Quarterly Market Review

Eh, that's Wade Pfau, the "Retirement Researcher" who is now a shill for insurance companies who want to convince you it's bad to invest, you should give them your nest egg to "buy" an uninsured annuity (which they will then invest and reap the profits, returning savings account level of returns to you). They want you to be scared to be invest, but they sure do, with your money! And, "Past performance is not indicative of future performance."

I just sat in on Vanguard's advisor-only post-2Q forecast. It's a mid-year July update of their end of the previous year outlook in January. Bear in mind, they have the top people and tools in the world on this, it's what they do 24x7 and they're very careful with their forecasts. I'd say they have a better grasp than any of us. That said, they're forecasts! Bear in mind this is their forecast for the next 10-year period.

US equities end 2021 forecast: 2-4% mid-year 2022 update: 3.4-5.4%

International (ex-us unhedged) end 2021 forecast: 5.1-7.1% mid-year 2022 update: 6.1-8.1%

US aggregate bonds end 2021: 2.1-4.1% mid-year 2022: 3-4%

Global bonds (ex-US bonds hedged) end 2021: 1.3-2.3% mid-year 2022: 2.9-3.9%

And yeah, we're in a bear market, likely a recession, which are necessary components of the economic lifecycle. Some great succinct points here: https://www.askfinny.com/bites/lessons-learned-from-prior-bear-markets-62d435f65b

I included the quarterly review in this thread solely as a source of factual information, Wade Pfau's name doesn't show up anywhere in the report. Once again I don't understand the animosity showed toward Wade 😕 . He doesn't work for an insurance company and doesn't sell annuities https://www.mcleanam.com/team/wade-pfau-bio/. Does he recommend annuities under certain circumstances? Sure. (I personally won't touch one.) Does that make him a bad guy, hardly 😯 . Vanguard sells variable and fixed annuities, does that mean we should discount anything they say? 🤐 As far as Vanguard (or any of the big boys for that matter) having the "best guys", I don't think so 🤨 . Vanguard is not a not for profit company, their advisors get paid money just like everybody else, and if nobody reads what they write or listens to what they say, they don't get paid. That's one reason why they and others make their ridiculous forecasts, to get noticed. 10 year forecast aren't worth the paper there written on (or typed into a computer) as I have stated in a previous asset allocation thread. And certainly should not be used to help you determine your asset allocation. I say all this with love 😍. My 10 year forecast is that I will be 10 years older 😋

theretirementresearcher.com is Wade Pfau's site. He says he doesn't sell annuities or "work for an insurance company" (as you've repeated), but it's slight of hand. If you dig under the covers, he left his unbiased research work to work for an insurance consortium or some other such shell, which allows him to push annuities, achieving their goal, whilst still saying that he "doesn't sell annuities or work for an insurance company". It sure seems he's biased. He's got a right to make more money, and I'm sure he is making a lot more in this new gig than in academia, but now there's this perceived bias.

I've listed the many ways annuities are expensive, complex, and in fact risky, so I won't go into that again. I recommend them to my clients in very few instances, such as someone that is toward the end of their lifeline, won't benefit much from investing and doesn't want to further worry about markets, doesn't want to leave the money behind, and hence a *simple* SPIA (single payment immediate annuity) would fit. Annuities are not protected the way savings are with FDIC, or brokerage firm investments are with SIPC. If the insurance company goes belly up, you're screwed. If they sell your annuity to another insurance company that goes belly up, you're screwed. Have fun in the state bailout fund line with all those other folks, or in bankruptcy court as one of many other creditors.

It's a similar comparison to why for life insurance, a simple, inexpensive, limited term life policy is better than a complex, expensive, *life-long payments* cash-value policy (whole, universal, variable, indexed, <insert new gimmick here>) life insurance policy. In investing, simple is better. Don't chase the latest gimmick or crazy article that some random person wrote as click-bait. What works is proven over time. It's boring, sure, but that's a good thing.

What does an insurance company do with your annuity or life insurance payments? They invest it and reap the profits, returning a fraction to you. Why not do that yourself and cut out the risk, expense, and middleman? it's not that hard, if you're doing it right.

PS Vanguard got out of the annuity business. They were using another company anyway. It wasn't a match with their principals. What does that say? I'm a pretty distrustful person 🙂 but they are the only brokerage founded on ethical principals, for working people.

Hopefully we'll all be ten years older in ten years, TGIF!

I actually agree with Bill's assessment of annuity's. And yes Vanguard got out of providing access to annuities about 3 years ago (my bad for not knowing this), but not because of "ethical principals". "Vanguard’s annuity business was orders of magnitude smaller than its world-leading passive fund management business (and other business lines that are also much larger). In announcing the change, Vanguard basically said as much: “While insurance-based options can be an appropriate choice for some investors, annuity administration is not central to our long-term product and service plans. We’re deepening our focus on our core priorities: delivering industry-leading funds and ETFs, enhancing the client experience, and expanding our advice capabilities,” said Karin Risi, Managing Director of Vanguard’s Retail Investor Group." https://www.forbes.com/sites/mattcarey/2019/06/22/vanguard-to-stop-offering-annuities-to-retail-clients/?sh=2f24b00954e9

Most of the big boys provide access to annuities such as Charles Schwab and Fidelity as well as Blackrock (within 401k plans of all things thanks to the SECURE Act of 2019). So does that mean the only advice we should follow is from Vanguard? I am from the trust but verify camp. Given the chose of following the advice of some unnamed "professional" from Vanguard (which may or may not be good) or from someone with a MS and PhD in Economics from Princeton who has published numerous research papers in professional research publications before "pushing annuities", well, you decide 🤓

Another thing to be careful of is that even though some of these companies "offer" annuities (such as Schwab and Fidelity) you may actually be buying them from a separate company underneath that household name. Vanguard was doing annuities through some other company, from what I remember. Caveat Emptor!

Back to the benefits of diversifying the equity piece of your portfolio between US and international stocks, one thing to keep in mind is that over the last ten years US paid an average of 1.44% whereas international returned 2.73%. That's a big deal if you like spending those dividends in retirement, or using them to rebalance your buckets at the end of each year (avoiding selling shares), or just dollar-cost-averaging by reinvesting them.

I have expressed my view on SPIAs in another post, so I won't go into that detail again. Also, I am not suggesting annuities are for all retirees, however, I do want to reiterate that we should consider using all the tools that we have available to us. Simple annuities and reverse mortgages are examples of tools that I agree are controversial, but they may solve a need for some retirees. We should also recognize that retirees have different preferences, and they may not align with our own.

Most (not all) economists, retirement researchers (for example yes-Wade Pfau, Michael Finke and David Blanchett), and academics think that a SPIA may (emphasis on may) be appropriate for a retiree whose social security and other secure income does not cover their basic living expenses. It is not an investment it is an insurance policy to help with longevity risk. The alternative is to rely on the portfolio returns to cover the income shortfall for life and this increases longevity risk if market returns are not sufficient. However, as Vanguard points out in some recent research, there is a tricky trade-off that needs to be evaluated. I recognize that your annuity is only as good as the insurance company, but that risk can be significantly mitigated through due diligence in selecting the insurance carrier and possibly purchase more than one from different carriers.

Keep in mind that when a retiree elects to delay taking social security until 70, they are buying an indexed deferred annuity with the monthly income they would have received if they started it earlier. I do think this decision is easier because the risk of the government going bankrupt may be less and benefits are adjusted for inflation.

Vanguard does not completely rule out the use of annuities either. Here is their conclusion from some research they have done. https://institutional.vanguard.com/content/dam/inst/iig-transformation/insights/pdf/2021/guaranteed-income-a-tricky-trade-off.pdf

Conclusion: Annuities protect retirees from longevity risk, serving as an effective substitute for the lifetime income once provided by DB plans. The simplest and most direct answers to longevity risk are immediate and deferred fixed income annuities (SPIAs and QLACs). Our simulations suggest that QLACs are more effective as insurance against longevity risk, replacing a larger share of target income at advanced ages. SPIAs, by contrast, allow for more income predictability and protection against poor financial market returns in the first few years of retirement, when poor returns can threaten an investment portfolio’s long-term viability.

Here are some comments from another Vanguard report: https://institutional.vanguard.com/insights-and-research/perspective/when-it-comes-to-annuities-its-head-versus-heart.

When can an annuity be appropriate?

Annuities often get a bad rap. Dubious sales practices and high fees have led to a saying in the industry that annuities are not bought, they're sold. But while there have been some questionable motives over the years, the primary idea behind an annuity is sound: It provides a guaranteed income stream throughout retirement.

Annuitizing a portion of an investor's retirement savings can make sense for some individuals. For example, an annuity could be a solution for investors who:

• Expect to live a long life.
• Have a low risk tolerance and are concerned about outliving their assets.
• Can maintain an adequate pool of assets to meet unexpected expenses after purchasing the annuity.
• Have no legacy intent for the money used to purchase the annuity.

As they plan for retirement, such investors may anticipate a gap between living expenses and income. It's a gap that an annuity can help to fill.

Here is a Vanguard discussion on return expectations that is interesting. The conclusion is below. https://investor.vanguard.com/investor-resources-education/news/tuning-in-to-reasonable-expectations

Although there is a spectrum of return expectations from other "professionals", the consensus does appear to be the same: Future returns expectations should take into consideration low bond yields and high stock valuations. Although we have had corrections, bond yields are still low in relationship to the past and stock valuations are still elevated. Vanguard's update is an example of forecasts that need to be adjusted as market conditions change. I do find it interesting that their update has a +/- 1% range which is not consistent with the range they use when they do the complete analysis.

This brings me back to the value of forecasting: Our forecasts today tell us that investors shouldn’t expect the next decade to look like the last, and they’ll need to plan strategically to overcome a low-return environment. Knowing this, they may plan to save more, reduce expenses, delay goals (perhaps including retirement), and take on some active risk where appropriate.

And they may be wise to recall something else Jack Bogle said: “Through all history, investments have been subject to a sort of Law of Gravity: What goes up must go down, and, oddly enough, what goes down must go up.”²

@golich428 Absolutely (FYI to others, the forecast in Greg's link is from Sept 2021, he was making a point about the past forecast).

This is why my goal as an advisor and life/retirement planner is to find the right path for clients to relax and enjoy their life without having a bad economy, recession, bear market, etc ruin it. That means bucketing, a strategic asset allocation (that factors in *their* DNA-based level of risk tolerance!), and most importantly, making sure they understand it all. Keeping it ultra-simple is a key thing in that last goal.

Revisiting each year and minor course-correcting if necessary is also important.

Regarding annuities, sure QLAC/SPIA could also be used if the client is very risk-averse and wants that as part of the "minimum dignity floor" (especially if they listen to the Retirement and IRA Show podcast). We discuss the variables - the insurance company could declare bankruptcy and leave them hanging (net of the fun of the state bailout fund and bankruptcy creditor queue), the gummint could cancel Social Security too. Then there's aliens, asteroids, and other fun unpredictabilities. There's no such thing as guaranteed or a free lunch (or zero percent interest...)!

IF your interested in annuities be aware that variation in some annuity payouts have exploded (due to higher interest rates):

https://www.thinkadvisor.com/2022/08/02/the-variation-in-some-annuity-payouts-has-exploded/

Quarterly Market Review for Q3 - 2022. (See attached)

Quick overview (ending as of Sept 2022):

US Stock Market/Bonds Inter. Developed Stocks/Global Bonds

1 year -17.63% -14.60% -23.91% -9.86%

5 year 8.62% -0.27% -0.39% 0.71%

10 year 11.39% 0.89% 3.62% 2.21%

Looks like International developed bond markets (ex US) is the better investment then US bonds.

Quarterly Market Review for Q4 - 2022. (See attached)

Quick overview (ending as of Dec 2022):

US Stock Market/Bonds Inter. Developed Stocks/Global Bonds

1 year -19.21% -13.01% -14.29% -9.76%

5 year 8.79% 0.02% 1.79% 0.52%

10 year 12.13% 1.06% 4.59% 2.10%

Quarterly Market Review for Q1 - 2023. (See attached)

Quick overview (ending as of March 2023):

US Stock Market/Bonds Inter. Developed Stocks/Global Bonds

1 year -8.58% -4.78% -2.74% -3.27%

5 year 10.45% 0.91% 3.80% 0.90%

10 year 11.73% 1.36% 4.91% 2.28%

Euro zone economy ekes out 0.1% growth in first quarter, misses expectations as Germany stagnates
https://www.cnbc.com/2023/04/28/euro-zone-gdp-q1-2023.html?__source=iosappshare%7Cch.protonmail.protonmail.Share