June 5, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for June 5, 2023

This Week’s Podcast – Does The Rule 100 Work in Retirement?

The conversation around risk is extremely important for you to have an investment structure you’re comfortable with.

Listen in to learn why investment risk is subjective and should be looked at as an individual. You will also hear us perform an exercise to help you understand our numerically driven system that measures risk comfort.

 

This Week’s Blog – Does The Rule 100 Work in Retirement?

A rule of thumb around risk is the “Rule of 100.”  If you haven’t heard of this rule before, we’ll outline everything for you below so that you have a better understanding of it. Keep in mind that risk in investing is somewhat subjective, and needs to be discussed on a case-by-case basis.

We have people ask, “What is my risk based on my age?” And this isn’t something that we really recommend. The “Rule of 100” is the rule of risk based on age.

Does The Rule of 100 Work in Retirement?

A rule of thumb around risk is the “Rule of 100.”  If you haven’t heard of this rule before, we’ll outline everything for you below so that you have a better understanding of it. Keep in mind that risk in investing is somewhat subjective, and needs to be discussed on a case-by-case basis.

We have people ask, “What is my risk based on my age?” And this isn’t something that we really recommend. The “Rule of 100” is the rule of risk based on age.

What in the World is the “Rule of 100?”

The Rule of 100 takes your age and subtracts it to help you determine how much risk you can take when investing. For example, let’s assume that you’re 50. The equation would be: 100 – 50 = 50.

In this case, “50” is how much risk you can take.

So, based on this figure, you should keep 50% of your money at risk. If you’re like many 50-year-olds who feel like they have plenty of years left, it doesn’t make sense to stop 50% of your money from its growth potential. You can still have good risk control and keep this 50% of your money growing with relatively little risk.

Now, imagine you hit 70. You take 100 – 70 = 30, so 30% of your money can be at risk and in the market. For some people, this formula works well, but there are many people who want more risk.

You can have two people who earn the same money, accrued the same debts, and are the same age but have different risk tolerance based on their individual situations. One person may be fine with 4% growth per year, while another wants to achieve 12% growth and invest in riskier investments because they want to pay for their grandkids’ education.

What’s right for you?

We’ve adopted our own method of risk calculation that looks at the bigger picture to help you better understand your goals and what risks you must take to reach them.

Walking Through Our Conversation on Risk with Our Clients

Retirement planning is truly unique to each person. You may want to travel the world, while another person wants to spend their golden years tending to their garden. The goals and aspirations that you have for life in retirement must, in our belief, be a major contributing factor to your risk tolerance.

Our system is numerically driven and asks:

  • How do you feel about risk in a six-month window?
  • Say you have $1 million and lose 10%. Are you comfortable losing $100,000 in six months?

Many people believe that they’re comfortable with losing 10% of their investments until they see the hard figure in front of them. Let’s walk through an example of how we help our clients understand and determine their risks.

$1 million Retirement Roleplay

In this example, Radon has $1 million and has just walked into our office. 

Murs

Radon, you have $1 million to work with. We want to set you up for your retirement. We want to take risks and earn you money, but we want to create a portfolio that allows you to sleep well at night. We need to understand what that number is for you because everyone is different. 

If you look at the screen, Radon, we’ve put your million dollars here and have a slide rule in place that allows us to adjust your investment risks.

The slide starts in the middle here, and the middle is 14%. At this percentage, you have a risk of losing $140,000, but you can also have a nice gain, too.

Radon, I am going to move the slide all the way to the left, which is –4%, or $40,000. What I want you to do is, as I start moving the slider to the right, tell me where you think you feel uncomfortable with your losses.

We’re at 7%, or around $68,000 of loss. We’re now at 10%, or a $100,000 loss.”

Note

What we find happens during this example is that the client starts to talk to themselves. For example, they may say that they didn’t feel good about losing 20% in 2022. The person then weighs their risk on what happened last year.

We recommend trying to look forward because the losses last year may never happen again. We often see clients tend to stop at 10% because losing $100,000 is tough to swallow. However, most people realize they need to let the market breathe a bit and can sleep at night with a 10% loss.

We’ve established our baseline at 10% because that’s our initial gut reaction, where we become uncomfortable with any further losses. The screen that is in front of the client will have the 10% in the middle and then have numbers on the left and right, which show lower and higher risk figures.

Now, let’s get back to our example discussion from above.

Radon

Radon, during this discussion, determines that he’s comfortable with a 10% loss on his $1 million, and this is the figure he doesn’t want to pass. 

Murs

Radon, you told me 10% on the downside is your limit, but what if we can improve that? Let me tell you. It’s different for different families. 

  • One person may receive the same reward of 10% while only having a 6% loss potential, or $60,000. This would be the left side.
  • One person may be comfortable with a 10% loss, but what if I can increase my gain potential to 16%? This would be the right side.

Radon, what looks better to you?

Radon

In this case, I think I am comfortable with the risk. I feel confident with a 10% risk, and if I had more reward, I would move to the right.

Note

This exercise is thought-provoking because some people are comfortable with going to the right to have more reward, but others find it a no-brainer to lower their risk.

Keep in mind that Radon wouldn’t mind earning a little more at 10% risk. The software shows us that we can stay where we are at –10% downside, or we can go 16% – 19% growth. However, this would mean a 12% risk, or $120,000 potential loss.

Murs

Radon, which one looks better to you? Would you like to stay in the middle or take a little more risk for a lot more potential?

Radon

The rationale that I’m looking at right now is that I get quite a bit more upside for a little more risk, which is kind of in my comfortable range. Again, I am kind of nervous, but I think I can take it a little higher to make up for some of the losses in 2022. I don’t want to miss out on the potential that’s coming.

Let’s take it up one notch and see what happens.

Murs

Great. Pushing it up one notch, we’ve moved from a –10% to a –12% comfort level. Now, the last one is, what if we can earn better by going to –14% downside in a 6-month window?

Radon

I was already pushing it with the 12% risk, so I think I feel most comfortable staying in this range and not pushing my downside any higher.

Summing Up

These few questions and scenarios show a client the hard figures, which makes it possible to really identify their risk tolerance and the losses they feel most comfortable with in their portfolios.

Using these figures, we can create an investment plan that is within a risk category and create a growth plan that doesn’t exceed the client’s risk tolerance.

We will then use our bucket strategy to allocate all the clients’ funds to help them achieve the growth they want from their retirement accounts. The three buckets include: cash, income and safety, and then a growth bucket.

Risk tolerance allows us to create a one-page investment strategy that we give to our clients that helps them understand exactly how their portfolio will look.

We find that using this type of risk tolerance assessment works much better than saying a “moderately conservative” plan that may be losses of 10% or 20%. Moderately conservative is a subjective term, and we take the subjectiveness out of the equation with the assessment we create.

Click here to schedule a call with us to help you better understand your retirement risk tolerance.

May 30, 2023 Weekly Update

We do love it when someone refers a family member or friend to us.  Sometimes the question is, “How can we introduce them to you?”   Well, there are multiple ways but a very easy way is to simply forward them a link to this webpage.

Here are this week’s items:

Portfolio Update:  Murs and I have recorded our portfolio update for May 30, 2023

This Week’s Podcast – How To Manage Risk in Volatile Markets

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.

 

This Week’s Blog – How To Manage Risk in Volatile Markets

Growing your money to secure your retirement is something that everyone should do as part of their retirement planning. Active management, which is what we do, is something that clients come to us for because they want us to manage their portfolios.

How To Manage Risk in Volatile Markets

Growing your money to secure your retirement is something that everyone should do as part of their retirement planning. Active management, which is what we do, is something that clients come to us for because they want us to manage their portfolios.

If you wanted a very low-risk investment you could keep your money in treasury bonds, CDs, or a savings account. However, growth opportunities with these types of investments are very limited. You might put some of your money in these accounts, but not 100%, because the potential to grow your money falls too much with a conservative investment portfolio.

Managing risks, especially in a volatile market, is more difficult for many investors because if you put all your money into an S&P 500 index, you take on all the associated risks in the process.

In the years 2000–2002, the S&P 500 was down 50%, meaning many retirees had their portfolios cut in half. Imagine if you’re withdrawing money from this portfolio at the time of a major decline, causing a compounded problem in the process.

Now, you could take 60% of your money and put it in the market and the other 40% into bonds. Come 2021 and 2022, and the bond market goes into a crisis, causing a lot of people to lose the money that they thought was very low risk.

Active Management to Lower Portfolio Risks

Managing your account actively helps negate these risks because we move within the market and take a very hands-on approach to growing your money.

Metrics and data points are used to help a person maximize their money within their own risk threshold. For example, hedge fund managers often try and make their clients the most money possible. The issue is that big returns also come with larger risks.

In an active management strategy like ours, our clients want safety and security and aren’t chasing the homerun gains that some of the other managers strive for with their clients. Instead, our active management approach maximizes returns while keeping risk at a minimum.

Many people are 10 years from retirement and have been through 2008 and 2020-2021, when the markets took a nosedive, and they don’t want to shoulder large risks any longer. As you get closer to retirement, earning and income potential begins to fall. At this point, you need to mitigate risks as well as you can.

When you have an active management strategy, the goal is to put your money into the best investment vehicles at the time.

Data allows an active management strategy to take place because we focus more about what the data is telling us and less about specific news on inflation and the debt ceiling.

Investing comes with pros and cons, but if you pick an investment strategy that works well for you, it can also help you secure your retirement.

Example from an Industry Podcast

Recently, on an industry podcast, they had a few financial advisors as guests to speak about how they manage their clients’ money. There was one response that stood out the most. This individual used to take part of the clients’ money and invest it actively, as we discussed above, and mentioned that the logistics of the approach were too complex and resource-intensive. Ultimately, they transitioned into a buy-and-hold strategy for their clients. The manager wasn’t set up for the trading involved in an active management environment, and a buy-and-hold strategy is easier to manage. 

With a buy-and-hold strategy, the most that needs to be done is balancing the portfolio on a monthly or quarterly basis. Technology makes this a touch-of-a-button scenario. Simply put in the wanted parameters, tap a few buttons, and rebalance a portfolio.

Instead, when we actively manage a portfolio, we check risk daily and will readjust a portfolio regularly. It’s unlikely that we need to perform a readjustment every day, but we’re ready to when it’s necessary.

At Peace of Mind Wealth Management, we like to manage our clients’ money in the same way that we invest our money: actively.

We find that an actively managed portfolio reduces risk greatly, which in turn reduces immense emotional tolls from portfolio losses.

Imagine losing 10% of your portfolio, realizing you lost $100,000 or $200,000. It doesn’t feel good. You can have a portion of your retirement savings in the market and another portion in safer investments that still offer plenty of opportunities.

This is why active management in a portfolio can be a powerful tool in retirement planning.

Asset Classes in a Portfolio

During any given year, some asset classes in a portfolio may be working and others are not. Asset classes can be a lot of things, such as:

  • Large-cap stocks
  • Mid-cap stocks
  • Small cap stocks
  • International markets
  • Emerging market investments
  • REITs
  • Investment bonds
  • Treasuries
  • Cash

Year-over-year asset classes move around, just like we saw in 2022 when the S&P 500 was down nearly 20%. Cash and treasuries were the leaders of asset classes in 2022 because they provided some level of return.

In 2021-2022, the 60/40 flaws started to show because a lot of the investment bond yields were down 11% – 13%. Bonds, for some people, were down as much as their market investments. At the time, many people thought it wasn’t possible to lose money in bonds.

Monitoring asset class movements and structuring a portfolio is how we like to invest our clients’ money. Monthly and quarterly data analysis and restructuring of asset allocation empower us to put investments in what’s performing well right now.

If the upswing and downswing of the market don’t bother you, then a buy-and-hold investment strategy may be better for you.

However, a lot of clients of ours love making a good return with minimal risk. Clients may sleep better at night and have peace of mind that they won’t wake up with a portfolio loss of 20%. This is what an actively managed portfolio provides.

Click here to schedule a 15-minute complimentary call with us to learn how your investment portfolio can be actively managed.