One of the biggest concerns I hear from investment clients is to have protection against large losses of principal. Over the last twelve months, we have picked up several new clients who have just kept their money in cash because of the volatility of the market. They are waiting for things to “settle down.” My response to them (and to those reading this newsletter) is that volatility is here to stay and will likely get worse in the coming years! It is the “new normal.”
Recently, a married couple in their mid-70s sold a shopping mall in San Diego and wanted to invest the sale proceeds in a “safe” manner so they could comfortably retire. They were worried about the volatility in the stock market and were not sure what to do. After reviewing their situation, we were able to assist them in selecting two investment funds – both of which have automatic protections against inevitable market downswings. Getting reliable income and returns from your investments while having a safety valve to protect against stock market nosedives . . . “Imagine That™!“
Today’s retirement planning looks very different from that of several decades ago. There is no single reason why traditional investment strategies no longer work or perform less successfully than before. A complex set of factors – from market volatility to global economic interdependence, geopolitical turmoil, and more – all play a role in wreaking havoc on retirement investment plans.
Here are some of the key issues facing investors today and why traditional investment strategies are inadequate for these new market realities:
- Market Volatility: Theories abound regarding the causes of the increased market volatility – from:
- The threat of terrorism and violence
- Globalization and interdependence of businesses and industries
- Tariffs between global trading partners (notably the U.S. and China)
- Civil and political unrest
- Economic uncertainty (e.g., Brexit)
- Increased computerized program trading
- The simple fact that more people are trading in the markets today
As well, since individuals make decisions based mostly upon fear or greed, there is also a great deal of emotional buying and selling, which in turn, reinforces dramatic price and market swings
- Longevity: Compounding the saving-for-retirement challenge, people are living longer today, which means their money must last longer, too.
- In 1935 (when Social Security was signed into law), the average life expectancy for men was just 59.9 and 63.9 years for women
- By 2010, the latest available data, the life expectancy of men was 76.2 and 81.1 for women (an increase of more than 16 years)
- Rising Healthcare Costs: The upward spiraling cost of healthcare increases the cost of insurance as well as out-of-pocket costs. According to the Centers for Disease Control:
- In 2000, Americans spent an average of $4,857/year for out-of-pocket healthcare costs
- By 2014, the per capita average nearly doubled to $9,523
An even greater concern is saving for the estimated healthcare expenses which will be incurred after retirement. According to statistics from the Employee Benefit Research Institute, in 2019, a 65-year-old couple would need to set aside $307,000 to give them a 90% chance of having enough money saved to cover premiums and prescription drug expenses over their lifetimes
- The New Retirement Lifestyle: Back when our grandparents retired, things were a lot different. Their need for cash declined because retirement in those days usually meant quietly living out their last few remaining years without having to work. Not anymore. The Baby Boomer generation has redefined the meaning of retirement. Today’s retirees are more active than ever, engaged in every imaginable pastime. As a result, it now takes a lot more money to be “retired”
- Poor Diversification Strategy: In the past, traditional investment strategy offered a diversity of investments, such as stocks, bonds, mutual funds, real estate holdings and commodities. But the new market reality is a very different animal. Our global, interwoven marketplace blurs the traditional lines of diversification among industries, companies, sectors of the economy, and even other countries. For example, nearly half (47%) of the sales of the S&P 500 companies are derived from foreign countries (Cook, C. (2017). Slash Your Retirement Risk. Wayne, NJ: Career Press). This interdependence has seriously skewed the models investors and their advisors have historically used to add “diversification” to retirement portfolios. The diversification has significantly eroded in this new global economy we live in
- The Inflation Effect: Back in the 1980s and 1990s, one could earn double-digit returns in certificates of deposit and treasuries. For the last decade and in the foreseeable future we live in a very low interest rate environment. It barely, if at all, keeps up with inflation. Parking your money in what was traditionally considered safe vehicles (e.g., corporate bonds) is a losing proposition, unless you need quick access to cash
- Market Conditions Five Years Before and After You Retire: The timing of a loss can have a dramatic impact on the reliability of income in retirement. A loss during the retirement risk zone – five years before retirement and five years after – could dramatically increase the probability your money will run out during your lifetime, especially if you are regularly withdrawing money from your nest egg for living and other expenses. Even small losses can sometimes add up to insurmountable ones, and make portfolio recovery especially difficult, if not impossible
- Periodic Rebalancing: Typical portfolio risk management tries to manage risk and limit losses through asset allocation with periodic rebalancing. That is, they spread a portfolio’s holdings over various asset classes:
- Market capitalization
- Different sectors
- Types of investments
- A combination of the above
It may work to help insulate a portfolio from diversifiable risk – risk that can be managed by allocating assets across different industries or sectors of the economy. It does not, however, inoculate a portfolio from systematic or undiversifiable risk. Those would be things like interest rate swings, recessions, wars, and other similar events.
New Investment Strategies to the Rescue!
For all these reasons and more, traditional investment strategies often fail. Newer strategies have come about, fortunately, which can create a more reliable, less stressful retirement, by:
- Smoothing out portfolio fluctuations that occur because of market volatility
- Protecting the value of your portfolio from large losses through a “trailing stop-loss”
- Investing across all 11 sectors of the U. S. economy vs. traditional models which usually do not
- Creating a stable stream of income for life, protected against wild swings in value
- Minimizing fees and costs to maximize portfolio gains and income distributions
- Having an ability to capitalize on market upswings to generate growth
- Diversifying your portfolio in a “non-correlated” fashion to the S&P 500 Index. Just because the S & P index goes down, your investment does not necessarily go down, too
- Growing your principal significantly over time by not having dramatic losses to overcome
If you are an exceptional entrepreneur, executive, professional or franchisee looking for a trusted advisor with over 30 years’ experience, contact our office today for a free 15-minute “get acquainted call.” Let’s find out more about your situation and how we can best serve your needs. We can help you avoid outdated investment strategies and have peace of mind . . .
Imagine That™! is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families. To be added to our monthly list, please click here.
Written by R. J. Kelly – October 2019
With grateful acknowledgment to Chris Cook, and his book, Slash Your Retirement Risk