This weekly column has explored the topic of risk management in some detail over the past three months, addressing several questions:

  • Are the retail investor and financial adviser underserved by the buy-and-hold philosophy?
  • What is the potential role for dynamic risk-managed strategies in investors’ portfolios?
  • How might modern, risk-managed portfolios be best constructed on a conceptual level?

In the most recent three columns, the focus has been on a related question: What risks, common to virtually all investors, do such strategies help mitigate?

Today, we offer a quick look at another risk factor.

The sequence-of-returns issue is most commonly written about for retirees who are making withdrawals from their investment portfolios. How investment returns are “sequenced” can have a profound impact on whether a retiree’s income-distribution plan will survive throughout a lengthy retirement. A portfolio consisting of dynamic risk-managed strategies can help smooth out market volatility and seeks to avoid the worst drawdowns of bear markets. This can help minimize the impact of the sequence of returns for retirees.

But what about those individuals who are not yet in retirement, are still in investment accumulation mode, and are not taking any withdrawals from their investment accounts?

You might have guessed it. There is a specific category of risk they face also—retirement date risk.

For investors who are within five to 10 years of retirement, the sequence of returns for their investment portfolio is also important. For passive, buy-and-hold investors, a singular market event (such as that experienced in 2008–2009), or a less dramatic series of negative investment return years, can erode a portfolio’s value to the point where a planned retirement date might have to be postponed.

If the portfolio drawdown is significant enough, this could be a postponement that lasts a long time.

Postponing retirement may be a viable option for those who are in a stable job situation, but it will be difficult for those who have lost jobs or are experiencing declining health. Alternatively, older workers could still follow through with a planned retirement date but will probably have to make a significant adjustment to their retirement income expectations. Retirement date risk impacted many individuals after 2008–2009, as they had to deal with the triple negative impact of a loss of investment wealth, high unemployment for older workers, and a hit to housing values.

A paper written in 2012 for The Russell Sage Foundation and The Stanford Center on Poverty and Inequality, “Older Workers, Retirement, and the Great Recession,” said,

“The increase in unemployment among older adults was nonetheless far more prominent than in prior recessions. Older adults also spent more time out of work when laid off. In the early stages of the recession, older workers were more likely to postpone retirement and remain in the labor force, presumably in an effort to counter losses in retirement wealth.”

According to The Federal Reserve Bank of St. Louis, the net worth of U.S. households and nonprofit organizations rose from $44.2 trillion in 2000 to a pre-recession peak of $67.7 trillion in the third quarter of 2007. It then fell $13.1 trillion to $54.6 trillion in the first quarter of 2009, about a 20% decline.

Trend in U.S. Nominal Net Worth: 1950–Present Day

The good news is that household wealth has rebounded impressively from the depths of 2009. But, the breakeven period for statistical household net worth recovery still took four to five years—critical years for those approaching retirement. In the real world, many people have still not recovered, for a variety of reasons.

Michael Kitces, a well-known blogger and speaker, has written about retirement date risk and says in part,

“The reality is that sequence of return risk is equally relevant for accumulators in the years leading up to retirement as well. The only difference is the problematic sequence is reversed—for retirees, the dangerous sequence is to get bad returns at the beginning (of retirement), while for accumulators it’s getting bad returns at the end (of the accumulation phase) that causes the problem. … Accordingly, accumulators in the final years leading up to retirement may wish to proactively manage risk and reduce the volatility of the portfolio, specifically as a means to reduce the retirement date risk they face.”

While investment theory is important, and statistics can provide many insights, what is truly most relevant for individuals, couples, and families is how their financial and investment plan addresses their specific situation and their long-term objectives.

Flexible Plan Investments believes goals-based investment planning benefits from recognizing the many types of risks that investors may face.  It is also served well by incorporating modern portfolio strategies that help provide portfolio growth, while proactively managing risk in any type of market environment.

(Note: We recently expressed our support and best wishes to those around the U.S. facing several natural disasters. This past week provided another, and our thoughts are with the families trying to recover from Hurricane Florence, as well as people in Massachusetts affected by the series of tragic gas explosions.)

FPI Research update

Domestic equity indexes posted strong gains last week, bringing the indexes to near-record levels. Strong economic data contributed to the gains, but trade fears reined in indexes on Friday (9/14) after the U.S. announced plans to impose an additional $200 billion in import tariffs on Chinese products.

The yield on the 10-year U.S. Treasury note rose last week to just below 3%, a level which hasn’t been breached since May. Bond yields move inversely to bond prices.

Wage growth may be trending higher. The most recent report announced wage growth is up 2.8% over last year, which is more than the growth in inflation (+2.7% year over year). The unemployment rate remains steady at 3.9%, providing confidence that the labor market remains strong.

With the labor market continuing to grow and real wages expected to increase, we anticipate the Federal Reserve will continue to gradually raise rates. The normalization of monetary policy will be paramount in the near term given the persistence of the bull market.

We have several trend-following strategies at Flexible Plan. These strategies tend to perform well in markets where fundamentals and technical remain sound, indicating a bull market could continue. Our strategies trigger risk-management measures when volatility rises and seek to provide safety in bear markets.

One example is our Self-adjusting Trend Following strategy. This strategy can obtain up to 2X exposure to the NASDAQ 100 Index, but can also move to single, neutral, and inverse exposure. This allows the strategy to not only potentially avoid losses but also profit from declines in the underlying index. The strategy is currently at 2X leverage and has been for some time, indicating technical indicators remain favorable in the current market environment. If there is a structural change in the technical indicators the strategy examines, it will react by reducing exposure and managing risk on the downside.

For investors looking for risk management in all market environments, we offer our All-Terrain suite of strategies. These strategies allocate across several asset classes proven to gain value over long time horizons. When used as part of the core holdings in a portfolio, these strategies can help provide potential exposure to asset classes not present in a traditional core. Holding an All-Terrain allocation in the core holdings of a portfolio could provide some much-needed protection during periods of equity volatility, which can chop up returns in the short term.

PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.  Inherent in any investment is the potential for loss as well as profit.  A list of all recommendations made within the immediately preceding twelve months is available upon written request.  Please read Flexible Plan Investments’ Brochure Form ADV Part 2A carefully before investing. View full disclosures.