Here is a portfolio cheat-sheet for pre-retirees
I don’t mind telling you that my team and I feel we are doing the most meaningful work of our careers. Part of that is publishing articles in this Forbes.com blog with greater frequency. To that end, if there is any topic you think would make for a good post, just let me know and we will consider it. We have no shortage of ideas, but we also do not have a monopoly on the good ones!
The financial markets and economy, not to mention this damn virus, do not care that you are just about ready to retire. That means when it comes to your portfolio, you have to be armed with as much value-added knowledge as you can get. After all, the investing methods that got you this far may not get you to and through retirement. That was a loud message the markets delivered over the past 6 weeks.
In case this is not over quickly
In today’s post, I am sharing a bear market investor’s “cheat-sheet” I created in response to several recent discussions with clients, with industry peers, and as a guest on a recent podcast and industry webinar. The bottom-line: don’t assume anything. Be optimistic about our collective future as humans. But do not make the mistake of thinking that the financial markets will magically get better right away. Here we go…
Volatility: don’t fear it or ignore it. Embrace it, and exploit it to your benefit
Here is what I see as a set of guidelines for retirement and pre-retirement portfolios, right now. If you are one of those investors that believes the best way to invest for retirement is doing nothing in a bear market, and waiting for the market to recover, this will not interest you at all. However, if you are concerned that every $1,000 you saved for retirement is at risk of being cut in half (as in the last 2 bear markets and recessions), read on.
Portfolio guidelines for retirees, right now
It’s all about being 4 things: liquid, flexible, adaptive and disciplined. That’s it. The rest of the story is just the details. And, here are those details.
High cash position
Hold more cash than you usually do. There is a lot of opportunity coming. Frankly, when and in what form are not yet known. What is known is that you can rip a hole in your retirement lifestyle if you try to get too “cute” now. Having more cash is certainly not about the yield, since that yield is about zilch. And, it is less about sheltering yourself from the stock market. It is mostly about liquidity. This is a time where you want to see the road clearly in front of you. Cash helps you do that. I am not saying have all your money in cash. But more than you typically would.
Minimal allocation to individual stocks
There will be a time to rebuild stock portfolios. But for retirees and pre-retirees, that is not a priority right now.
Too much of the stock market is being whipped around in unison. And, the impact of index funds is being felt in a big way. In the current environment, value is not being recognized. At some point later in the cycle, it will be. That’s the time to get active here.
Long and short ETFs
My last article described a method known as “arbitrage,” or investing in pairs of securities. I think this can potentially help investors make good use of their cash while sidestepping the “all in or all out” decision that freezes so many investors at times like these. It’s about flexibility at a time like this.
Considering call options and put options
This one might not be within your reach as an investor. However, it’s worth bringing up in concept anyway. This is the adaptive part of the short list I noted above. Options allow us to participate in the upside of the broad market or segments thereof, but we can define our maximum loss. That’s because if you buy an option, you can’t lose more than you put up.
Even if you decide that options are not for you, there have been option-oriented funds around for decades. So, you might be able to “outsource” that part of the work.
The issue I have with the “let it ride” crowd in S&P 500 Index fund portfolios and the like is this: no one knows where the bottom is, and no one knows how many years it will take to recover to the asset level you had a month ago. As I will show in another article soon, that recovery time could be months, years or decades. Yes, decades.
Have a process, that focuses on your objectives
Last and definitely not least is the discipline part. My late father was never a professional investor, but he taught me to chart stocks when I was 16 years old (I, in turn, taught my own son, starting around the same age).
40 years later, those early lessons help drive my investment process in a way that relies on process, data, format, and above all else, aggressive capital preservation. It crowds out much more of the flippant, erratic, uninformed and frankly biased decision-making that we see and hear all around us, especially these days.