Ep. 212 – How To Manage Risk in Volatile Markets

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss managing investment risk in volatile markets using the active management strategy. An active management strategy is not superior to the buy-and-hold investment strategy, but it is a great way to reduce risk in volatile markets.

Listen in to learn how we use data/numbers to identify and align with the best asset classes to be invested in. You will also learn why an active asset management strategy allows you to make a decent rate of return, not lose a bunch of money, and have peace of mind in your retirement.

In this episode, find out:

  • Understanding actively managing – very low to no risk on your investment.
  • Good risk management – using data to identify and align with the best asset classes to be invested in.
  • The portfolio adjustments we conduct with an active management strategy.
  • How we significantly reduce risk by leaving a risk-managed opportunity in the portfolio.
  • Why monitoring how asset classes move is a good way to structure the portfolio.
  • The peace of mind you get in your retirement by having an active asset management strategy.

Tweetable Quotes:

  • “Actively managing means we’re going to transition the portfolio so it’s in a good place as it can be, but it could also mean that we reduce risk.”– Radon Stancil
  • “There are pros and cons to investing in general; at the end of the day, you want to pick a strategy that’s comfortable to you.” – Murs Tariq 


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here is the full transcript:

Radon Stancil:Welcome everyone to Secure Your Retirement podcast. Today we’re talking about a topic that’s of interest to everyone and that is growing their money, getting a return on their money. And we’re really kind of giving this one a theme of active management, the kind of the pros and cons versus a buy and hold, especially in retirement. So how does active management work in retirement? That’s kind of the process. But to get us a little bit of a context here, I think it’s kind of important for us to think through maybe kind of this high level differences between how we would invest. Because here’s the thing, if a person says to us, “I don’t want risk on my portfolio,” well, then where could you go to have very low to no risk? Everything has a risk, by the way. Low to no risk, what would that be?  
 Well, I could put up my money in the bank, I could put it in a CD, I could go and buy even treasury bonds, which are pretty safe. Or I could go and buy a fixed annuity and I say, “Look, I just don’t want any risk. I’m okay making two, three, 4%.” Right now, you can make around 4%, so that’s good, but I want to put all my money in those kinds of environments. Well, that’s okay because I’m saying I don’t want the risk, that’s fine. But what happens there is I’m kind of locking myself into a pretty conservative low rate of return. I don’t really have any growth opportunities there for that money. And by the way, a lot of our clients put a percentage of their money in those places that I just mentioned, and we think it has a good place.  
 But if I’m looking at a hundred percent of the money, a lot of times people say, “No, I’d like to have some of my money going out there and going and getting some growth.” Well, now I have to introduce the portfolios out there and say, “Hey, I’ve got to go into stocks and bonds.” And that’s just making that a really big broad picture. But the reality is, once I do that, I’ve got to make a determination of how do I want my money invested within stocks and bonds? So one person could say, “I just want lowest fees possible, so just go buy me an index fund.” In fact, I could just go buy an index fund that mimics the S&P 500 and I just say, “Hey, if it’s up, it’s up. If it’s down, it’s down.” The thing you have to realize though, that if I mimic the S&P 500, I’m going to have all of the risk of the S&P 500.  
 And what does that mean? Well, now I go back and I look in the years like 2000, 2001, 2002, the stock market dropped 50%. If you had a million dollars and you dropped 50%, now you’re at $500,000. If you’re taking withdrawals on that, that is not good. 2008, the stock market, the S&P 500 dropped 58%. In 2020, it dropped 34%. And so now I’m going, “Whoa, okay, I want to make the good returns, but I cannot handle that kind of risk,” especially if I’m close to or in retirement. Because if I’m withdrawing from the portfolio and it goes in half and I’m still withdrawing, it’s a compounded problem. So now the other level is I do something again, super basic. I say, “Let’s take 60% of the money, leave it in the market like an S&P 500 look, and then 40% and I go put it in bond market.”  
 Well, then comes something like 2021, 2022 timeframe and the bond market crashes. Well, now my 60/40 portfolio is down as much as the market’s down. And I go, “Wait a minute. How did that happen?” And so now we grow and we say, “Wait a minute. Now let’s look at how do we manage this risk that could be in stocks and bonds.” And that’s where we kind of come down this path of actively managing the account. So actively managing means we are going to transition the portfolio so that it’s in the good places it can be, but it also could mean that we reduce risk. Now I’m going to transition this over to you Murs, because I kind of want you to… So I’m just trying to give you the visual. The visual is saying, “Hey, I want to be able to be in the market, get growth, but I don’t want all that S&P 500 risk. So how do I do that?” And then we can talk about the pros and cons.  
Murs Tariq:So in an active management strategy, the idea is that we are going to be moving around within the market. That’s what active management is. Based on metrics or data points or however the money manager is running the money, you could have one strategy that is very aggressive that says, “I want to be outperforming, outperforming, outperforming, and doing better than the markets.” That’s typically what hedge funds align themselves with to do as good as they possibly can, which means they’re also going to take on sometimes more risks in that buy and hold type of scenario. And then you have an active management strategy like ours that is really about good risk management. It’s not all about trying to hit the home run rates of returns because those home run rates of returns also come with the large amounts of risk that quite honestly our clients just do not want to deal with anymore.  
 They come to us and they say, “Hey, I’m 10 years away from retirement. I’m five years away from retirement. My earning years are greatly reduced now. My ability to save is greatly reduced now. I’ve got what I’ve got and I need to make sure that it’s going to last. And I can’t afford to go through another 2008, 30, 40, 50% type of sell off.” So how can we do this? How can we be invested in the stock market and be able to mitigate the risk of what the market brings? Last year, 2022, the S&P was down about 20%, right? It’s still very fresh for a lot of people. And what I tell some people is that it was a gut check for a lot of us as far as how we are exposed to risk today. So how can we mitigate some of that risk?  
 And in our opinion, it does need to be actively managed. So there are portions of the market that do really well in given situations and there are portions of the market that just do not perform well. You can talk about where we’re at with the inflationary environment that we’re in, debt, ceiling issues, the pandemic. There are portions that did really well during the pandemic. Technology, for example. Large caps like Amazon, for example, did very, very well throughout the pandemic and then a lot of the other asset classes suffered. So in our opinion, we need to track what’s doing well and what’s not doing well and let’s be a part of that. And really what that boils down to in a simplistic way of looking at it at is that there is a time to be invested in what we believe are the best places to be invested at the time.  
 And then there is a time to have risk that is reduced or taking some of that risk off of the table and going into more stable investments. And it’s all data driven from the way that we look at it. So what’s going on right now with the debt ceiling crisis and inflation, we’re not guessing as to how the debt ceiling is going to be resolved and making investment decisions based off of that. With inflation, we’re not guessing as to where the Fed is going to go with interest rates and making decisions off of that or this potential impeding recession that could be coming at the end of the year or in the first of next year. We’re not guessing and aligning the portfolio that way. We’re purely going off of data. The data and the numbers that are coming in the door help us see what are the best asset classes to be invested in right now.  
 And so let’s align the portfolio a little bit that way, knowing that those asset classes are going to move and we need to have the ability and the flexibility to move within what the data is telling us. So that’s really a high level as to what we believe is a good risk management philosophy. Again, there’s pros and cons to investing in general. There’s pros and cons to everything that I think everyone should understand. But at the end of the day, you want to pick a strategy that is comfortable to you. And I’ll go back and say it, that our clients that come to us, they say that, “Hey, I want to make a decent rate of return. My plan is going to work great off a decent rate of return. I cannot afford to lose a bunch of money at this stage in my career as I approach retirement.”  
Radon Stancil:Yeah, it’s funny, I was listening to a podcast… Actually, I listened to podcasts all the time. I know Murs does as well. And I was listening to a podcast and in this podcast… It was an industry podcast, meaning it was another financial advisory type podcast where they would interview people who actually own their own advisory firm. And so the person was asking, “Well, what is your investment philosophy? How do you all, in essence, manage your money for your clients?” And she said, “Well, we used to do kind of what we’re describing here, which means we had a part of the portfolio that was a little bit more invested all the time, and then a part of the portfolio that we actively managed and that we would manage the risk over there. And ultimately,” she says, “as we went down that path,” she says, “we really weren’t set up to be able to have the trading involved that we needed to do.”  
 And she says it was just a lot of work to be able to do all that. And so she said, “We just because of logistics opted to go to a buy and hold strategy.” Because a buy and hold strategy is pretty easy for an advisor to manage. With a buy and hold strategy, the most that I’d have to do is do a balancing of the portfolio either on a monthly or quarterly basis. And I will tell you, in our world today with technology, that is press of a button. I mean it is zero complication for us. And all we do is go in, put in the parameters that we want it met, we press a button, and the software goes out to all of the accounts and makes those rebalances and it’s done. I mean, it takes me no time at all. But if we’re going to actively manage the risk in the portfolio, there’s a lot more work involved.  
 We’ve got to look at things on a daily basis, not that we’re trading every day, but we’re going to make adjustments to the portfolio on a much more regular basis. Now we believe that is what we want. By the way, all of us have our money invested that way. So we want to have the risk on that money managed as well. And so we’ve set up systems to be able to do that. But I will tell you, the vast majority, if you were to go out and talk to a financial advisor, they’re going to operate on a buy and hold strategy. Now again, we’re not trying to get into a battle, “Is buy and hold better than active?” Or, “Risk on, risk off, is that better than just buying the market?” Because that’s being told a lot is just, “Buy the market, hang in there, don’t let go, and survive and it’ll come back. Don’t worry. It’ll come back.”  
 And as Murs said that, I think, a nice job is for people with long-term horizons, they can actually afford to have it go down a little bit and come back because they’re not going to touch it. I will tell you though, even if you can afford it and you say, “Hey, I don’t mind if I’m down 50%, it’s okay to me because I’m not going to touch the money anyway,” emotionally, that can be very difficult. I mean, we do a risk conversation with all of our clients that are going to become our clients, and we kind of take them through that whole idea. “If you were to lose X amount of money in the next six months, at what point would you decide that, “That’s too much, I can’t handle it?” And we start and we show them real dollar.  
 So just in your mind, take a million dollar account. If you’re down 10%, “I don’t know, that doesn’t sound that bad,” but if I say it’s a hundred thousand dollars, that sounds real bad. Or if I say you were down 20%, $200,000, well, all of a sudden people, when they see those numbers, they start to go, “Yeah, that 10% is kind of the threshold.” I’ll say our average client says around that 10 to probably the high side, 15%, they’re starting to get really nervous. Well, how do we manage that? Well, we say, “Look, let’s reduce risk on the portfolio.” By the way, if we have a part of the portfolio that’s pretty much always invested, but it’s only say 40% of the portfolio, the other 60% is being risk managed. I don’t have all the exposure of the market, but I also have opportunity on the portfolio at all times. And so that’s kind of how we operate and that reduces that risk significantly.  
 So Murs, I know that you have a chart that you look at that kind of shows a little bit like how that operates, why active management could be a good thing on either side of the portfolio when you think about different asset classes, how they operate from one year to the other.  
Murs Tariq:Yeah, so the thing about asset classes is that some are working in a given year and some are not working in a given year. And when we’re talking about asset classes, this is very broad based of what the market is comprised of, you’ve got large cap stocks, small cap stocks, international investments, emerging market investments, REITs, which are real estate type of investments, and then you’ve got the area of the bond world, which is high grade investment bonds, high yield investment type of bonds. And then you’ve got cash or treasuries basically. And there’s a chart here that you can easily find if you were to Google asset class returns year over year. Basically, it looks kind of like a periodic table of how often one asset class moves around year by year by year.  
 So 2022, it’s not out of our minds yet, the S&P was down about 20%, the NASDAQ was down closer to around 30%. Don’t quote me on that, but somewhere in that realm. 2022 was a bad year. Cash or treasuries was the leader of the asset classes last year because everything else was down. We think about bonds and we think about how they go to that 60/40 portfolio. The bond side of the portfolio is supposed to save us. It’s supposed to provide safety. It’s supposed to provide income. And the 60/40 portfolio in 2022 and 2021 just did not do well because bonds were down. In 2022, the high yield bond arena was down 11%, the high grade investment bond arena was down 13%. And we’re talking to people and their bonds are down almost as much as the stock market, and they’re saying, “I didn’t even know this was possible. I thought the bonds were managing the risk of my portfolio, but they lost a significant chunk as well.”  
 And so monitoring how asset classes move, we believe, is a good way to structure the portfolio. Not saying that if we’re seeing that small cap, if we’re talking about a race, the leading car in the race, we’re not going to say, “Let’s go all in on small cap.” That would be irresponsible. But could we put a little bit of a leaning towards that? Absolutely, we could. And we track that measurement knowing that things are moving on a monthly basis, on a quarterly basis, on an annual basis, and we want to keep up with that as best as we can.  
Radon Stancil:Hopefully this is the messaging. The messaging is if you don’t care about losing a bunch of money because you’re just like, “I’m just not going to worry about it. If I’m down, I’m down. And if I’m down 50%, I believe the market’s going to come back,” there is a subset of people that believe that and that’s okay. We are not trying to tell you that buy and hold is inferior to an active managed approach. What we are saying very clearly is that we can reduce risk on the one side, whereas on the other side, it is what it is. You just ride the mountain down to the valley if that’s what happens, and that’s what occurs. What we believe though and what we’re comfortable with, what the clients that are attracted to us are comfortable with is like, “Hey, let’s manage this risk. And if I can make a decent rate of return and not lose a bunch of money, I’m golden.”  
 Many times we show a potential client or a client, “Hey, if we just make 6%, 7% on average over your retirement, you’re going to be completely fine.” That’s not saying we’re limiting that. What we’re saying is though, the client understands, “Hey, if I can make a decent rate of return, not lose a bunch of money, and I can sleep well at night, I’m going to have a great retirement. I’m going to have peace of mind in retirement. If I’ve got all that exposure, I’m nervous. I’m on a vacation, yet I’m still thinking about my money and I don’t want to have to think about that.” So if that’s not appealing and you say, “Nope, I would like to have this peace of mind, being able to sleep well at night kind of scenario,” well, then you could explore that as a topic.  
 So we hope this is at least giving you a little bit of insight on how this works. If you decide you’d like to have a conversation with us, please reach out to us. You can go to our website, top right-hand corner, click on Schedule Call. Our calendar comes right up, and you’re able to go in and schedule that 15 minute complimentary, no obligation phone call with us. We’re glad to kind of walk you through the strategy, show you exactly how this could work in your overall plan. So feel free to reach out to us. We hope this has been of some benefit. We’ll talk to you again next Monday.