“Many people hope their portfolios will last as long as their retirement. But, do they have any idea how to make that happen?” Diane Marra
When it comes to planning for the time when they no longer work, many people have what I call a “hope and a prayer” approach. They hope their portfolio will be able to meet their needs and goals when they retire, and they pray that it will, but they don’t have a real plan for making that happen.
Often times this is because they attach themselves to advisors who push what is known as “Modern Portfolio Theory.” Modern portfolio theory is the impetus behind the idea of diversification as the key to all investing. I believe that “diversify, diversify, diversify” may be the wrong advice for many of those wanting to retire successfully, with less stress.
Take the 2008 stock market crash, for example. Were you one of the millions who did “asset allocation” in a portfolio that wasn’t actively adjusted? Were you diversified? If so, did your accounts still go down when the market tanked? If you’re like most people, they did. When the recession ended, you may have found yourself in the painfully exhausting position of having to rebuild your wealth. Unfortunately, many retirees and pre-retirees never fully recovered from that market downturn.
Is there an alternative to Modern Portfolio Theory?
The style of investing I most recommend to my clients is “tactical asset management.” This dynamic investment strategy actively adjusts your portfolio’s asset allocation. The goal of tactical asset management is to enhance the risk-adjusted returns of passive management investing. The key differentiator is that tactical asset management is an active investment style, rather than a passive one.
If you want your money to last as long as possible when you retire, your plan and portfolio MUST be able to go to a “risk off” cash position so that you minimize maximum drawdowns. Tactical asset management can help you do just that by giving you a well-calculated and solid method of spending the money you’ve worked so hard to save. After all, even if you have managed to accumulate a sizeable nest egg, not having the correct plan to disburse your money puts your hard work at risk.
In a nutshell, tactical asset management involves dividing your retirement blueprint into six segments, each with a specific goal, that give you a 20-30 year forward view of your retirement. Tactical asset management is a shift in mindset from one “ROI,” Return on Investment, to another ROI, Reliability of Income.
Basing your retirement on a Reliability of Income model versus Return on Investment can help you:
Achieve a more reliable monthly income.
Address inflation issues
Segregate an amount of money that can be used to generate additional income, or that can pass on to your heirs.
Maintain reasonable liquidity within your portfolio
As always, you should keep in mind that investing is risky and that investors can and do lose money. As with any other investment strategy, tactical investing’s past performance is not indicative of future results. A tactical approach entails risk, including the risk that accounts can still lose value. There’s also a risk that such a defensive position may prevent accounts from appreciating in value.
Obviously, there isn’t enough space in this short article to give you all the details about how tactical asset management works, my book, Retirement Made Easy, can fill you in. Contact my office and I will be glad to get you a copy.
Investment advisory services offered through Horter Investment Management, LLC, an SEC-Registered Investment Advisor. Horter Investment Management does not provide legal or tax advice. Investment Advisor Representatives of Horter Investment Management may only conduct business with residents of the states and jurisdictions in which they are properly registered or exempt from registration requirements. Insurance and annuity products are sold separately through Marra Financial Group. Securities transactions for Horter Investment Management clients are placed through AXOS Advisor Services, TD Ameritrade and Nationwide Advisory Solutions.
There is no guarantee that a manager will be able to avoid future market losses by going risk off to cash. In addition, holding cash may carry the risk that a manager will not be invested during periods of positive market performance.
Past performance is not indicative of future results. Investing is risky. Investors can and do lose money. Like any other investment strategy, a tactical investing approach entails risks, including the risk that client accounts can still lose value and the risk that a defensive position may, at any given point in time, prevent client accounts from appreciating in value.