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Annualized Returns & Realistic Expectations

Most investors at or in retirement need to know how long their portfolios will last when they start withdrawing for income.  They know what their monthly living expenses are and how much social security comes in every month.  By using an annualized rate of return, retirees can calculate how much money they can withdraw each month from investments to help cover the expenses lacking from social security and any other supplemental source of income they may have.

Younger investors can use annualized returns to help plan their future retirement nest-egg.  With an annualized return plugged into the equation, you can easily calculate how much you need to contribute monthly to “have one million dollars when I’m 65.”

“On the first day of every week, each of you is to put something aside and store it up, as he may prosper, so that there will be no collecting when I come.”  1 Corinthians 16:2   English Standard Version

Generally, most sectors of the stock market were down last year.  If you owned Advanced Micro Devices, Chipotle, Under Armour or Etsy last year, good for you.  Goldman Sachs, IBM, General Electric or Bitcoin? Oops!  Many investors saw their portfolios fall 1-15% last year, some even more.  That wasn’t in line with the return they were “expecting” based on 5-6% annualized returns the stock market has seen over the last 20 years.

Let’s take a closer look at expectations for earning a 5-6% annualized return on a year-by-year basis. Below are two hypothetical data tables showing the yearly data for calculating the annualized returns shown at the bottom of each table.  Table A shows annualized returns for 11 years (2008-2018), table B shows 10 years (2009-2018) of data.

                   TABLE A                                                                               TABLE B
Year Return   Year Return
2008 -17.23%      
2009 31.25%   2009 31.25%
2010 11.21%   2010 11.21%
2011 2.41%   2011 2.41%
2012 14.78%   2012 14.78%
2013 11.10%   2013 11.10%
2014 7.98%   2014 7.98%
2015 -2.15%   2015 -2.15%
2016 12.11%   2016 12.11%
2017 4.19%   2017 4.19%
2018 -2.45%   2018 -2.45%
11 Year Annualized return: 6.00%   10 Year Annualized return: 8.66%

The annual returns above are arbitrary, shown to give you an idea how returns have, can and will continue to fluctuate in the future.  In Table A, you may notice that there was not one year with a return of 6%.  In fact, there were three years of negative returns.  Annualized returns are averages that include compounding annual returns over a given period (in this case 10 and 11 years).  Investors should expect to see years of returns greater than 6% and years that make less than 6% – and in some years, losses.

Table B shows the same returns, minus 2008 (the last major bear market).  By not including the 2008 bear market, the annualized return jumps an additional 2.66%.  The lesson here is to make sure you have as much data as possible when looking at historical returns.  It is ideal to see returns for a full market cycle (bull and bear market).  Looking at returns through a full cycle will do three things: one, prepare you for bear markets, two, give you a better idea of what to expect about long term annualized rates of return when planning for retirement and three, be very realistic on your time horizon.

Back to retirement.  Retiree A wants to preserve capital and withdraw the gains over time on a systematic monthly plan.  She looks at the annualized returns of 6% over a full market cycle and decides to withdraw 5% every year, knowing there will be annual fluctuations but that over time her principal should be intact.

Retiree B wants to do the same as Retiree A above, but he reviews data from Table B and decides to withdraw 8.5% each year.  Because Retiree B is not looking at data covering a full market cycle, he more than likely will dip into principal over time.

Annualized returns can and should be reevaluated periodically to keep client expectations intact.  If future returns are consistently less than past performance, adjustments may be needed. 

The S&P 500 has annualized 11.29% over the last 70 years (12/31/1948-12/31/2018).  But the annualized return over the last 20 years (12/31/1998-12/31/2018) is 5.61%. 1   

An investor with 10+ years to go before retirement may need to contribute more money annually and/or rebalance his/her portfolio more aggressively.  For investors in retirement, they may have no choice but to start withdrawing less money until markets show signs of improvement.

At Spectrum Financial we evaluate client portfolios at least annually to ensure goals are being met, however, our Investment Team monitors the portfolios on a daily basis.  We let clients know the various options available to them so they can stay on track.  Annualized returns are an important part of helping clients reach their goals but are only a part of the equation.  Please call our office to discuss this topic in more detail for your specific retirement goals.

1 Bloomberg data

IoT (Internet of Things)

“Augmenting the human experience with a connected world”[i]

“Oh! Sorry I didn’t see you sitting there. It’s my morning break here at work, so I was checking a few things at home. Making sure that I locked the front door and checking to see if we had eggs in the fridge. Looks good. And the dog’s behaving.

So, do you remember back in 2019 when IoT was new and security was sketchy? I figured I didn’t have a lot to lose by installing that smart front door lock. After all, it was nice for the door to unlock when I pulled into the driveway, and then have it auto-lock when I left for work. I could even unlock it for my daughter who dropped by unannounced from out of town. Nice.

At that time, some people weren’t comfortable with the level of cybersecurity in IoT, so they stayed away. Others…they did their homework and only went with devices that were designed from the ground up for security. Smart.”

What’s Involved?

IoT (Internet of Things): “the interconnection via the Internet of computing devices embedded in everyday objects, enabling them to send and receive data.” So, many “smart” things are in this category: locks, thermostats, lights, alarms, toys, automobiles, garage doors, sprinklers, IP cameras, refrigerators, or your home DVR. Convenience and utility.

IoT can make your home more secure from burglars by automatically locking your front door when you leave, alert you to someone at your front or back door, make your coffee, turn your lights on and off, etc., etc. What’s not to like, right?

This transformational technology is growing geometrically and is poised for an explosion. IHS Market (a London-based global information provider) predicts that by 2025 there will be 73 billion IoT devices installed[ii]. That’s more than 9 per person on earth! With all these devices connected to the Internet, the bad guys are constantly attempting to gain access in order to steal information and steal your stuff.

Are they secure?

With all these advantages, the question becomes what is the risk of installing a smart device? It turns out that there is a lot NOT to like, IF you are not careful. Alas, most IoT manufacturers have no program for disclosing and reporting security issues. A December 2018 report explains that “90% Of Consumer IoT Vendors Don’t Let Researchers Report Vulnerabilities”[iii]. That could mean that if you are not technically inclined or are not willing to do the homework, you may want to wait until IoT technology is more mature and secure.

Here are some of the issues and possible consequences:

Issue Possible Consequence
No security updates Device could be vulnerable
Weak credentials that can’t be changed Device is vulnerable
A hacked IoT device Allows access to your other accounts on your network, identify theft
Remote (unattended!) enablement of stoves, cookers, microwaves Safety hazard
Self-driving car vulnerabilities Theft, safety concern

“As an example, an IoT thermostat very likely communicates to a cloud server to provide updates and to control the device remotely,” Jett [Justin Jett, director of audit and compliance for Plixer] says. “If the IoT security is robust, but the cloud security is significantly lacking, the entire system is vulnerable.”[iv]

What can you do?

For those who want to enjoy the benefits of current IoT tech, this may be a good time to do a little online research and get a smart lock for your front door or smart LED lights that turn on at sundown and can be controlled from anywhere in the world.

If you decide to take a step into the Internet of Things, remember that your smart device will be part of your local network. So, here’s what you should do.

  • Choose your IoT devices not just based on convenience, but also on security.
    • Smart locks are very convenient, and they are as secure as traditional locks IF well designed and supported.
    • Make sure the manufacturer is actively supporting the device.
    • Keep a “good ol’ fashion” key handy when the keyless remote entry fails.
  • Insist on strong security and check your devices’ configurations.
  • Keep your computer and smart phones updated; they usually share the same network at your home.
  • Install computer virus and malware protection
  • Use multifactor authentication when possible.
  • Don’t use public Wi-Fi without VPN.
  • Only use known devices. E.g., if you don’t know where a USB thumb drive has been, leave it alone.

Here’s an excellent consumer guide for smart home devices, developed by the UK government.

The Future

California has enacted the first law covering IoT and this may drive future federal regulations. “The short IoT bill requires IoT manufactures to equip devices with “reasonable” security measures, appropriate to the function of the devices and to the information they collect or transmit.”[v] The move is toward more security and accountability, which is good for the industry and for consumers…like you.

Spectrum IT

The IT Team at Spectrum works behind the scenes to ensure that your investment and personal information is kept safe and secure. We also strive to make sure that Spectrum’s other teams have access to the information they need, enabling them to make the best timely decisions possible for you.

[i] “The next chapter of IoT is just beginning as we see a shift from digitally enabling the physical to automating and augmenting the human experience with a connected world,” says Carrie MacGillivray, IDC. https://www.idc.com/getdoc.jsp?containerId=US44390618

[ii] IHS Markit, The top transformative technologies to watch this year, 2018 (PDF, 16 pp., no opt-in)

https://www.marketwatch.com/story/7-ways-to-keep-your-smart-home-from-being-hacked-2016-10-17

[iii] https://www.forbes.com/sites/daveywinder/2018/12/13/the-silence-of-the-brands-90-of-consumer-iot-vendors-dont-let-researchers-report-vulnerabilities/#4f60977d9c88

[iv] https://www.scmagazine.com/home/security-news/lightly-secured-cloud-with-a-chance-of-iot-attacks/

[v] https://www.scmagazine.com/home/opinions/californias-new-iot-security-law-is-not-nearly-enough-we-need-a-gdpr-for-iotnow/

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Spectrum Financial, Inc 2019