fund and has a roughly 65% Stock -to 35% Bond allocation. Here is the same table for The Wellington Fund. The return beats the hypothetical return of the article’s 401-k plans by 4.2%. This is likely due bonds not being an efficient market like the stock market, so active management can add value.
Year VWELX Inflation After Inflation
YTD 13.8% 2.8% 10.6%
2023 14.3% 4.1% 9.6%
2022 -14.3% 8.0% -21.2%
2021 19.0% 4.7% 13.4%
Total 32.7% 18.3% 8.4%
Annual 7.8% 4.6% 2.2%
During the financial crisis between 2008 and 2010, I concluded that Dividends were for me. You could buy great stocks like Home Depot and Microsoft that were offering a current yield around 4.5%. 4.5% meets current income requirements by covering the 4% safe withdrawal rate and beats what bonds were paying at the time. Home Depot was growing its dividend around 20% at the time and Microsoft between 10% and 15%. My thought was that dividend increases would keep me ahead of inflation. During 2022, when the market value of my holdings went down slightly, my dividend income increased. Here is a table comparing the before and after inflation returns for one of my self-managed IRA Accounts.
Year IRA Inflation After Inflation
YTD 16.2% 2.8% 12.9%
2023 4.5% 4.1% 0.2%
2022 -1.0% 8.0% -8.9%
2021 19.2% 4.7% 13.5%
Total 43.1% 18.3% 17.0%
Annual 10.0% 4.6% 4.3%
The 10% average annual return is close to what Ned Davis research predicts for dividend growers and initiators having an average return of 10.19% and a Beta of 0.89.
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Interesting numbers – thanks for sharing. A bit more positive than the table from Heritage, but they are political activists, so motivated to take a pessimistic approach.
Yes – 2022 was awful all around. I really thought the mismanagement was going to negatively impact 2023, too. Thankfully, it started getting better on the equities side.
I saw an interesting article that tried to analyze dividend stocks against other equities. Their POV was that it was not necessarily better (or worse) because ideally good companies have strong ideas to invest that money in – and the return should come through the stock price. I bookmarked it somewhere and will send it to you when I find it.
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I just had a similar conversation with my oldest son who I am teaching about dividend investing and how to structure his own portfolio. He is the third generation. I was the second generation when my Scottish ancestry Grandfather taught me. My son was worried about missing out on AI stocks, which have actually been the primary driver of S&P 500 Returns during the Bidumb Administration. In my opinion, chasing capital gains is a difficult way to invest for retirement because you are dependent upon Mr. Market to drive the stock higher. Sometimes Mr. Market doesn’t cooperate. Sometimes stocks thrive on people buying them simply because they believe the stock will continue going up.
With non-dividend payers you have to pick the right stocks and buy and sell them at the right time. With dividend stocks all you need to do is pick safe ones (determined by history and current financial conditions) and screen for current yield, growth rate and whether the stock is undervalued compared to its PE historical range. Then all you have to do is sit back and receive dividends coming into your account. Once a year or more often, you receive a dividend increase. You still receive income in the form of dividends and pay raises in the form of dividend increases even when Mr. Market isn’t cooperating. When Mr. Market is depressive, and you are dividend reinvesting, you actually get to put more money to work at higher current yields.
If Mr. Market decides that he likes your formerly unfavored stock now, then you have the opportunity to sell him your now over valued stock. You can then redeploy the gains in another under valued stock and crank up your current yield.
Here is a link to an article about Ned Davis Research analysis of dividend growing and initiating stocks versus other options. You can also get this information from Ned Davis Research directly, but they require you to provide your contact information. When you are looking for stocks that are in the dividend paying group, you are searching where the odds of success are highest.
https://www.hartfordfunds.com/insights/market-perspectives/equity/the-power-of-dividends.html
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The last traunch of $$$ that came my way went right into a high-dividend mutual fund. I don’t buy individual stocks, but your philosophy is persuading me!
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The attribute I don’t like about Open Mutual Funds is that they have to sell their holdings when share holders panic and sell. You can end up getting stuck with capital gains to report on your taxes, despite not selling any shares yourself or realizing any income. In addition to the surprise capital gains, the fund is not able to buy bargain shares when there is panic. I like to go bargain shopping when there is panic. Warren Buffett said be greedy when others are fearful and be fearful when others are greedy.
You can vote your shares in your own best financial interest instead of for some woke agenda. Finally, its fun owing shares in companies. I like going into Home Depot knowing that they give me nice dividends every year.
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Like most anything, “manual” management requires some time upfront, but offers extra flexibility / advantages.
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