Originally published on Forbes.com on Aug 11, 2019
You are not getting younger. None of us are. But your portfolio strategy may get old fast. Preventing that from happening may help you feel a lot younger. That starts with what I believe is the single biggest threat to retirement dreams of late-career investors today: Specifically, the habit of relying too much on traditional approaches to stock market investing. The over-use of S&P 500 Index funds today is at the core of that threat.
Don't blame the index companies. They are just making the products available. And, after a lengthy bull market that has seen the S&P 500 outperform nearly all other major market indexes, tagging along is natural. But doing so at the expense of risk-management is the issue. On this count, I see too many situations where an investor, with or without a financial advisor helping, has themselves in a high-risk/high-reward scenario. For some investors, this makes sense. For many, it is a ticking time bomb.
Performance analysis of your portfolio should always...I repeat...always...be done by starting with what you actually aim to achieve from your investment efforts. That is, are you using the stock market to try to grab a piece of its growth potential over time? If you are in retirement or close to retirement, I hope you are. Because if you are not, you are inviting the wolf at your door to come into your home, and by extension, your retirement plans.
Wait a minute. Here's a guy who invests for a living, has written 2 books and over 300 articles about investing in the stock market, and he is telling me I may not need the stock market to retire as much as I think I do? What's up with that?
It comes back to my definition of investing as it relates to the stock market: the market is a tool to achieve your end goals, not the goal itself. This is why I am skeptical that investing in the S&P 500 and other major market indexes in their pure, index form (as opposed to active risk management) will be as simple and easy a path to long-term success as much of Wall Street is making it seem.
My clients and I remember 2000-2003 very well. We also remember 2007-2009. These were game-changers for the "set it and forget it" crowd. Furthermore, today these same investors are that much closer to retiring. If you were 40 years old when you lost 1/2 your portfolio in a standard S&P 500 index fund during the dot-com bubble, you could deal with that. You were only 40, with a long career ahead of you. However, as we sit near all-time highs in the S&P and other major indexes, you are not 40 years old anymore. You are about 60 years old. And retirement is not some distant concept. It’s around the corner. Want proof? You are already old enough to withdraw funds from your IRA or 401(k) plan without an IRS penalty (you will still pay taxes on the withdrawal, of course).
Neil Young will need to forgive me for that sub-heading. But it is clear that many investors have forgotten that markets don't always go up, and things don't always work out "in the long run" (Eagles reference unintended). Successful investing for retirement is about taking what the markets give us. Then, we determine how to thrive best in those conditions. The markets give us liquidity. They also provide a variety of choices of what to own and for how long. In addition, they offer us the ability to focus on growth, preservation and/or cash flow as we see fit. It’s a good deal, if you take advantage of it and keep your emotions in check.
That is very different from just investing in an S&P 500 Index fund, or a variety of other asset class indexes that basically move up and down with the S&P 500. Here is a chart showing that index from the end of 1999 through the end of 2012. That's a 13-year period of essentially zero returns.
Sure, there was a lot of excitement along the way. But with the S&P 500 potentially at or near a long-term peak, can a 60-year old afford to take this ride again? Financially speaking, who wants to wake up at age 73 in the same position they started in when they were 60? THIS is the challenge for retirees and pre-retirees right now.
And, that assumes you are not taking any money out. If you have retirement plan assets or an IRA, you will have to do so by law (at age 70 1/2). The taxes from doing so will reduce your nest egg.
Bonds have two problems right now. First, interest rates are low and likely heading lower. And, the places people used to go to "reach" for additional yield (bonds rated BBB and lower) are in a treacherous position. You can read some of my other articles from this year to see more on that.
So, is the stock market a place where returns can be made over the next several years? I think so. But the key is the method and approach one takes to pursuing those returns. Risk-management has to be front-of-mind, holding periods likely need to be shortened, and we need to realize that investing in "the market" via a simple, S&P 500 index fund is a bigger risk than it has been in over 10 years.A good place to begin is by deciding what ground rules and guardrails to impose on your own practice when it comes to the range and intention of your investment decisions.
For any investor, this is a time to truly understand what you own and why you own it. In addition, make sure you understand the investment decision process you (or those you delegate decisions to) will follow. We have had an era of relatively robust returns. Adjusting to what comes next is the key to a graceful path to financial retirement.
Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors