As I’ve written many times, I can’t see into the future, and I certainly don’t presume to predict investment returns.

With that said, this third decade of the 21st century looks to be a challenging one for investors. The reasons are obvious everywhere we look right now.

This is an especially challenging time for new retirees, the elder “Class of 2020.”

If you retired at the end of last year with your money invested in the S&P 500
your portfolio has probably declined in the neighborhood of 9.3%. If you had a 60%/40% mix of stocks and bonds, you may have lost about 7%.

In either case, it’s not a good way to start.

That’s the bad news, along with the fact that the future is more unsettled than usual these days.

But wait — I’ve discovered some news, too.

Here’s what I found, in capsule form:

• Retirees typically rely on the S&P 500 for the equity part of their portfolio.

• But an alternative allocation that uses just four U.S. index funds was remarkably consistent in outperforming the S&P 500 both in the 1970s and in the 2000s.

• This combination has a great track record in good times as well.

This alternative portfolio does not abandon the S&P 500. It simply adds equal parts of three other asset classes for an allocation of 25% each in large-cap blend stocks (the S&P 500, in other words), large-cap value stocks, small-cap blend stocks, and small-cap value stocks.

I’ve written about this four-fund strategy before, and today I want to show just how well it performed in two trying decades.

Bad times in the 70s

In the 1970s, after three pretty good years, investors were hit with a bear market in which the S&P 500 lost 37.3% of its value in 1973 and 1974.

Front-page headlines announced “the end of equities,” and many people bailed out of stocks.

Investors who were accumulating assets (and who continued to buy equities through these harsh times) eventually recovered nicely. But for those who retired in these years, recovery wasn’t so easy.

The new math of retirement: Save 10%

Bad times in 2000 through 2009

The “00” decade punished S&P 500 investors with two bear markets. In 19 months from the spring of 2000 to the autumn of 2002, the S&P 500 lost 50.5% of its value. Then over 17 months from the autumn of 2007 to early in 2009, the market lost another 50%.

The effects of this second bear market, coupled with a major collapse of real-estate values, left a lasting financial scar that is remembered by most investors today.

As in the 1970s, investors who stuck with the market and continued investing ultimately profited greatly from the long bull market that ended abruptly this year. But for newly minted retirees, as we shall see, the “00” decade was much tougher — at least if they relied on the S&P 500.

The four-fund combo and retirees

Retirees typically take money out of their portfolios on a regular basis. Their portfolio values are affected by these withdrawals as well as by the underlying returns of their investments.

To see how the four-fund combination held up to this challenge, I looked at data from both of those “bad” decades from the point of view of a retiree whose withdrawals started at either 3% or 4% of the portfolio value and were increased after that to keep up with inflation.

Results in the 1970s

With apologies for all the statistics in percentages (there’s really no way to avoid them), here’s what I found for the 1970s:

Imagine you retired at the start of the decade and took out 3% of your portfolio value at the start of each year, adjusted for actual inflation in the previous year.

Assume you used the four-fund combo for equities.

• If your equity allocation was 40% (with the rest in bonds), by the end of 1979 your portfolio would have been worth 62.9% more than when it started.

• If your equity allocation was 50% instead of 40%, you’d have 67.6% more than when you started.

• If you had been taking out 4% each year instead of 3%, your portfolio would have been up 40.8% with a 40% equity allocation or up 44.4% with 50% equities.

In those same scenarios, if your equity investments were all in the S&P 500, your gains would have been much less:

• At a 3% withdrawal rate, up 35.4% with 40% equity allocation or up 33.5% with 50% equity.

• At a 4% withdrawal rate, up 16.8% with 40% equity or up 14.7% with 50% equity.

Results in the 2000s

The decade of the “00” years began in very different times than the 1970s and contained two bear markets instead of just one. Nobody could have credibly predicted a repeat performance from 30 years earlier.

And yet that’s what the four-fund combo delivered, with amazing consistency.

Table 1 shows this. The figures under the decades represent the increase in value of the portfolio after 10 years of withdrawals.

Table 1: Four-fund combination for retirees

Withdrawal rate

Equity allocation



















Those are extremely similar results, across the board, for two very different decades.

Contrast that with the results for the S&P 500 in Table 2.

Table 2: S&P 500 index for retirees

Withdrawal rate

Equity allocation



















Two things jump out at me from Table 2.

• First, there was a very big difference between taking out 3% and taking out 4%.

• Second, if your equities were all in the S&P 500, you fared much worse in that decade by having more (50%) rather than less (40%).

As I said at the outset, there’s no way to know what this present decade has in store. But over the past 90 years, this combination of four U.S. asset classes outperformed the S&P 500 in six of the past nine decades and over the entire 90-year span 1930-2019.

Perhaps more relevant for new retirees, the four-fund combo outscored the S&P 500 in every single 20-year period that consisted of two back-to-back decades.

To see the decade-by-decade results, scroll to Table 1 on this page.

Here’s one other piece of advice that naturally follows from the numbers I’ve shown you: If you can swing it, plan your retirement so you can take out less each year (3%, for example) instead of more.

This will give you more peace of mind and much less risk of running out of money, no matter what lies ahead.

For my thoughts on how retirees can do better, check out my latest podcast, 10 ways retirees can make an extra $1 million on their portfolios.

Richard Buck contributed to this article.

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