A Guide for Individuals to Help Make Better Investing Decisions

Do you know how well your individual future financial needs will be met? Are the individual decisions you are making today going to help or hurt your portfolio in the coming years?

Today's individual investor faces a changing economic landscape, and having a financial plan that keeps pace with the changes can be critical to achieving long-term financial goals.

Making sure an adequate nest egg will still be there for you in the years ahead takes discipline, knowledge, and a deep understanding of portfolio management. Fisher Investments can help explain some potential risks and walk you through some tough decisions that could impact whether your portfolio will meet your future needs.

How big does your portfolio have to be to reach your financial goals?

A new reality has arrived. The pension plan era is over. Social Security is no longer backed by a solid guarantee, and healthcare costs are rising above the historical pace of inflation.* This means your portfolio may need to provide more money than you previously thought in order for you to enjoy a comfortable retirement.

So how much of your peak pre-retirement income will you need to keep your lifestyle constant in retirement? And with your annual withdrawals, how much money will remain in your portfolio at the end of your time horizon?

There is no simple answer to these questions. They involve numerous variables including time horizon, cash flow needs, and estate-planning goals.

Let's examine a hypothetical retired 65-year-old investor who wants to spend $50,000 per year for living expenses and adjust that amount for inflation in the future. Say he also wants to leave $2 million to his heirs and estimates his time horizon at 25 years.

The table below illustrates the probability of the portfolio ending with at least $2 million while providing the required cash flow over 25 years given several different initial investment values and asset allocations.

Portfolio Stimulation

This table is based on a Monte Carlo simulation, a sophisticated statistical technique which allows for random sampling of historical stock, bond, and cash returns while taking into account historical inflation to determine the probability of investment outcomes.

The simulation shows a high degree of sensitivity to the initial investment. In the $1 million scenario, even the optimal asset allocation yields a low probability of success, whereas when starting with $4 million, the probabilities of success are excellent regardless of asset allocation.

*Keehan, S. et al. "Health Spending Projections Through 2017," Health Affairs Web Exclusive W146, 2/21/2008.