Three Risks of Relying on the S&P 500 in Retirement Planning
For the past 15 years, investors have been rewarded for doing one thing well: owning the S&P 500. Cap-weighted, growth-heavy portfolios dominated returns and reinforced expectations that strong recent performance would persist. The risk is not what those portfolios delivered, but what investors now assume they will deliver next, and how those assumptions hold up once the objective shifts from beating a benchmark to funding retirement income.
When success is defined by generating consistent, absolute returns rather than relative outperformance, the trade-offs change. Drawdowns matter more, volatility becomes asymmetric, and the order of returns can overwhelm long-term averages, particularly once withdrawals begin.
Using rolling 15-year data across major US equity styles, this analysis addresses three practical questions that matter for retirement outcomes:
- How do trailing returns influence future return expectations?
- How often do different portfolio designs meet an 8% long-term return target?
- How do withdrawals affect drawdown risk once investors shift from accumulation to spending?
Using rolling 15-year data across major US equity styles, this analysis addresses three practical questions that matter for retirement outcomes: How do trailing returns influence future return expectations? How often do different portfolio designs meet an 8% long-term return target? And, How do withdrawals affect drawdown risk once investors shift from accumulation to spending?
1. Trailing Returns and Forward Expectations
One of the hardest habits for investors to break is assuming that recent performance will continue, even when “recent” means a decade or more.
That may sound discouraging for investors in broad market passive or growth-oriented portfolios, but history has also shown a better outcome for strategies that emphasized diversification or valuation discipline, such as equal-weight, value, or defensive approaches. For these portfolios, looking back on the last 15 years has historically had little bearing on what the next 15 would bring. Even after strong periods, diversified, value-focused, or defensive quality-oriented styles did not experience the same sharp drop-off in returns that cap-weighted or growth investors often faced.
One potential cause of this divergence is portfolio construction. Cap-weighted and growth portfolios systematically increased exposure to recent winners, magnifying returns during strong periods while embedding risks that only surfaced during market stress. By contrast, diversified, value-focused, or defensive quality-oriented portfolios relied less on multiple expansion and more on fundamental drivers, while systematic rebalancing trimmed winners and added to laggards. These structural features enforced valuation discipline over time and helped mitigate the boom-bust pattern that historically plagued concentrated growth exposures.
The data confirmed this intuition. As illustrated in Figures 1 to 7, rolling 15-year analysis showed a strong inverse relationship between trailing and forward returns for cap-weighted and growth portfolios. Diversified, value-focused, or defensive quality-oriented styles, on the other hand, exhibited muted cyclicality. In other words, the portfolios that looked safest based on strong trailing performance carried the greatest forward risk, and those that appeared “boring” often delivered more stable outcomes across full cycles.
Figure 1: The Next 15 Years: Rethinking Equity Style Risk.
| Portfolio | Trailing 15‑Year Return | Estimated Next 15‑Year Return | Median 15‑Year Return | R² (Trailing vs. Forward) |
| Top 500 Growth | 17.8% | 6.1% | 11.4% | .79 |
| Top 500 Cap Weighted | 14.2% | 8.3% | 10.5% | .74 |
| Top 500 Equal Weighted | 12.3% | 11.7% | 11.7% | .54 |
| Top 500 Value | 12.9% | 14.5% | 13.3% | .47 |
| Top 500 Low Vol VMQ | 12.1% | 13.9% | 12.9% | .28 |
| Top 500 Low Vol | 11.5% | 11.1% | 10.3% | .51 |
Disclosures: Past performance is no guarantee of future results. All the returns in the chart above are in reference to unmanaged, hypothetical security groupings created exclusively for analytical purposes. These are hypothetical styles based on describing characteristics. Please see appendix for definitions and citations.
Figure 2: Growth’s Next 15 Years May Not Look like the Last 15 Years.
Figure 3: Market Cap-Weighting’s Next 15 Years May Not Look like the Last 15 Years.
Figure 4: Equal Weight’s Last 15 Years Have Been Consistent With Long‑Term Norm.
Figure 5: Value’s Last 15 Years: Right in Line With Its Long‑Term Return Profile.
Figure 6: Low Vol VMQ’s Forward Prospects Look More Constructive.
Figure 7: Low Vol’s Next 15 Years May Look Like the Last 15 Years.
For cap-weighted and growth portfolios, the regression lines showed a pronounced negative slope: periods of exceptional trailing returns were typically followed by much lower forward returns. For example, over the last 15 years the Top 500 Growth delivered 17.8%, but the forward 15-year expectation is just 6.1%. This pattern is consistent with valuation mean reversion and the cyclicality of market leadership.
2. Benchmark Performance vs. Your Retirement Target
This section analyzes rolling 15-year returns for major US equity styles with a focus on the practical implications for retirement savers. Their success does not depend on beating the S&P 500, but rather, achieving consistent, absolute returns required to hit retirement savings targets.
Most retirement plans rely on a return from equities of about 8% per year, a number baked into many glide paths, actuarial models, and retirement calculators. That assumption is critical because it determines whether portfolios grow enough to fund future withdrawals.
Overshooting that target, thanks to strong markets or product outperformance, is a welcomed bonus. But undershooting it may be catastrophic. It may mean delaying retirement, at the cost of precious time, or accepting a lower standard of living for decades.
On the surface, the average cap-weighted or growth portfolio return looked very attractive, even across decades that included both bull and bear markets. But a closer look revealed something troubling, in nearly a third of the 15-year periods, these portfolios failed to reach the critical 8% annualized return.
By contrast, diversified, value-focused, or defensive quality-oriented portfolios dramatically reduced that risk. In fact, the chance of missing the 8% target dropped to nearly zero for value-focused portfolios, and simple equal-weighted portfolios had only a 15% shortfall risk. While these approaches were less likely to fully capture the best periods (think fewer “home runs”), they have better odds of meeting the goal that mattered most: fully funding a secure retirement.
Figure 8: Market Cap-Weighting Had the Most Sub 8% Returns.
Disclosures: Past performance is no guarantee of future results. All the returns in the chart above are in reference to unmanaged, hypothetical security groupings created exclusively for analytical purposes. These are hypothetical styles based on describing characteristics. Please see appendix for definitions and citations.
3. Withdrawals and the Amplification of Drawdown Risk
When investors shift from saving for retirement to spending in retirement, the arithmetic of portfolio returns undergoes a fundamental transformation. While higher returns on average benefit both savers and spenders, the consequence of weaker periods disproportionately hurt the spender.
During the retirement saving period, investors experience the benefits of dollar‑cost averaging. This is where volatility becomes an ally. The same dollar amount buys more shares in down markets, thus boosting average returns 2%-3% as seen in Figure 10.
But once withdrawals begin, that same volatility becomes a threat as losses are compounded, not repaired. The additional shares sold to provide income during down markets can never be repurchased. Moreover, the strong markets that follow are also less impactful as they are lifting the market value of fewer shares.
This dynamic, sequence-of-returns risk, is always present in retirement planning, but it becomes dramatically more dangerous as withdrawal rates increase.
Stress Testing an 8% Withdrawal Assumption
In recent years, one of the most aggressive examples discussed in the advisor community is an 8% withdrawal benchmark. This 8% rule has often been associated with public figures like Dave Ramsey who claim that equity investors can sustainably withdraw 8% annually because long-term stock returns average 10% to 12%, thus providing an income of 8% plus a 2% to 4% inflation buffer.
Results: Why Timing Luck Dominates Cap-Weighted and Growth Outcomes
The data revealed that timing luck becomes the single most important determinant of outcomes when retirees are withdrawing from cap-weighted and growth portfolios. High average historical returns create an illusion that high withdrawal rates can be safe. But retiring before a weak market may devastate a cap-weighted or growth portfolio, sometimes permanently.
The good news is that luck historically has only a very minor impact on a diversified portfolio, one that is focused on diversification, valuation, or defensive quality.
The Methodology: 8% withdrawals Adjusted for Inflation
The 8% of the portfolio value that is distributed monthly is compared to the initial $160,000 target (8% from a $2 million portfolio). To determine success or failure, we implemented a +/- 2% ($40,000) buffer in Figure 9, which means annual distributions of less than $120,000 were considered failures ($160,000 – $40,000).
Diversified, value-focused, and defensive quality-oriented portfolios failed to sustain distributions of at least 6% (>= $120,000) of their starting balance only 2% to 3% of the time (inflation adjusted over 15-year rolling periods since 1965).
By contrast, the standard cap‑weighted broad-market portfolio was up to eight times more likely to fail in generating at least 6% income of the starting balance with a failure rate of 17% (inflation adjusted over 15-year rolling periods since 1965).
Because the cap-weighted portfolio failed more often, natural intuition may lead you to believe that a cap-weighted portfolio also more frequently delivered above the target range. Think: more strikeouts should lead to more home runs. Data revealed the opposite. Not only were the diversified, value-focused, or defensive quality-oriented portfolios less likely to miss on the downside, they were also more likely to provide a year above the targeted range (>$200,000).
This gap is not theoretical. It reflects a real, structural difference in how portfolio designs have historically responded to extended market weakness. Growth and cap‑weighted portfolios have been far more exposed to long stretches of suppressed returns, while diversified, value-focused, or defensive quality-oriented approaches have distributed risk more evenly across market environments.
The conclusion therefore is that although cap-weighted and growth portfolio may deliver the best individual years (way above the 8% goal/plan), the diversified, value-focused, or defensive quality-oriented portfolios more reliably delivered the 6% to 10% income that clients budgeted from their equities.
A Real‑World Stress Test: 2000–2015
The early‑2000s tech collapse followed by the Global Financial Crisis was one of the most challenging 15‑year windows in modern market history. The broad market return was a paltry 4% with two drawdowns of 50% or more. This is notable because there have only been four 50% drawdowns in the past 100 years. This period provided a clear, real-world example of how divergent the saver and the spender experiences can become from the averages in Figure 10:
The saver’s return jumped from 4% to 8%, simply because contributions were continually added throughout the downturns.
The spender, taking an 8% withdrawal (adjusted for inflation), depleted roughly half of the portfolio, effectively earning –4% annually after accounting for withdrawals.
This period illustrated the fundamental flaw in assuming that 10% to 12% long-term stock returns could support an 8% withdrawal rate: Averages didn’t matter when sequencing risk was extreme. The order of returns mattered far more than the magnitude.
Figure 9: Market Cap-Weighted Failed 17% of the Time.
Disclosures: Past performance is no guarantee of future results. All the returns in the chart above are in reference to unmanaged, hypothetical security groupings created exclusively for analytical purposes. These are hypothetical styles based on describing characteristics. Please see appendix for definitions and citations. Date Range: 12/31/1964 – 12/31/2025.
Figure 10: Accumulators Benefited From Market Volatility.
Disclosures: Past performance is no guarantee of future results. All the returns in the chart above are in reference to unmanaged, hypothetical security groupings created exclusively for analytical purposes. These are hypothetical styles based on describing characteristics. Please see appendix for definitions and citations. Date Range: 12/31/1964 – 12/31/2025.
Broader Implications: The Risks of Relying on Market Cap-Weighted Portfolios
History shows that periods following concentrated, growth‑led surges often deliver disappointing future returns for the Cap-Weighted S&P 500 or growth investor. Portfolios built with broader diversification, valuation sensitivity, lower-volatility, and quality characteristics delivered more stable, goal-aligned outcomes, regardless of the previous period’s performance. These more risk-managed portfolio designs may not have captured the highest highs, but they reduced the risk of shortfalls during the transition from accumulation to withdrawals, when consistency mattered more than outperformance.
For portfolios in the accumulation phase, the implication is clear: Shift the focus from chasing relative performance to designing portfolios that maximize the probability of meeting long-term retirement income objectives.
For portfolios supporting retirement income, this stabilization of outcomes becomes even more critical, as diversified, value-focused, or defensive quality-oriented portfolios missed the income goal of at least 6% in only 2% to 3% of historical periods, compared with a 17% failure rate for cap-weighted or growth portfolios.
Limitations and Future Research
The analysis is based on rolling monthly 15-year windows from 1965 to 2025 and could be improved in future research using moment-match parametric Monte Carlo simulations or bootstrapping from observed returns.
Future research could also incorporate longer time horizons, multi-factor portfolios, additional asset classes, dynamic withdrawal policies, and regime-based risk management techniques.
Distributions were set as a percentage of the portfolio as opposed to a hard initial dollar amount, both practical and behaviorally driven. However, there are many other acceptable and commonly used ways to take distributions, like the most common 4% starting amount, then linearly adjusted for inflation (CPI). Future research could investigate how various portfolio designs affect the different withdrawal methods.
Appendix & Citations
Data Source: Compustat.
Calculation: Hartford Equity Modeling Platform.
U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPILFESL, January 9, 2026.
Style Definitions:
Top 500 Value: US top 500 stocks top 30% based on composite value as defined by multiple equally weighted valuation metrics to arrive at an aggregated valuation metric. Valuation metrics include: P/E, EBITDA/EV, operating cash flow/EV, revenue/EV, and B/P Yield (used only in financials and real estate as a replacement to EBITDA/EV), then cap weighted.
Top 500 Low Volatility: US Top 500 Stocks top 30% based on a composite volatility score defined by multiple equality weighted volatility metrics to arrive at an aggregated volatility metric. Volatility metrics include three-year weekly beta and six-month daily standard deviation, then cap weighted.
Top 500 Low Volatility VMQ: US Top 500 Stocks top 50% based on a composite volatility score defined by multiple equality weighted volatility metrics to arrive at an aggregated volatility metric. Volatility metrics include three-year weekly beta and six-month daily standard deviation, then cap weighted. Then top 50% based on combined score of 50% value, 30% momentum and 20% quality. Combined scores for financial and real estate sector companies are assigned weightings of 65% Value and 35% Momentum. Composite value as defined by multiple equally weighted valuation metrics to arrive at an aggregated valuation metric. Valuation metrics include: P/E, EBITDA/EV, operating cash flow/EV, revenue/EV, and B/P Yield (used only in financials and real estate as a replacement to EBITDA/EV), then cap weighted. Composite momentum equally weights Last 12 ex-1 monthly returns and last 6 ex-1 monthly returns to arrive at an aggregated momentum metric. Composite quality uses gross profitability to total assets.
Top 500 Growth: US top 500 stocks top 30% based on five years sales growth, then cap weighted.
Top 500 Cap Weighted: US Top 500 stocks, cap weighted.
Top 500 Equal Weighted: US Top 500 stocks, equal weighted.
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