Investment Portfolio Strategy
Risk is a major concern for people nearing and in retirement. When you’re younger, you can withstand higher risk, and you have time for the economy to correct itself even after a significant downturn.
For example, when the market crashed in 2008, many people lost money and had their retirement plans upended.
If you were 70 at the time and had most of your investments in stocks, especially riskier stocks, you didn’t have the same luxury of a 30-year-old who is still:
- Working to bring in income
- Actively able to wait out the crash
When you secure your retirement, your investment portfolio allotment should change to be less risky. As we have seen after 2008, there is a trajectory where people are very cautious with their investments after a significant loss, but now, people tend to enjoy more risk.
The fear of the market crashing is well behind us, so risks tend to increase in an investment portfolio.
Risks should be adjusted on your own basis. We promote a risk adjustment portfolio because it helps you sleep well at night and secure your retirement the way you want.
What is a Risk-Adjusted Portfolio?
A risk-adjusted portfolio, for most people, will mean that they want an adjustment to their asset allocation. For example, asset allocation may include buying smaller pieces of the market, such as:
- Small-cap funds
- Mid-cap funds
- Large-cap funds
- Tech stocks
- Pharmaceutical stocks
If you’re 70 years old, you’ll probably mitigate risks by putting more money into bonds because they’re a safer investment option. Many people create a 60/40 portfolio, where 60% is in equities and 40% is in bonds and safer investments.
Unfortunately, this allocation method may still be too risky for some retirees.
A good example is if you had 60% in the S&P 500 index and 40% in the AGG index (basically a bond index). As you saw in 2020, the S&P fell over 30% and even further in 2008, 60% of your money can lose 50% of its value overnight.
When it comes to returns, there are two things to consider:
- Year-to-date returns, which are how much the stock or portfolio netted you in the last year or a specific year.
- Max drawdown is where a portfolio goes up, peaks, and goes down. Peak and bottoms aren’t the best ways to look at investing, so we like to look at yearly changes because markets fluctuate, and max drawdown can be very emotional to see.
Since 2001, the max drawdown on a 60/40 portfolio is 36.7%. If you look at this from a retirement standpoint, how would you sleep at night knowing you lost nearly $370,000 or the $1 million you saved for retirement?
Most people would lose sleep over this figure.
Investment planning helps you lower the max drawdown. However, every investor has their own way they want to invest. Traditionally, you’ll find two main trains of thought when investing:
- Buy and hold
- Active account management
Our approach is slightly different, and it has worked well for our clients.
Risk Adjusted Portfolio by Supply and Demand
The supply-and-demand concept is simple: when things are in demand, let’s be a part of it, and if it’s not in demand, let’s not be involved. What does this mean in the world of investing?
If stocks are doing exceptionally well, we can go all-in on them with 100% of assets.
When risks get higher, we might go all into bonds or move most of a portfolio into bonds. On the other hand, if things get bad, it may mean putting 100% of our money into cash and holding it until other investments start recuperating and going back up.
Supply and demand allow us to make smarter investments, make money and fight back against risks, too.
A recent example of this happened in March of 2020:
- The pandemic hits, not many people have been through one, and the market falls 34%.
- A risk-adjusted portfolio helps protect against that.
- Our risk-adjusted portfolio fell just 9%, while non-risk adjustments led to 34% losses.
The current state of bonds is a prime example of when bonds don’t work. Inflation is leading to the potential of an interest rate increase, which will lead to lower bond returns. Negative bond returns occur when interest rates rise, and the Federal Reserve is planning to raise interest rates to slow inflation.
So, what does someone trying to find an alternative to bonds do if bonds are at a negative return?
Fixed annuities may be an option because they do offer safe growth. These annuities are an insurance option, and when the bond market falls, this is an option. However, returns are more conservative.
These annuities do have liquidity issues to consider.
For example, most annuities only allow you to take out 10% of your investments a year. You’ll have access to this money, but the limit does make it less inviting to invest in annuities.
We like to put some money into annuities while also diversifying into other options, such as the stock market. Diversifying allows you to access 100% of the liquidity of non-annuities while accessing 10% from the annuity per year.
Risk adjustment is a major part of smart investing, but there are multiple ways to adjust and tackle your risks. While we’ve covered a few ways in this post, you may have another risk adjustment method that you prefer.
The idea is to know the many options available to you so that you can adjust your risk in a way that makes the most sense to you.
Do you need help with retirement planning or with an investment portfolio strategy? We can help.
A good place to start is by taking out 4 Steps to Secure Your Retirement Video Course.
However, if you want to connect with us to review your investment portfolio and seek one-on-one investment advice, schedule an introduction call today.