Through 2014, what we know about the S&P 500 is that roughly 46.7% of the time it will return 10% or higher, while 28.9% of the time it will yield 0% or negative returns,1 which leaves approximately a 24.2% probability of landing somewhere between 0 and 10%. All of these fancy probabilities basically tell you one thing: Every four years, your inflation-adjusted average return could look like the following: 8%, 8%, 0%, 8%. Very simple math will show an overall return of 24% over each consecutive four-year period.

In this hypothetical example, Person A (we’ll call him Adam) is a firm believer in passively indexing oneself in hopes of gaining the maximum amount of efficiency while keeping things simple. Adam chooses to use an S&P 500 index fund during his accumulation years as his investment methodology because he believes that it will provide sufficient diversification to meet his needs.

Person B (we’ll call him Bob) believes that a more actively diversified approach will better suit his needs during his accumulation years. Bob chooses an investment method that produces a lower but more consistent average return that looks like this: 6%, 6%, 6%, 6%. Very simple math will again show an overall return of 24% over each consecutive four-year period.

Both Adam and Bob have achieved the same return with two different investment approaches; so, why dissect the topic any further? The answer is because the accumulation years and the retirement distribution years have completely different characteristics. Let’s now look at both Adam and Bob as they begin to withdraw the exact same amount of money from the exact same amount of investment dollars.

Adam has $1,000,000 and wishes to withdraw $50,000 per year using his passive approach indexed against the S&P 500 with the returns listed above. In year one, Adam makes 8% and withdraws $50,000 at the end of the year, which brings the investment to $1,030,000. Year two, Adam makes 8% and withdraws $50,000 at the end of the year, which brings the investment to $1,062,400. In year three, Adam makes 0% and withdraws $50,000 at the end of the year, which brings the investment to $1,012,400. (Herein lies the problem with inconsistent returns regarding compounding interest.) Finally, in year four, Adam makes 8% and withdraws $50,000 at the end of the year, which brings the investment to $1,043,392.

Bob also has $1,000,000 and wishes to withdraw the same $50,000 per year using the lower-returning but more consistent and actively diversified approach with the returns listed above. During year one, Bob makes 6% and withdraws $50,000 at the end of the year, which brings the investment to $1,010,000. In year two, Bob makes 6% and withdraws $50,000 at the end of the year, which brings the investment to $1,020,600. Year three, Bob makes 6% and withdraws $50,000 at the end of the year, which brings the investment to $1,031,836. In year four, Bob makes 6% and withdraws $50,000 at the end of the year, which brings the investment to $1,043,746.

The point is this: While both investments grew at the exact same overall rate during the accumulation phase (24% over a four-year period), the distribution phase painted a different picture. We all want our money to work as hard for us as we did for it, right?

There are opportunities inside many investment or insurance products that will allow the opportunity to enhance potential returns without jeopardizing the risk aspect. Diversification is a cornerstone of all investment philosophies, but simple is just simply not always the best approach.