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Dorion-Gray Capital Management® Weekly Commentary August 17, 2015

| August 17, 2015
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After big gains last Monday, U.S. stocks ended the week higher. Oil prices edged up from near six-and-a-half year lows, but weak global demand and oversupply concerns are expected to keep them down. For the week, the Dow rose 0.67 percent to close at 17,477.40. The S&P gained 0.73 percent to finish at 2,091.54 and the NASDAQ climbed 0.09 percent to end the week at 5,048.24.

At the Pump – 

Through Friday, Aug. 7, 2015, the average nationwide price of a gallon of gasoline has dropped or stayed the same for 23 consecutive days, finishing last week at $2.616 a gallon (source: AAA, BTN Research). 

First, But Declining – 

Oil is the world’s leading source of energy (ahead of coal, natural gas and nuclear energy), responsible for 32.6 percent of global energy consumption. However, oil’s share of worldwide energy utilization has declined each and every year for the last 15 years, i.e., 2000-2014 (source: BP Statistical Review of World Energy 2015, BTN Research). 

College Is Expensive - 

Of the 40 million Americans that currently hold student loans, 8 million of the borrowers are in default (source: Bureau of Consumer Financial Protection, BTN Research). 

WEEKLY FOCUS – Does the Four Percent Rule Work Today? 

When counseling investors about drawing down their retirement accounts, advisors historically quoted the four percent rule. The rule was created in 1993 by a registered investment advisor who examined 30-year retirement periods since 1926 and tested different portfolio withdrawal percentages. 

He determined withdrawing 4 percent annually, adjusted for inflation, normally kept funds from running out for 30 years, based on a portfolio with a 60/40 split between large cap stocks and intermediate-term government bonds. Later, he included small cap stocks and changed his recommendation to 4.5 percent, but the original “four percent rule” name stuck. 

For the rule to work optimally, withdrawals primarily consist of interest and dividends – which is why advisors are debating whether the rule needs to be reduced for our times. Things are quite different from when it appeared. The yield on a Treasury bill in 1993 was over 6 percent, and stock returns in the 90s averaged 18.17 percent. 

In typical environments, a well-diversified portfolio with adequate equity exposure is essential for the rule to work well. If too much is allocated to conservative assets like bonds and CDs, recouping subtractions may be unlikely; this is especially true in our low-interest rate environment. Some retirees looking for greater certainty have turned to immediate fixed annuities, deferred income annuities or managed payout funds. 

The rule definitely doesn’t work if retirees don’t track withdrawals accurately or if they “cheat” by making big purchases – even in years when their investments outperform expectations. High inflation during the first years of retirement is another danger; removing too much early on can have a disproportionate impact on a portfolio’s future growth. 

No matter what the markets are currently, it’s important to remember a set withdrawal rate is at best a starting point. Because it’s impossible to predict economic fluctuations or future health challenges, course corrections may be required in days to come. Our office can help you devise an allocation and withdrawal strategy to reduce the risk of asset depletion. 

The Dorion-Gray Team 

Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. A Registered Investment Advisory Firm. Dorion-Gray Capital Management is a Registered Trademark for the 4 Tactical and 9 Strategic model portfolios currently offered by Dorion-Gray Financial Services through Securities America Advisors, Inc. Dorion-Gray Retirement Planning is a trade name of Dorion-Gray Financial Services, Inc. Dorion-Gray Financial Services, Inc. and the Securities America companies are separate, unaffiliated entities. 

© 2013. Dorion-Gray Financial Services, Inc.

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