Ready For Retirement
Ready For Retirement
3 Investments That Should Never Go In Your Retirement Portfolio
Think your retirement’s safer with a little gold, a favorite stock, and a home full of equity? Time for a reality check. In this episode, we put three “sacred” retirement assets to the test and show how they can quietly derail the one outcome that really matters: a steady paycheck for life.
You’ll learn how to define your retirement portfolio’s real job, growth that beats inflation and protection that funds your lifestyle through market swings. We unpack gold’s myth versus math, why concentrated stock bets widen your risk, and how home equity fits more as lifestyle than income.
Then we share a clear framework for sustainable withdrawals:
- growth sleeves that fight inflation
- reserve sleeves that fund stability
- rebalancing rules and guardrails that keep you on track
Because a great retirement isn’t built on shiny objects or hometown pride, it’s built on reliable income you can live on, year after year.
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The strategies, case studies, and examples discussed may not be suitable for everyone. They are hypothetical and for illustrative and educational purposes only. They do not reflect actual client results and are not guarantees of future performance. All investments involve risk, including the potential loss of principal.
Comments reflect the views of individual users and do not necessarily represent the views of Root Financial. They are not verified, may not be accurate, and should not be considered testimonials or endorsements
Participation in the Retirement Planning Academy or Early Retirement Academy does not create an advisory relationship with Root Financial. These programs are educational in nature and are not a substitute for personalized financial advice. Advisory services are offered only under a written agreement with Root Financial.
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There are many different investments that you as an investor can pursue. But when it comes to investing in your retirement portfolio, there are three specific investments you should stay away from. The first investment that you should not own in your retirement portfolio is gold. Now, to understand why, let's understand some context here and take a step back. When it comes to your retirement accounts, the goal there is to fund your ability to maintain your lifestyle in retirement. To do that, you need two things. You need growth in investments to maintain your purchasing power and offset inflation over time. And number two, you need protection. You need protection against the inevitable downturns, the inevitable extended downturns that will happen in the stock market. So where does gold fit into the picture here? Because typically people think of it as an inflation hedge. Well, here's the thing with gold, and here's why I don't like it. If you go way back to 1934, Congress passed the Gold Reserve Act. And the Gold Reserve Act pegged the price of gold to$35 per ounce. Now that pegged price, that artificially pegged price, meaning the government controlled it, it wasn't floating on a free market, that lasted until 1971, until President Nixon removed us from the gold standard. So what do you think happens when you have an asset that's value is artificially pegged to a certain price, and it's artificially pegged for almost 40 years? Well, there's a good chance there's going to be a run-up in the valuation or the price of that asset when the artificial price, when the artificial peg is removed. That's exactly what we saw in the 1970s. In 1971, towards the end of 1971, the gold standard was removed, or there's no longer pegged to the dollar. And from 1972 until the end of the 1970s, the annualized return of gold was 36% per year. So 36% per year from 1972 to 1979, if you compare that to US stock market, the US stock market annualized 4.6% per year from 1972 until 1980. So when you look at just that, gold was a far superior investment. But you have to ask yourself the question: how much of that run-up was attributed to gold all of a sudden be worth a whole lot more, versus how much of that was simply gold no longer being pegged artificially to such a low standard like it had been for the previous 35, 40 years. So that was the 1970s. The return on gold, the performance on gold far surpassed the return on the S P 500. But what about the 1980s? Well, in the 1980s, the SP 500 actually did quite well. It returned about 17% per year over that 10-year stretch. Gold, on the other hand, lost 2.5% per year. Not just for one year, not just for two years, but on average, over that 10-year time period, the annualized return was negative 2.5% per year. So that was the 1980s. Well, how did gold do in the 1990s? Well, after averaging a negative 2.5% return in the 80s, gold went on to average a negative 3.3% return during the 1990s. So a negative total return in the 1980s followed by another negative total return in the 1990s, this one even more severe. Going back to stocks using the SP 500, they were up 15.3% in the 1990s. Then things did switch in the 2000s. In the 2000s, it was actually the SP that had a negative return. Its annualized return was negative 1% during the 2000s, while gold actually did quite well. It was up 13.9% during that decade. Then quickly, just to round things out, in the 2010s, gold returned 2.9% per year, and the SP 500 returned 13.4% per year. Now, since 2020, both gold and US stocks have had a very nice return, returns in the low to mid-teens for both asset classes combined. But how do things stand as a whole? Why do I think you shouldn't have gold as part of your portfolio, at least your retirement portfolio? Well, if you look at the annualized return of each, gold's annualized return during this time period was 7.4%. US stocks return during the same time period was 10.5%. Now here's the thing. If you take out the 1970s, which is when there's that major run-up in the price of gold or the return of gold, if you take that out, the return of gold since 1980 is closer to about 4% per year, a little north of 4%. So that's not a strong return as compared to the S P 500. And many of you are saying, James, it's not supposed to be tracking the S P 500. It's more for inflation protection or it's more for downside return. So you're right, it's not an apples to apples comparison. We also need to understand the risk characteristics here. One way of measuring risk is what's called standard deviation. The higher the standard deviation on an investment, the more volatile it's going to be, the more it's going to fluctuate, which isn't the only definition of risk, but it's one that's very relevant specifically for a retirement portfolio. During this time period, the standard deviation on gold was 20%, whereas the standard deviation on the SP 500 was in the 15 to 16% range. Now, those numbers maybe don't mean a whole lot. Maybe I can do a different episode explaining what that means, but the higher the number, the riskier it is. But here's a different way, and maybe a more practical way of measuring risk. What's the downturn that I as an investor can expect to experience and how long does it take to wait out that downturn? Because for my retirement portfolio, I need to know I can count on this. I don't have an infinitely long time horizon. I need these assets to support me today. I need these assets to live on today. Well, we've all heard of the lost decade. The lost decade is when the US stock market averaged negative 1% per year returns from 2000 to 2010. And that was largely because of what happened in 2007-2008, when the US stock market lost 51% of its value. So that was the max downturn that we've had in the US stock market since the end of World War II. So if we look at the time period from 1971 until now, so in other words, the time since gold stopped being tied artificially to a specific price, that's the worst downturn we've had in the US stock market, negative 51%. If you look at gold, its worst downturn was negative 62%. And get this, that downturn, it started way back in October of 1980, and it took all the way until August of 1999 for that negative 62% to bottom out. Meaning it wasn't a sharp V-shaped recovery that popped right back up. It took almost 20 years that downturn to play out, and then it took another six, seven years for it to fully recover. Or in other words, there is a full 26-year time period where gold did absolutely nothing. If you happen to be a retiree at the beginning of that and you had an asset that returned a negative return for the first 25 and a half years and didn't break even until 26, that's not a great asset for your retirement. So this isn't the only comparison that should be made. It shouldn't just be US stocks compared to gold. But as you start to see this, as you start to see that gold doesn't necessarily have the return characteristics of US stock markets over a longer period of times, nor does it have the same risk characteristics, meaning it's actually more risky in many different ways. That's why I don't believe gold should be part of your retirement portfolio. The second thing that should not be part of your retirement portfolio is overly concentrated stock positions. Now here's the thing, I'm not opposed to an overly concentrated stock position. If you work for a company or you have a certain affinity for a company or there's just a company you really love, own it. Own a concentrated position in it. But that cannot be what you have in your retirement portfolio. You need to think of your retirement portfolio saying, what's the balance that I need so that I can meet my income needs throughout retirement. And regardless of what happens to this specific stock or the market as a whole, I have a very high likelihood of meeting my needs throughout retirement. Here's a simple way of thinking about that. Let's assume I want to retire and spend$75,000 per year today. Let's assume that of that I have a social security benefit that covers$25,000.$25,000 from Social Security, which means the remaining$50,000, that's what needs to come from my retirement portfolio. My retirement portfolio can generate, depending on how you're invested, about 5% per year of withdrawals and support a 30-year retirement. That's based upon research from Bill Bangin. That's based upon research from other people like Jonathan Guyton. This is a number that doesn't just come out of thin air, this 5%. This is based upon research of saying if you're invested the right way, here's what you can expect to be able to withdraw and have that money last for 30 plus years and have a very high probability of success. So continuing with that example, if I need the remaining$50,000 per year from my retirement portfolio, my retirement portfolio can generate 5% per year. What that means is I would need a million dollars in my retirement portfolio.$1 million generates$50,000 per year. Stack that on top of the$25,000 per year that I have coming in from Social Security, there's my$75,000. So here's the thing. If I only have a million dollars, I shouldn't own any concentrated stock positions. I need that full million dollars to be invested, to be diversified, to be allocated in a way to support that 5% withdrawal rate. But if I'm sitting here with$2 million, for example, and saying, I already have the million dollars carved off to be able to support my needs, I do have more flexibility with that remaining million dollars. I wouldn't necessarily think of it as my core retirement portfolio. It's almost excess in a way or extra in a way. Doesn't mean we want to be foolish with this, it doesn't mean we don't want to maximize our returns with this, but it does mean there's a little less pressure to get that right than there is with the initial million. So this is just one way of thinking about it. Now, last thing on this, side note on this, being concentrated, owning one specific stock, which I see a lot of today, specifically high growth tech stocks, that doesn't mean you're gonna get higher returns. In fact, it's not even more likely that you're gonna get higher returns. One of the reasons that we diversify is because it's actually maximizing our potential to get the highest possible returns. Being more concentrated simply means we have more range of expected outcomes. The potential highs will be higher, but the potential lows will be lower. So keep that in mind. Being concentrated isn't a way of saying I'm gonna guarantee your lock-in even a higher probability of success. It simply means your potential outcomes, the range of potential outcomes is going to be much wider. But if we bring this back to your retirement portfolio, that core piece that needs to fund your retirement lifestyle, concentrated stock positions do not belong there. If you have more than you need for your retirement, you can think about doing that, you can consider that, but keep that away from your retirement portfolio. The third thing that does not belong in your retirement portfolio is your home. Now, to many of you, this sounds obvious, but I can't tell you how many conversations I have with people talking about their retirement, talking about their planning, talking about long-term goals, and they say, yeah, I've built a ton of equity in my home. Almost as if to say they're just looking at their net worth. On paper, their net worth is$2 million,$3 million,$4 million. But when you actually look at that, only a small portion of that is in liquid investments. Now, that net worth is great, but if all your net worth or the majority of your net worth is in your home, that's not gonna support your retirement needs. In fact, your home, if you're living in it, is more of a liability, the bigger it is, the more equity it is than anything, because there's greater maintenance, there's greater upkeep, there's greater property taxes. Now, this makes sense to a lot of you, but for some people, this message of your home is not a retirement asset needs to be heard. Your home's not actually gonna lock any ability to create cash flow, which is actually what you're most concerned about in retirement. The only way it does it is if you rent it out, so bring renters into your home while you're living there, borrow against it, either borrowing or a reverse mortgage, or selling it and downsizing so that you unlock some of that equity to actually use for cash to fund your retirement goals. But if you think about your home and building net worth, that's great for your net worth, but that does not translate to your actual retirement needs. That does not translate into your ability to meet your needs throughout retirement to create an income stream that you're not going to outlive. So tying this all back into what you do need to do. What you do need to do as an investor with your retirement portfolio specifically, say how do you allocate your money, enough of your money to growth assets that are going to keep up and surpass inflation over time so that your lifestyle today, as inflation continues to drive the cost that higher, you have a portion of your portfolio growing higher with it to continue meeting your income needs. On the flip side, how do you have enough and stable reserves that say when this portion of your portfolio is down 20, 30, 40%? Because it will be down 20, 30, 40% at some time. Do you have another portion of your portfolio that you can draw from that's not going to be subject to those same downturns? The things that do not fit either of those categories are investing in gold, investing in concentrated stock positions, or treating your home as a retirement asset.
