Keep a balance between risk, return


Successful retirement investing depends more on avoiding serious mistakes than it does on realizing exceptional gains. Cash flows from your portfolio when investment values are depressed can cause damage that won’t be repaired later by better returns.

If you withdraw $10,000 from a portfolio when it is worth $200,000, you’re withdrawal represents 5 percent of your portfolio. If, alternately, you withdraw that same $10,000 from your portfolio after its value has fallen to $100,000, you’ve now withdrawn 10 percent of your portfolio’s total value. A withdrawal rate of 5 percent might be sustainable over 20 or 30 years, but a withdrawal rate of 10 percent probably isn’t.

The sustainability of the withdrawal stream over time will be determined by two factors: where your portfolio’s value is today and what happens to your portfolio over the rest of your life. In the first case, that planned $10,000 annual withdrawal might look sustainable today, when your portfolio’s value is high, but it might fail if the investment strategy you employ produces unacceptable future results. In the second case, what looks like an unworkable plan might be saved by the right investment results somewhere down the road. In either case, the secret to success is to structure your portfolio to achieve the returns you’ll need to make things work without simultaneously generating significant risk of failure.

Either investing too conservatively or too aggressively would be the serious mistake you’re trying to avoid. Invest too conservatively and you’ll minimize or avoid the risk of suffering short-term losses, but insufficient returns will condemn your portfolio, and your income stream, to a slow death in the long run. Invest too aggressively, and your long-term prospects will look great, but a bad year or two in the markets can mean a serious reduction in your income stream, or worse, total failure.
Remember that return and risk go hand in hand. To have the opportunity for gain, you must accept a certain amount of risk. By avoiding one kind of risk, you might be inadvertently taking on another kind of risk. For example, if you avoid the risk of capital loss in the short run, you might be taking on the risk of failing to earn needed gains.

Serious mistakes in investing often occur not as a single big event, like a large speculative bet gone bad, but as a series of smaller mistakes that accumulate into a large problem. The kind of volatile markets we’ve seen over the past 10 years, where it’s almost impossible to predict whether the next big move will be up or down, tend to inspire this kind of serial error pattern.
It is tempting to react to downward moves by shifting to a more conservative investment allocation. For Thrift Savings Plan investors, this usually means selling the C, S and I stock funds and buying the G Fund for greater stability. The problem with this tactic is that, if you were in the right allocation to begin with, the move means that you’ve now shifted to an allocation that runs the risk of failing to produce needed returns. You’re trading an acceptable risk of short-term loss for an unacceptable risk of long-term failure.

Does this make sense? Of course not!

Nor does it make sense to try to avoid a short-term loss after it has already occurred. Maybe you think that selling your investments after their prices have fallen is a sensible way to avoid further losses? Not really, since as the prices fall, so does the risk of further loss. In fact, as the prices fall, the opportunity for future gains actually rises.

Herd mentality is no good rationale for abandoning the right investment strategy for the wrong one. After the price of your C, S, I or F fund shares has fallen, the logical thing to do is to buy more of them, not to sell them.

The most reliable and efficient way to produce success in the long run is to decide on the proper investment allocation for your particular needs — just aggressive enough to get the long-term job done without unacceptable or unnecessary risk — and then rebalance your portfolio to this allocation at least once each year, but no more frequently than four times each year.


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Mike Miles is a Certified Financial Planner licensee and principal adviser for Variplan LLC, an independent fiduciary in Vienna, Virginia. Email your financial questions to and view his blog at

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