Hello, YieldAlley readers! In this issue:

🧑‍🧑‍🧒 How to Avoid Outliving Your Retirement Savings? It’s All in the Sequence (Morningstar)

🏝️ J.P. Morgan Guide to Retirement 2025 (J.P. Morgan)

🤖 Can AI Empower Investors? (Financial Planning)

🚘 Tesla investor survey shows 85% believe Elon Musk’s politics are having ‘negative’ or ‘extremely negative’ impact on company (CNBC)

💰 Dividends and Buybacks - Inertia and Me-tooism! (Aswath Damodaran)

"I'll just buy and hold the S&P 500." This straightforward investment approach has gained widespread popularity, especially among index investors. While this strategy has merit, the recent S&P 500's 7.47% decline over the past three months has sparked conversations about historical recovery periods.

When evaluating market performance, looking beyond short-term fluctuations provides essential context. A three-month chart shows recent volatility, but a 30-year perspective reveals that significant downturns often become mere blips in an overall upward trajectory. It's worth noting that the 2000 crash took 7 years to recover, and Japan's market took over a decade to regain previous highs. This historical context offers a useful perspective for investors considering their asset allocation strategy.

For investors with long time horizons, market downturns can represent buying opportunities through dollar-cost averaging. By continuing to invest regularly during market declines, investors can acquire more shares at lower prices, potentially accelerating their personal portfolio's recovery compared to the broader market index.

Investment strategy should be tailored to one's time horizon. Younger investors with decades until retirement can more readily embrace market volatility, while those nearing retirement need to consider their portfolio's resilience to extended downturns.

Temporary market declines may be less concerning for those with retirement 20-30 years away. However, as investors approach retirement or face shorter-term financial goals, the prospect of an extended recovery period becomes increasingly significant.

The traditional approach to retirement planning often starts with heavily stock-weighted portfolios that gradually shift toward bonds as retirement approaches. However, as highlighted in "The 90/10 Portfolio Myth," this conventional wisdom deserves thoughtful reconsideration.

The research by Professor Edward McQuarrie analyzing over two centuries of market data reveals that from 1793 to 1903, stocks and bonds delivered remarkably similar returns, with bonds frequently matching or outperforming stocks. This historical context challenges the assumption that aggressive stock allocations are always optimal for longer time horizons.

The performance of bonds relative to stocks following the 1999 market peak is particularly noteworthy. It took approximately 18 years - until 2017 - for the S&P 500 to finally surpass the Total Bond Index in total returns. This extended period serves as a reminder that recovery times can be longer than many investors anticipate.

While conventional wisdom often suggests aggressive stock allocations for younger investors, the historical performance of the 60/40 portfolio presents an alternative worth considering. Analysis shows this balanced approach has delivered comparable results to more aggressive allocations in about two-thirds of historical periods while taking on significantly less risk.

This isn't to suggest that younger investors should abandon equities, but rather to recognize that meaningful bond allocations might provide valuable stability without necessarily sacrificing long-term returns. The psychological benefit of reduced volatility may also help investors maintain their strategy during market downturns.

As investors approach retirement, the importance of portfolio stability increases significantly. Those nearing retirement should consider higher bond allocations to protect against sequence-of-returns risk.

This approach recognizes that retirees don't have the luxury of waiting through extended recovery periods when they need to make regular withdrawals for living expenses. For these investors, bonds serve as both a stability mechanism and a source of reliable income during market turbulence.

The cautionary perspective on recovery periods doesn't invalidate index investing but rather encourages thoughtful consideration of asset allocation based on individual circumstances. For investors with longer time horizons, a balanced approach may provide a comfortable middle ground between growth potential and stability.

For those closer to retirement or with shorter investment timeframes, the historical evidence supports a more conservative approach with higher bond allocations. This shift toward fixed income becomes increasingly important as the time horizon shortens.

Today's investment landscape presents both challenges and opportunities. Current bond yields are more attractive than they've been in years, potentially increasing their appeal as portfolio components. Meanwhile, stock valuations deserve careful consideration when projecting future returns.

Rather than attempting to predict whether markets will experience extended recovery periods, prudent investors can acknowledge historical precedent while constructing portfolios that align with their personal time horizons and risk tolerance.

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