There are no "gimmes" when you're investing

Are you ready to dominate your financial course?

Then you came to the right place.

Welcome to the only newsletter that’s one part #golf, all parts #money.

I’m super happy you’re here.

I know you’re reading this because you want to have confidence and clarity over your financial future.

I’m here to help guide you there.?Think of me as your financial caddie .

Together, we're going to remove the complexity from your financial course so you can spend more time doing things you enjoy with the people you enjoy doing them with.

So, if you’re feeling loose, let’s tee one up on…

Investing for better outcomes

We all like a sure thing.?

• Three-foot putts? The PGA Tour players convert an average of 99.48% of their putts from inside three feet.
• Stocks as a better investment than cash? Over 10-year time horizons, there’s an 86% chance you’ll make more by investing in stocks than sitting your money in cash.
• Betting on not getting hit by lightning while running through that storm? Your odds of being struck are pretty slim at about 1 in 500,000.

?However, while all these things sound like a sure thing, they’re not. Even though the odds are minute, there are periods of time where the stock market tanks for a decade, hundreds of people do get struck by lightning every year, and PGA Tour pros do miss three-foot putts.?

Just ask Dustin Johnson.?

As the sun began to set over Puget Sound, two players remained in contention as play moved to the 18th hole at Chambers Bay at the 2015 U.S. Open.?

Jordan Speith, who was playing in the second to last pairing, birdied the par five 18th to give him a one stroke lead over Dustin Johnson. However, Johnson had yet to complete his round.?

Playing in the final pairing, Dustin Johnson crushed a second shot from the fairway that settled within twelve feet of the pin.

If he made the twelve- foot eagle putt he would win the tournament and his first major championship. Two putts would mean he and Spieth would be headed to an 18-hole playoff the following day. Johnson would do neither.

Johnson’s first putt would travel wide of the cup and sail three feet past the hole.? The three-footer, a “gimme” for most bogey golfers, was all but a sure thing for Johnson.?

In fact, in 2015 he had 600 attempts at putts inside of three feet. He converted on all but three of them.?

This putt was one of those three.?

Playing the Odds

When it comes to numbers, our brains encounter some problems. They’re just not wired to comprehend probabilities. So, when we hear things like “99% chance” or “there’s a 1 in 500,000 chance of getting struck by lightning” our brains make a generalization about the probability of that event happening.?

When we hear 99% chance, we think “that’s a sure thing.”

When we hear 1 in 500,000, we think “that will never happen to me.”

But in real life, that’s not how it works.?

In the case of Dustin Johnson at the U.S. Open, he was going to miss that three-footer on 1 out of 100 occasions. It just so happens that 2015 was that one occasion.

Same thing applies to lightning strikes. Hundreds of people are actually struck by lightning every year.?

This phenomenon is called overconfidence bias, and it’s pervasive in all aspects of our lives, including investing.

Overconfidence in Financial Markets

Market corrections, defined as a 10% decline from the most recent high, can be unnerving. Just think about how you felt in March 2023 when the S&P 500 was down more than 12%.?

However, if I told you the S&P 500 experiences a correction once every ten years, or only in 10% of years, you’d probably feel pretty comfortable. Your sentiment would also be completely misguided because my statement is entirely false.???

In fact, the S&P 500 has experienced a correction in 10 of the past 20 years , with the most recent being in 2022. Market corrections are an extremely frequent event, and they will happen to you.?

If you’re a mid-career professional, still saving for retirement, these pullbacks can be a great opportunity, because you have time on your side, but if you’re approaching or already in retirement, they can be quite nerve-wracking.?

What do you do?

Putting the odds in your favor

If you’re a golfer, weather is out of your control and will undoubtedly play a large role in your experience on the course.

Likewise, if you’re an investor, volatility is out of your control and will undoubtedly play a large role in your experience in the markets.

Benjamin Graham, a much smarter investor than I, said, “The purpose of the margin of safety is to render the forecast unnecessary.”?

To put it another way, if you pack your rain gear and your sunscreen you don’t have to worry about the weatherman’s forecast next time you tee it up.?????????

Three strategies for better outcomes

Bucketing

The bucketing method evokes Benjamin Graham’s margin of safety.?

This strategy looks at your overall withdrawal needs from the portfolio and determines the appropriate asset allocation based on your spending needs. Your margin of safety comes in the form of holding one year’s worth of portfolio distributions in cash and five to ten years of withdrawals in bonds.

For example, let’s say you have $2,000,000 saved for retirement and need $8,000 each month, or $96,000 per year from your investments to meet living expenses.? According to the bucketing method you should have:

• One year of withdrawals, or $96,000, in cash.
• Five to ten years of withdrawals, or $480,000 to $960,000, in bonds.
• The remainder of your portfolio in a diversified equity portfolio invested for growth.

The bucketing method is more of a guideline than an exact science, and you should leverage additional data points to ensure you don’t run out of money in retirement.?

William Bengen’s 4% Rule:

Bill Bengen originally published “Determining Withdrawal Rates using Historical Data” in the Journal of Financial Planning in 1994. Since then, his “4% rule” has become a universal rule of thumb for retirement investors, but the original research is often misconstrued by pundits.? ????

Bengen’s research used two asset classes, U.S. large cap companies and Treasuries, to arrive at a “safe withdrawal rate” for retirees. He concluded that an investor could avoid running out of money in retirement by starting with an annual withdrawal of 4.15% of their portfolio, adjust it for inflation annually, and their portfolio would last for at least 30 years.? ???

The challenge to Bengen’s research is that your cash flow needs will likely fluctuate from year-to-year and you may require more than Bengen’s 4% rule permits in a given year to take that once-in-a-lifetime trip or pay for an unforeseen healthcare expense.?

Guyton-Klinger’s guardrails:

To enhance Bengen’s 4% rule, Jonathan Guyton and William Klinger came up with the system that is now known as Guyton-Klinger’s guardrails.

Their original research from 2006 showed that retirees could increase safe withdrawal rates by 10%-20% provided that they were able to adjust withdrawal’s down in the event of a market decline.? ?

For example, let’s assume once again that you have $2,000,000 saved for retirement. Bengen’s 4% rule would allow for $80,000 of portfolio distributions in your initial year, but Guyton-Klinger’s guardrails would say it’s safe to go as high as 6% depending on your asset allocation. This would mean an additional $40,000 of cash in your first year of retirement.?

However, if your portfolio decreases due to a market decline, your withdrawals will also have to decline. Notice, I said “withdrawals” and not “spending.”?

Why?

Let’s say you don’t need the full $120,000 in your initial year of retirement and $100,000 will do just fine. You still take out the full $120,000 but add the excess $20,000 to your “cash bucket.”

The next year, your portfolio declines 20% and your safe withdrawal is cut to $96,000. You can still spend $100,000 (or more) by drawing from the extra $20,000 in your cash bucket.

Financial Swing Tips

1. Market declines are inevitable and you should have a plan for them, especially in retirement.
2. Adjusting your asset allocation, the ratio of stocks and bonds, in your portfolio is one of the primary ways to avoid running out of money in retirement.
3. Create a margin of safety by holding one year’s worth of portfolio withdrawals in cash.
4. Your safe withdrawal rate should be monitored and adjusted annually.