Retirement Investing

A poor stock market can have a significant impact on a retirement portfolio, especially when one is taking distributions.  For example, if the stock market takes a 5% drop and you are taking a 5% distribution, you will need an 11% rate of return to get back to even.  If you are taking a 5% income in the second year as well, that means you will need a 16.67% rate of return in year 2 to get back close to where you started.  This is commonly referred to as sequence of returns risk*, the chance of experiencing poor investment returns at the wrong time.

When we design a retirement portfolio for a client, we look to add some additional diversification, to attempt to reduce risk and volatility while hopefully not sacrificing a large amount of return.

Many retirees were disappointed in how their retirement portfolios performed in 2008.  Yet some are still using a very similar investing approach.  Many advisors rely heavily on Modern Portfolio Theory.  This "modern" approach to diversification was designed in 1952.  While there are benefits to this system, it relies heavily on a rising stock market.  With our approach, we look to further diversify this theory with more modern investing ideas, such as buffered exchange traded funds (ETF's) and managers with unique strategies, including long/short.

If the market hits a rough patch when you are 45, you keep working and contributing to your investment.  But when you are 70, you may not have the time or additional contributions to help your portfolio recover.

A retirement investor needs to not only focus on rate of return but should also know risk measurements such as standard deviation, maximum drawdown, and Sharpe and Sortino ratios.  

  *  Sequence of Returns Risk