Investing During Retirement – Buy and Hold or Active Management?

Are you planning to invest during retirement? If so, you’re probably debating whether you should choose the buy and hold investment strategy or active management. There are pros and cons to both, and in this post, we’ll take you through active management vs. passive management to help you make the best decision for your circumstances and your retirement plan.

We’ll also discuss investing for retirement in volatile markets, which is extremely important for anyone getting closer to retirement or already retired.

It’s vital to consider how you invest for retirement in volatile markets because of risk tolerance. As you edge closer to retirement, you’ll likely have less risk tolerance. You’ve probably heard that you should increase the bonds in your portfolio risk to produce above-average returns or decrease the stocks in your portfolio. Terms like “60/40” tend to arise and advice to ensure you are as diversified as possible. You might be in what’s called a “conservative portfolio,” and all of these things could potentially give you a false sense of security.

We want to help clear up the confusion around buy and hold and active management so that you can invest confidently during retirement.

What is the buy and hold investment strategy?

In terms of investing, buy and hold is a relatively simple way to invest. Buy and hold is a long-term passive investment strategy that involves an investor buying stocks and holding them for a prolonged period despite market fluctuations.

When you first meet with an advisor, whether in-person or online, one of the first things they do is gauge your risk tolerance. From there, the advisor sets up a portfolio mainly based on your risk tolerance score. In buy and hold asset allocation, the primary purpose is to construct a diversified portfolio that aligns with your risk tolerance score. You may be put in a 60/40 portfolio, something like 60% exposure to equity and 40% exposure to the fixed income or the bond arena.

They will then break the equities down into different sections within the 60%. These sections may include aggressive growth stocks, mid-cap, small-cap, international, and other pieces of the pie in various sectors. Once the portfolio is set up, it stays there, and you hold it. You rise and fall with the markets. Ultimately, buy and hold is constructing a portfolio, buying into it, and letting it work. It could take five, ten, or 20 years to make money.

The problem with that is not everyone has 20 years to make back any losses that may have occurred. That’s the main downside to the buy and hold investment strategy. It’s passive, and you have to sit back and “roll with the punches.”

What is active management?

With a buy and hold 60/40 portfolio, your money goes up and down with the market. So, if you have one million dollars in a portfolio and you’re down 30%, you’ve lost $300,000. That’s a lot of money, and it wouldn’t be such an issue if you’re still growing. However, if you take continuous withdrawals from that same account, you’ve got a big problem.

So, how can you protect yourself from significant downturns?

We believe that the answer lies with active management. The ability to actively manage your portfolio is so important. The Wall Street industry works from a buy-side bias. If you approach a mutual fund company and ask what the best time is to put your money to work, they will immediately shoot back with “right now is the best time.” Of course, we know that isn’t true. Now isn’t always the best time to buy. There is the right time to buy, and the right time to sell, which is how we navigate the market.

With active management, your investment portfolio’s performance is tracked and monitored by either a professional money manager or a team of professionals. This is what we do for our clients, making strategic and specific investments to outperform the overall market, investment benchmark index, or target return.

How to invest and deal with volatile markets?

Volatile markets could be anything from the President’s election to a pandemic or a breakdown within a bubble (such as the housing bubble breakdown of 2008).

While investing for retirement in a volatile market, you must have a pre-determined discipline. Essentially, the discipline is that whenever the market is in demand, we will participate. But, when the market is not in demand, we will not participate.

You mustn’t confuse this discipline with market timing because they are two different things. Instead, we gauge the entire scope of what the market is doing before making any decisions. We identify who the leaders are in various sectors and sections within the bond, fixed income world, and cash. For example, when the market is booming, we want to be invested in the leaders of the equity world. However, we also consider what is happening in the market during turbulent times. We are not fixed to one leader over another. We move if we believe it is the right decision. We focus on the market’s ultimate direction and track the numbers to take the guesswork out of the equation.

Why you should protect yourself from significant downturns

To put the importance of protecting yourself from significant downturns into perspective, let’s imagine that we are helping you to construct your retirement plan. We run various rates of return, and let’s say you earn 6% or 7%. If you have been a great saver, and we told you, “If you can earn 6%, you’re going to have more money than you can spend in your lifetime.” You would probably be pretty happy to hear that news. But what if you didn’t quite make it to 6%? What if you earned 5.5%?

Fortunately, earning a half percent less is not going to destroy your retirement plan. On the other hand, if you lose 50% of your money, that kind of loss can wreck your retirement plan, especially if you end up taking money out.

We use this analogy all the time. The market is like an elevator when it falls but going back up is like riding an escalator. Making it back to where you were before the fall is a much longer process, which is why you need to have protection in place.

Why active management is the best investment strategy in volatile markets

One of the best things about active management is that when something like an economic crisis or a global pandemic happens, actions are taken. When the market falls, you have two strategies to choose from. You can take a passive approach and ride the markets down and hope that things will turn around, and they’ll come back up again. Or, you can also choose the active strategy that limits how much you are willing to lose in a challenging market.

Volatility can trigger markets to fall. Therefore, leaders who once reigned on top fall too, and new leaders take their place. We make those shifts. For example, 2020 started good. But once the pandemic hit and things escalated in March, the markets fell by 32%. We let our clients know that there was no good place to be, in all honesty. So, we shifted to cash, and in doing so, we avoided a significant amount of that fall.

When the markets improved again, we got back in. This is what active management can do for you during retirement and when unexpected events like a global pandemic happen.

Since we had a pre-determined action plan for when catastrophe hits and communicated with our clients throughout the process, we could navigate accordingly and ensure that our clients were not hit with huge losses.

There are many important factors to consider when retirement planning, so where should you start?

Well, we have created a mini video series on the 4 Steps to Secure Your Retirement to help you better prepare and plan for retirement. You can access this amazing video series for free right here.