Why Small-Cap Value (SCV) Outshines the S&P 500 in Sequence of Returns Risk

Sequence of returns risk matters most during retirement when withdrawals magnify the impact of poor market performance. Small-Cap Value (SCV) funds, despite their higher volatility, often outperform the S&P 500 in mitigating this risk over the long term.

Key Advantages of SCV

  • Rapid Recovery: SCV historically rebounds faster after downturns, reducing the long-term drag of early negative returns during retirement.
  • Higher Historical Returns: SCV's premium growth has outpaced the S&P 500 over extended periods, enabling portfolios to recover and grow despite withdrawals.
  • Resilience Over Time: While the S&P 500 offers stability, SCV’s superior compounding offsets early losses, preserving purchasing power in later years.

S&P 500 Limitations

  • Slower Growth: Moderate returns may not compensate for inflation and withdrawals in the long run.
  • Prolonged Recovery: S&P 500 recoveries after bear markets are often slower, leaving less room for portfolio growth during retirement.

Strategic Takeaway

For retirees, SCV funds provide the growth needed to offset withdrawals and sequence risk, especially when paired with a disciplined withdrawal strategy. Incorporating SCV into your portfolio can better protect your retirement savings over time.

Comments

Post a Comment

Popular posts from this blog

Unlock a 6% Withdrawal Rate: The Power of Small-Cap Value Stocks and Long-Term Treasuries

Image
The "4% Rule" has long been the gold standard for retirees planning to withdraw from their portfolios. However, recent research and alternative strategies suggest it may be possible to safely increase your withdrawal rate to 6% under specific conditions. One such approach involves using an 80% allocation to small-cap value (SCV) stocks and 20% to long-term Treasury (LTT) bonds. Let’s explore how this unconventional portfolio design works and why it can support a higher withdrawal rate. The Theory Behind the 6% Withdrawal Rate The 4% Rule is rooted in historical backtesting, aiming to ensure a portfolio lasts 30 years under various economic conditions. While it prioritizes safety, it is often overly conservative due to its reliance on broad market averages and assumptions that ignore more aggressive yet historically reliable allocations. By allocating 80% to SCV stocks, which have higher historical returns and volatility, and pairing them with 20% in LTT bonds, known for their...
Read more

How We Hacked Our Kauai Trip: A Travel Hacker's Guide

Image
Dreaming of paradise without breaking the bank? Here’s how we spent 11 luxurious nights at the Grand Hyatt Kauai Resort & Spa, flying to the island with our family and exploring it in style—all while leveraging points and perks. The Grand Hyatt Kauai Stay: 11 Nights in a Standard Suite Cost in Points: 350,000 Hyatt Points 35,000 Hyatt Points per night for 10 nights 1 Free Night Certificate 2 Suite Upgrade Certificates used for the standard suite Retail Value: $11,000+ Average nightly cost of a standard suite is $1,000, plus taxes and fees, which would have added another $1,500 to the total bill. Thanks to points, our out-of-pocket cost for the suite was $0. How We Did It: Transferred Chase Ultimate Rewards to Hyatt at a 1:1 ratio. Standard Suite at Grand Hyatt Kauai: Video walkthrough (not mine) Globalist Perks As Globalists, we received free Club Lounge access—a game-changer. The lounge offered: Breakfast: Fresh fruit, pastries, eggs, and more. Snacks: Grab-and-go treats thr...
Read more

How Tax-Deferred Investment Vehicles Can Help You Retire Faster

Image
  Achieving financial independence and retiring early (FIRE) is a dream shared by many. Leveraging tax-deferred investment vehicles can significantly accelerate your journey to this goal. Inspired by insights from Mad Fientist’s blog post, How to Retire Even Earlier , this article explores how these tools can supercharge your retirement savings. The Power of Tax Deferral Tax-deferred accounts, such as 401(k)s, traditional IRAs, and Health Savings Accounts (HSAs), allow your investments to grow without being diminished by annual taxes. This means your money can compound at a faster rate compared to taxable accounts. By deferring taxes, you reduce your tax burden today and give your investments more time to grow before paying taxes in retirement. Benefits of Tax-Deferred Vehicles 1. Immediate Tax Savings Contributions to tax-deferred accounts are often made pre-tax, reducing your taxable income in the current year. For high-income earners, this can save thousands of dollars annually,...
Read more