Put It All Into FMAGX And Forget About It?

Yahoo had an article about....wait for it....people 55 years old and up retiring early because they feel emboldened by portfolio growth over the last few years. They post an avalanche of retirement doom and then this. Both can be true. The vast majority of Americans of all ages could be woefully undersaved while those who are not undersaved could easily have enough to retire earlier than they planned.  

Make of it what you will but there was this comment which is constructive for digging into sequence of return risk and maybe a couple of other things.

Well congrats on your good 'TIMING,' recent retirees; you just got LUCKY! I was in the Magellan fund in the early 2000's and my 10-YEAR return at one point was -0.5% !!! Yes, you heard it!!! You got lucky and I didn't!!! Timing Timing Timing!!!! And watch out below; these returns are NOT sustainable. Especially when the left get power again.

Gaming this out, if he retired on Dec 31, 2000 with $400,000, here's where he stood after ten years taking 4% per year.

The time period comes pretty close to capturing his experience. Carrying it forward to today, if he stuck at 4% withdrawals, he's about 25 years into his retirement and he has more than double what he started with. 

Yes, he would have been better off in SPY but back then, Magellan seemed like a good bet. This reader's bad luck for timing is a great example for defining sequence of return risk, it was a terrible time from a market standpoint to retire. I'm not saying there wouldn't have been real fear in this scenario, the scenario bottomed out at $152,000 in March 2009 but markets worked over his long term.

Above, I said Magellan was a good bet which it was and maybe is now, not sure about that but no matter how good something might appear to be, the comment implies he put it all into Magellan. No matter how good something might be, it should be obvious what a bad idea that is. Maybe the fund would have done very badly versus the market (not the case for this guy) or maybe the market itself would do badly (that was the story with this one). Back then, bonds were fine to invest in. 

Same scenario with 60% Magellan, 40% in intermediate treasuries.

He would have compounded at 3.7% which of course is not so hot but not negative. At the low, he'd have been at $265,000 not $152,000 and at the end of this ten year run, he'd have been down a couple of hundred bucks in nominal terms not $100,000. Being 100% Magellan wouldn't have caught up to 60/40 until late 2021 all the while running at about half the volatility of 100% Magellan. 

For a little more context for unlucky timing versus lucky timing, if he had put his $400,000 into Magellan at the end of 2009, taking out the same 4% along the way, he'd now have $1,578,000.

Back in 2000/2001 it was obvious we were in some sort of serious market event but no real sense that something like a lost decade could be coming other than probably Grantham or Hussman. The market action of the financial crisis wasn't as collectively new because stocks had just cut in half a few years earlier but the real estate aspect and the rest of it was new. 

Most events have a combination of some familiar aspects with some that seem different and it's not that events don't all end at some point leading to new highs but that each path might be different. This is why you diversify equity exposure and why you diversify your diversifiers. 

This example is also why I always talk about optionality and resiliency both in life and in the portfolio. For anyone believing in the importance of this in a similar manner, the path to their ideas for optionality and resiliency will probably be unique. I think it is easier now to add portfolio resiliency thanks to dramatically improved access to sophisticated strategies that didn't exist when this guy loaded up on Magellan. Creating optionality and resiliency in life probably needs to come from within. Success comes from being motivated for whatever reason versus the outcome of being forced to take whatever part time job you'd least want to take.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.