My Investment Return for 2021

My portfolio’s return for 2021 was 16.7%, which is the same as my benchmark’s return.  Even with higher inflation, markets delivered a double-digit inflation-adjusted return for my overall portfolio.  For a few years now I’ve been thinking that the probability of a correction in stocks has been rising, but that correction has never come.  Instead, the opposite has happened; stocks keep rising.  It’s a good thing I don’t act on my specific guesses about the future of markets.  I try to make sure I’m well positioned for a wide range of possibilities.

As stock prices grew to nosebleed levels, I thought about if and how I should respond.  However, I had no interest in making emotional portfolio decisions.  In the end I decided to use the blended Cyclically Adjusted Price-Earnings (CAPE) ratio of my stocks to make small adjustments to both my bond allocation and my expectations about future stocks returns.  These adjustments are simple formulas that are coded into my emotionless portfolio spreadsheet.  I don’t expect stock valuations to rise to ever crazier levels, but if they do, my spreadsheet is ready.

Below is a chart of my cumulative real (inflation-adjusted) portfolio returns since 1994.  Money I saved in 1994 has grown in purchasing power by a factor of more than 8.  In nominal terms it has grown even more.  The power of saving money in stocks for the long term is amazing.

Leading up to my retirement in mid-2017, I worried about what would happen if stocks crashed shortly after I retired.  This is called sequence-of-returns risk.  To compensate, I waited until I thought I’d still have enough savings to retire if stocks dropped 25% to 30%.  Fast-forward to today, and my compound average real return over the 4.5 years since I retired has been just over 7% per year.  So, I now know that I worked longer than I needed to, but I couldn’t have known that at the time.

If I were retiring today with stock prices as high as they are, I might build into my plan as much as a 40% initial drop in stock prices.  This isn’t a prediction.  It’s just the way I think about whether I have enough savings to retire.  Among a reasonable set of possible outcomes is poor stock returns in early retirement.  Your mileage may vary.