We have been blessed to manage money for some of our clients for over 20 years. In that time, we have seen great change in not only in the global landscape but also in the array of investment options available. The tools we have at our disposal today are cheaper and more able to pinpoint exact areas of the market that we wish to invest in. As the landscape evolves and the debate of active investments versus passive investments continues, one thing has not changed for us: your unique needs and risk tolerance.
Most of our investors are nearing retirement or post-retirement. Their ability to accumulate wealth by earning and saving is a thing of the past. This group is now focused on enjoying what they have saved and most want to leave something for the next generation. You have heard me talk about why diversification in portfolios is so important because as one writer said, “it won’t make a killing, but it won’t get you killed either.” Determining how much risk we take for retirees is based on several factors, including your goals (and the associated time horizon), but also your withdrawal rate (spending) and risk appetite (or tolerance for volatility).
History has taught us for some time now that if an investor spends more than 4- 5% of his or her portfolio annually, that investor runs an increased risk of running out of money in the event of a prolonged bad market. We have been fortunate over the years to have clients who have heeded the lessons of history with regard to reasonable withdrawal rates.
Volatility is the “bounce” of your monthly statement when it appears in your mailbox at home or your email. Markets rarely move in a straight line but tend to trend up over time. Take a month like April 2022 — the “bounce” this month has been harsh. For the first time in many years, the general bond indexes were down as much as the S&P 500. When this happens, everybody loses money on paper and there are few places to take shelter. We try when onboarding a new client to gauge their ability to stomach this volatility. Most folks we meet tell us the following: “I want to make money, but I don’t want a lot of risk!” Of course, the reality is somewhat the opposite, and can be especially difficult if a client needs to draw heavily from his or her savings for income. Risk tolerance does often change as we age and that is why we regularly analyze your portfolio and to compare it to how we view your risk tolerance. Sometimes the two metrics don’t match up. We encourage you to let us know if the “bounce” has gotten too much for you and your money.
When a reasonable withdrawal rate is used and you have the right attitude about risk and longevity, the results can and have been remarkable over time for most of our clients.
Some of our investors are younger and in the process of building wealth through their retirement plans at work and personal investing in the markets, real estate, and small businesses. These investors mostly are interested in growth, especially when time is on their side, and they have the ability to recover from the inevitable drops in the market.
We tend to favor an approach of investing in growth companies in the large/mid/small cap space for these clients. As investments in growth areas occurs this group should expect a tremendous amount of volatility as the markets do what they always do and churn higher over time. We have noticed recently among this group of investors that the new shiny investments of cryptocurrency, speculative real estate, and technology companies is front and center on their minds. Some of these offer great opportunities, but they also offer much greater risks. In fact, many of the investors in the markets today who are trading on the hip new Robinhood platform or who are trading crypto on Coinbase have never experienced a significant downdraft in the markets. Lessons will be learned.
So how do we manage the mix of growth versus preservation of your capital? We are not market timers, but we do pay close attention to the macro trends of the markets. We made the decision to hold an increased amount of cash a few months ago — and that has worked out — but it is only a near-term move. We see factors that advise us to avoid bonds for now, and we believe cash is the best option until we see how far the Fed will go. As to stocks, we believe the world is shifting back to value and away from growth as rates rise and inflation affects the American consumer. We will pick areas we like and use a sector strategy to invest here.
When markets get rough and turbulent like they have recently, our newer clients usually ask, “What are you waiting for? Are you going to just sit there until we lose all our gains?” The short answer is yes, we are. It is a fool’s game to think that any of us can fully jump in or out of the markets at the right time. Please remember that we are interested in achieving a certain rate of return over the long-term. We may have your portfolio more aggressive (or conservative) based on your situation, spending or feelings about risk.
We always welcome your questions and your input as we strive to be better each day and to make you and your loved ones better off financially.
Lee