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June 2011



Risk of investing in retirement years

"There are three kinds of lies: lies, damned lies and statistics."

As always, Mark Twain had a foresight that was centuries ahead of its time with this quote. Many investors - especially those already retired - would be wise to heed Twain’s advice regarding the use of statistics in order to gauge the health of their investment portfolio. Oftentimes, the averages used to describe performance are at real odds with the dollar value of the account and this can lead to a very risky situation for those investors relying on these funds.

As Joe discovered, the return percentages that are given to you do not necessarily tell the real story of your investment portfolio performance. Joe retired 6 years ago and collects a pension income each month. With his life savings of $300,000, Joe decided to invest on his own in a mix of stock mutual funds so he could also see some growth in his savings. When the market swooned, Joe stayed invested in order to ride it out and when the market recovered he benefited from that as well. However, his brokerage statements, which have an annual performance percentage on the first page, make it appear that he hasn't lost any money, yet he is still down about $75,000 or 25%.

What Joe and others have run into lately is the fallacy of statistics. Here is a three-year example that shows just how distorted numbers can get. If an investor invests $100,000 and after the first year loses $50,000, he is naturally down 50%. In the second year, if he gains just $16,600 back, heacer is up 30%. In the third year, he makes no return for 0%. In this scenario, the total return is -20% for an average annual return of minus 6.8%. But what is the dollar value of this same account? Of the original $100,000, the investor has just $66,600 - a loss of 33% with an average annual return of -11%.

The real trouble with performance numbers is that they sometimes mask a huge problem for retirees needing to draw income from their investment. Joe is fortunate as he has a pension and can wait out the market until his investments recovers their value. Many retirees need to create income from their investments, but if performance statistics do not accurately portray reality (losses), it can spell disaster. When losses occur to a retirement portfolio, investors must cut back on the income they draw in order to give their investments a chance to recover.

The best way to avoid major losses altogether is by using a professional to assist with your investment planning. Creating a diversified blend of investments can greatly reduce the ups and downs in a portfolio.

Retirement Planning – because it’s the right thing to do.

Call Hans Mathisen today at (306)242-7042.
or email -


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