Proactive investment strategies

Don’t let market losses devastate your retirement plan.

What happens to you if, two years into retirement, the stock market tanks? Stop asking how the market is doing. The real question is, how are you doing?


It seems that hardly anyone these days has a good old- fashioned crystal ball. We certainly do not. But we do have a terrific rear view mirror. And it doesn’t take much magnification to recall how devastating the tech bubble of 2000/2002 was to millions of families. Nor how close on its heels was the nearly calamitous events of 2008 which followed.


Sure, the markets came back. But the damage had been so terrifying that investors by the legion sold out at the bottom and swore they’d never get back in. Some were good to their oaths. Others tiptoed back in as the markets again approached new highs. Each of those behaviors carries with it a definite – but opposite – risk: missing out, and buying when the market is ready for a correction.


s&p 500 comparison from January 2011 to February 2015

The only thing that goes up in a down market is correlation

Buy-and-Ignore is not a viable approach when you are nearing retirement. Many financial firms are purveyors of pie charts. The investment solution they invariably pull out of their hats is a smoke-and-mirrors variation on 60% stocks and 40% bonds – and don’t come back until sometime next year!


We believe there is too much at stake to try to weather another major downturn in your savings. Many of the investments we suggest are professionally managed programs designed to help move  out of harm’s way during major bear markets. Others have little direct correlation to stock market moves.


All investing involves risk of one kind or another. But we strive to find the best strategies to help you say, “I’m doing fine.”


What is the aim of a target date fund?


Here’s the problem: The older we get the less opportunity there is for making up lost ground. At age 25, you can afford to roll the dice and take a chance. There’s always time to make a comeback. That’s not the reality at 55, 65, or 75. Target date funds – or freedom funds as some firms call them – were promulgated by the giant mutual fund companies to build in an automatic “glide path” of portfolio rebalancing that moves further away from stocks the closer you get to retirement. That logic assumes two things: 1) that the alternative assets are safer than stocks, and 2) that they do not correlate with stocks. Both of the statements are true. Sometimes. Sometimes they aren’t. And when they aren’t, it can occur at some very inconvenient times.


There are two telling charts on these pages. Below is a chart showing how certain target date funds (five Vanguard funds and five Fidelity funds) have performed in recent years relative to the all-stock S&P 500. They all performed virtually alike – every one having a correlation to the S&P over .9. And there was almost indistinguishable performance differences between the funds with near-term target dates and those further into the future. The chart on this page is even more revealing. It shows that a near-term target date fund performed in virtual lockstep with the S&P during the near collapse of 2008.


Near fund target date performance 2007 through 2009

Are you getting the diversification you’ve been sold?


One more item of interest: the fund in the overlay recently held 34% in bonds in a potentially interest rate rising environment, and 17% in international stocks during some roiling international frictions. Bear in mind … Caveat Emptor.


A hidden risk – sequence of returns


It is not just long-term average returns that impact your financial wealth, but the timing of those returns. When retirees begin withdrawing money from their investments, the returns during the first few years can have a major impact on their wealth.


Two retirees with identical wealth can have entirely different financial outcomes, depending on when they start retirement. A retiree starting out at the bottom of a bear market will have better investing success in retirement than another starting out at a market peak, even if the long-term averages are the same.