“The cosmos is within us. We are made of star-stuff. We are a way for the universe to know itself.”

                                                -Carl Sagan

Betelgeuse is the 11 ^th brightest star in the nighttime sky and prominently makes up the left shoulder of the constellation Orion, the most recognizable constellation in the Northern Hemisphere. So important was Orion to ancient cultures, some believe the Giza pyramid complex is laid out to mimic Orion's pattern in the sky. Betelgeuse (which loosely translated means the armpit of the central one in Arabic) looks red to the naked eye and is in fact a red giant star. Betelgeuse was never really in balance, it was always too big, but at least for the first eight million years or so of its life the energy being produced by all those hydrogen atoms fusing into helium atoms counteracted the forces of gravity of this super-massive ball of gas – keeping it shining as a yellow star. Then sometime 40,000-100,000 years ago that balance was tipped, the amount of helium in the star outweighed the hydrogen so it began to burn with more energy (and a red hue) counteracting the gravitational forces and expanding its size substantially. If Betelgeuse replaced the sun in our solar system the edges of the star would touch the orbit of Jupiter (and needless to say we would not be here to see it.) Recently Betelgeuse has begun to dim, the star is known to have variations in brightness but this is a larger variant than normal. It’s possible this is the beginning of the next phase in Betelgeuse’s life cycle; when the helium is mostly gone and very quickly the helium and some of the remaining hydrogen atoms begin fusing into denser gases, then into heavier and heavier elements potentially forming all the natural elements we know. When this happens the energy released will push away and super-heat the remaining gases while the metallic center of the star, then without fusion energy, collapses in on itself. Those glowing gases are what we call a supernova and Betelgeuse is large enough and close enough to earth that the glow from those super-heated gases will become at least the third brightest object in the sky after our sun and the full moon, and could even rival the full moon in brightness. This amazing celestial event would cast shadows at night, and be visible during the day for at least a year – not just bright but potentially multi-colored as well. It would be the most amazing astronomical event of our lifetimes, and because it is so relatively close to earth, the supernova of Betelgeuse could be the most brilliant seen in all of human history. 

Meanwhile our sun goes on burning like it has for the last four and a half billion years and as it is expected to continue for the next four billion or so. Our star is boring and average, but it has staying power. There is something to be said for balance, even our star will someday go through a much less dramatic red giant phase but it will do so after 9-10 billion years of life, while out of balance Betelgeuse will burn hotter, and bigger and brighter but from formation to supernova it’s entire life cycle will last at best 10 Million years – 1,000 times shorter than our sun. The S&P 500 has been burning like a red giant for the last decade, beating almost every other stock market average on earth and certainly beating out any other major asset class you may care to invest it. Dig deeper and you’ll find not just the S&P 500, but a handful of stocks within it have led this charge. Coming off a year where that index went up more than 30% you may be wondering why you would stay in a balanced portfolio that holds those other, under performing assets? I guess we all forget when the markets went supernova in the fall of 2008? Let’s take a deeper look.

I'm going to be discussing some hypothetical illustrations, these illustrations use real numbers, but they don't tell the whole story. First, they don't include any fees and those fees are sure to lower your return on one hand - but for simplicity sake these numbers also don't include other asset classes, like international equities, small cap stocks and others than can both increase your overall return and lower the volatility of the portfolio on the other. They system I use to illustrate these examples isn't as smart as I'd like it to be , when it takes withdrawals it takes them from across the portfolio in proportion to each holding, which wouldn't always be the best place. So for the sake of this argument we’re going to use an investment that tries to replicate the performance of the S&P 500 to represent all equities, an investment that tries to replicate the performance of the Bloomberg Barclays U.S. aggregate bond average to represent all bonds, and a cash account earning 0.5% to represent all cash. (You can't invest directly in an index, so this is the best way I'm allowed to illustrate this concept.) If you had put $100,000 in the S&P 500 proxy on January 1, 2010 at the end of last year it would have grown to approximately $356.700 – an average return of about 13.50%. If you had put $100,000 in a more balanced portfolio made up of 60% the S&P 500 proxy, 35% bond index proxy and 5% cash, re-balanced twice per year, it would have grown to approximately $239.600 – an average return of about 9.10%. Even if we add in withdrawals, say in the amount of $5,000 per year, our stock only portfolio would still be worth $254,450 while our more diversified and re-balanced portfolio would be worth $160.800. Ten years is certainly a long time, but over the course of our lives or even our retirements we hope it isn’t forever. Just like Betelgeuse, the U.S. stock market shined brighter and gave off more heat than our old, boring, more diversified portfolios. 

What if we look at things from a longer perspective? Instead of the last ten years, we stretch things back over the past twenty. When you do that our $100,000 all in stocks would have grown at about 6.30% to approximately $340,000 (yes, less than over the past ten years because the markets were actually negative in the first decade of this century.) Our diversified portfolio would have grown at about 5.65% to approximately $300,185 – so still not quite equal to all stocks but we’re getting closer and during that twenty years the all stock portfolio would at one point have been worth only $54,000, while the balanced portfolio never dropped below $87,000.  Now what happens if we take withdrawals over that twenty years? Back to our examples, $100,000 all in stock starting in the year 2000 with a $5,000 per year withdrawal would have been worth only about $30,900 at the end of last year. A more diversified and balanced portfolio would have also lost money, since a 5% withdrawal rate is unsustainable long-term, but you would still have had approximately $72,650 at the end of last year – in both cases you put in $100,000 and took out $100,000 but the more diversified and re-balanced portfolio was better able to maintain that income even though it had a lower overall rate of return. What matters most when withdrawals begin or are about to begin, is the consistency of returns not the absolute level of returns – and over the long run you don’t have to give up much of the latter to get the former if you are well diversified and intelligently re-balance your portfolio.

Betelgeuse could go supernova before this article is published, or anytime between then and 100,000 years from now, but it is going to happen. Stars that burn the brightest go out in a blaze of glory in a relatively short period of time. As spectacular as supernovae may be, we don’t want your investment portfolio to light up the night sky for a few years and then collapse into a black dwarf. We want your portfolios to chug along, providing life sustaining heat and light in long-term, predictable amounts. The longer Betelgeuse shines as a red giant, the closer it gets to that ultimate ending. I wish on you all that you get to see this spectacular event in your lifetimes and looking up at the sky after this cosmic explosion fills you with awe and wonder. When you look at your financial statements; however, we want a much more muted response.

As always call us with any questions or concerns - and, yes, we are still accepting referrals.

This is a hypothetical example and is for illustration purposes only. No specific investments were used in this example, actual results will vary. Past performance is no guarantee of future results.