Today’s blog is an excerpt from our whitepaper, “The Sungarden Study” which addresses the retirement income crisis, standard solutions, and offers a recommended alternative to traditional approaches.  

Many investors and financial advisors operate under the mistaken assumption that if they simply invest in market index funds and give it some time, they will reach their investment goals. One of the more notable observations of the “Sungarden Study”, is that in the last 20 years the S&P 500 Indexi has produced an average annual five-year return of 4% less than half of the time. We also found that the index we created to represent the concept of “Hedged Dividend Investing” (see explanation below) exceeded that 4% bogey much more frequently.

 

60 Month Period Return Performanceii

(02/01/94 – 11/30/13)

Source: Sungarden Investment Research 2014

Source: Sungarden Investment Research 2014

 Indices are unmanaged and investors cannot invest directly in an index

 

 

We analyzed the returns on a period-to-period basis. Each period was one month and there were a total of 178 observable periods in the simulation. The graph above shows that the Sungarden Hedged Dividend™ Index significantly outperformed the S&P 500 on a period-to-period basis. 

 

Generally, a 4% annual withdrawal rate from a retiree’s assets is considered to be enough to avoid the retiree outliving their money. As the chart below shows, the index returned at least 4% in over 89% of total periods studied.  In fact, over the total 20 year period, the index returned greater than 8% more frequently than the S&P 500.


Piece it all together and we believe this allocation structure addresses the true concerns of retired and retiring investors much more directly and effectively than the stock/bond paradigm. This is likely something most investors and financial advisors have never been shown, and would not have believed it until they saw the proof.  There it is.

 

 

The index is simply an 80%/20% allocation between two securities. One is a dividend index. Specifically, we used the S&P 500 Dividend Aristocrats Index[i]v.  The S&P 500 Dividend Aristocrats includes members of the S&P 500 that have increased their dividend payments each year for the past 25 years. This was chosen for a few reasons.  It has been in existence for longer than any other dividend index we considered.  It is equally weighted instead of weighted by yield, which we believe reduces bias in the results caused by over-weighting certain stocks in the portfolio.  Also, positions are rebalanced more frequently (quarterly) than many other dividend indexes.

The other part of the SHD™ Index is a mutual fund which aims to move in the exact opposite direction of the S&P 500.  The security used for our simulation is the Rydex Series Trust Inverse S&P 500 (symbol RYURX), formerly known as Rydex Ursa.  Ursa is the Latin word for bear, which is Wall Street’s symbol for declining markets.  While today’s markets offer several ETFs that can accomplish the same objective at a lower internal cost (i.e. fund expense ratio), ETFs have not been around nearly as long as this fund, which was the pioneer of inverse investing for those who choose not to use derivative securities such as options and futures, or short individual stocks.

[i] Indices are unmanaged and investors cannot invest directly in an index. The performance of indices do not account for any fees, commissions or other expenses that would be incurred.  Returns do not include reinvested dividends. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
 
[i]i Indices are unmanaged and investors cannot invest directly in an index. The S&P 500 Dividend Aristocrats measure the performance S&P 500 companies that have increased dividends every year for the last 25 consecutive years and is rebalanced quarterly. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company.
 
[i]ii Past performance is no assurance of future results; investing in equity markets involves risk, you could lose a significant portion or all of your original investment.
 
[i]v Indices are unmanaged and investors cannot invest directly in an index.The S&P 500 Dividend Aristocrats measure the performance S&P 500 companies that have increased dividends every year for the last 25 consecutive years and is rebalanced quarterly. The Index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company.

© Sungarden Investment Management

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