Financial planners may make broad assumptions when building a retirement plan for their clients. This exercise is intended to show one danger in making a blind, general assumption when designing a retirement plan.

On the attached Excel worksheet, you are presented with three scenarios for a $1,000,000 portfolio where your client annually liquidates $50,000 for their retirement needs. Each portfolio has annual investment returns of 6.76% and the following portfolio volatility (as measured by standard deviation):

• Base Portfolio - 0.0% standard deviation.
• Portfolio A and Portfolio B - 12.8% standard deviation.

Your Assignment: Each of these three portfolios hold the same investments. What is different is the timing of market conditions (volatility) for Portfolio A and Portfolio B; the Base Portfolio is assuming no volatility. Notice that Portfolio A and B have the same average annual returns and volatility (in fact, they are reverse mirror images of each other), but they have dramatically different results for your retiring client.

Critically compare Portfolio A and Portfolio B. As a retirement planning consultant, what conclusions can you draw from your comparison? Is there a danger in using the Base Portfolio when designing a retirement plan for your client?

Please note: I am not asking you to identify which is the best portfolio. Instead, I am asking you to comment on how volatility affects these three portfolios.