In our previous post, we discussed that when it comes to retirement planning, one way to eliminate the discomfort of what for many is a painful process is to make sure you have a plan in the first place. Most people don’t and instead focus their efforts are buying certain types of financial products.
In this post, we’ll discuss another important way of reducing the pain of retirement planning.
Dynamic Versus Passive Risk Management
Most folks coming us have a traditional buy and hold investment portfolio that uses a passive approach to risk management know as diversification*. The concept is that by taking my money and spreading risk around by investing in a number of asset classes within a portfolio, when times get rough in the market, some will ‘win’ and some will ‘lose’ but that ultimately, given enough time, you will come out ahead.
In contrast with this approach, dynamic risk management is a strategy that chooses to adjust portfolio weighting, holdings or even exit the market in part or sum-total based on market conditions and what’s best given your goals.
Those who went through the financial crisis starting in 2008 and following can tell you that there was no asset class in which to hide. In fact, I tell people who visit with us for the first time that the number one question I would ask a financial advisor during an exploratory evaluation is how their portfolios performed during the financial crisis.
In fairness, did the market recover? Yes! However, that only matters if you weren’t the person retiring in 2008. That is, you had time to recover. We have known many that had to postpone retirement for a number of years before coming to us due to their losses in 2008. Perhaps now your investment horizon is on a much shorter leash. My point is that no one knows when the next correction/bear market will happen. I can tell you that we are well beyond what is on average a seven-year bull run in the market and we are long overdue for a bear-market correction and cycle shift.
Maybe you’ve come to believe that most of your money must be in the market to have any chance of retiring or staying retired with any dignity. Have you bought into the media dribble that says you must accept the pain of the roller coaster-like stock market and that you should just “hang in there”? The truth is, dynamic risk management offers a different way to invest that takes a more proactive and defensive approach.
Alternatives to investment portfolios, such as fixed index annuities,** rental real estate, and other such assets can help manage your market volatility exposure, work well along-side your investments and augment your overall investment, tax and income plan.
Obviously, you want to make sure you have gone over the positives and negatives with your planner as well as educate yourself on these different areas and how they may or may not be helpful to your long-range goals. However, stable income sources in many cases are much more attractive to my retiring clients than rate of return options. Over 20 years of our firm’s experience has proven to me that the only people who should always be 100-percent in the stock market are those who simply MUST (or so they think) or who can afford to lose.
If you feel like that hound dog in our story in the first post and you’re ‘yelping’ but not moving off the nail, give us a call or email me to schedule your complimentary consultation. We’ll do the analysis for you, give you a second opinion on your current financial situation and make helpful, common-sense recommendations on how YOU can get off the nail and get clear direction for your retirement.
* Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
** Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. Withdrawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.