As some of you may know Aaron is our resident baseball fanatic. Earlier this month baseball celebrated a fictitious holiday, Bobby Bonilla day. Bobby Bonilla day is where baseball fans recognize the annual payment of $1,193,248.20 to Bonilla from the Mets. If you’re confused on what this means, or why it matters read on.
After a subpar season in 1999 the Mets released Bonilla, but they still owed him the 5.9 million dollars remaining on his contract. In order to free that money up for other uses the Mets and Bonilla agreed to defer payment of his $5.9 million in exchange for 25 payments of $1,193,248.20 starting in 2011. For Bobby, this meant he had an annualized return of 8% on his money in order to accumulate the $29,831,205 needed to for those yearly installments. A lot of people think that if Bobby had taken his $5.9 million and invested it and he would have had considerably more money today. A bird in the hand is worth two in the bush, right? Well… not always; it’s about timing and perspective. Sure, by today’s standards 8% might not sound great next to the S&P’s return of 11.74% last year but for Bobby it paints a different picture.
Had Bobby taken his $5.9 million and invested it in the S&P he would have earned 1.4% annualized over the first 10 years meaning his $5.9 million would have grown to $6.8 million. In order to get that $6.8 million to grow enough to fund his $1.193 million-dollar payment, Bobby would have had to annualized 17.3% over the next 25 years. Now I know what you’re thinking, of course he only returned 1.4%, the 2008 financial crisis was smack dab in the middle. If we look at it objectively we know that 2008 really impacts the numbers negatively, but if we expand our time frame from 2000 until 2016 the S&P has still only annualized 4.5% putting Bobby almost 50% behind his 8% target.
What can we take away from this? The first is a bird in the hand isn’t guaranteed to better than two in the bush. Since no one’s financial situation is the same your current and future needs can dramatically change your outlook going forward. Secondly and more importantly have perspective and realistic expectations for your portfolio. Often times returns can sound poor compared to double digits but keep in mind over the last 90 years the average annualize return of the S&P 500 is 9.8%. Sometimes taking a lower return in order to minimize down side or even guarantee a return can be critical to your financial future.