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Review & Outlook: Quarterly Market Overview

October 16, 2012

With regard to spending levels and risk taking, we found it most often makes sense to invest in either an all equity portfolio or a balanced portfolio of stocks and bonds. A portfolio composed of solely fixed income is rarely optimal, even for the risk-averse investor. If you spend a lot, you will need the growth that comes with equities. If you spend very little, an all fixed income portfolio can be an unnecessary form of insurance that will probably substantially suppress the value of your estate.
-Gordon B. Fowler, Jr., president, Glenmede

One of the key benefits of having a financial plan is how it can inform decisions regarding spending patterns and investment strategy. There are two questions that often come up during the process of developing a financial plan:

1. How much risk should I take in my portfolio, assuming different spending levels?
2. If I seem to have enough to cover routine expenses, how much splurge spending is possible in periods of excess returns?

Ultimately, the answers to these questions depend on many personal perspectives. However, simulation analyses can provide directional insights and conclusions. For our discussion, we have simulated an analysis for a “generic client.”

With regard to spending levels and risk taking, we found it most often makes sense to invest in either an all equity portfolio or a balanced portfolio of stocks and bonds. A portfolio composed of solely fixed income is rarely optimal, even for the risk-averse investor. If you spend a lot, you will need the growth that comes with equities. If you spend very little, an all fixed income portfolio can be an unnecessary form of insurance that will probably substantially suppress the value of your estate.

The simulations also allowed us to reach conclusions regarding splurge spending in instances of excess returns. Analyses of spending and investing usually start with an assumption that individuals will be disciplined, assets will grow steadily with inflation and that an investor will spend a fixed amount. In real life however, individuals tend to exhibit much lumpier spending patterns, splurging on real estate, trips or gifts to charities and children. While real answers require specific client input, analysis from our generic client simulations demonstrates that even moderate splurging can be dangerous to one’s long-term financial health.

The same types of models employed in our examples are available to each of our clients. We welcome the opportunity to customize data based on individual circumstances and figures.


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