Is Your Retirement Portfolio Following the Fundamentals?

Is Your Retirement Portfolio Following the Fundamentals?

| August 20, 2018

There are several fundamentals that all successful investors should follow.  These fundamentals become even more important to execute as you approach retirement. After the transition into retirement, most people will have to use their savings to help supplement their other forms of income.  Therefore, for the first time, how your money is invested can impact your income.  And unlike decades before when you were younger, you now have less time to recover from mistakes! The information we provide you with below is not based on our opinion, it is evidenced-based fact.  You should pay attention, because this is what we have seen work!

Asset Allocation:

Studies show that the most important decision you can make regarding your portfolio is your decision as to your asset allocation*, which, simply stated, is the percentage of stock you own to the percentage of bonds and cash that you own.  What that means is this; it's not your ability to pick the next winning stock or your skill at guessing when it’s time to get in the market or out of the market.  In fact, stock selection and market timing combined are only a small determinant of investor results, regardless of the amount of magazine articles and television air time that is dedicated to selection and timing!  The plethora of financial "noise" out there often leads investors to think that what is being broadcast is relevant to them; therefore they should be doing something! This type of hyperbole may sell magazines, but its not in anyone's best interest to pay attention to it. The truth of what you need to listen to is much less sexy:  make a well-informed decision regarding your asset allocation and then hold it steady, regardless of what markets are doing or pundits are shouting.


Investor Behavior & Market Timing:

Studies show that individual investors’ performance lags behind the benchmarks they invest in year over year by about 3.4% ** Why?  Individual investors tend to make all the wrong moves at all the wrong times.  Studies show they are hesitant to buy into a market when it is down (what if it falls further?)  and hesitant to get out of the market when it is up (what if it goes higher?), leading them to buy high and sell low, exactly the opposite of what you should do!  There are always people who believe they can successfully time the market.  You may have heard stories about someone who withdrew from the markets before the Financial Crisis of '08-'09, thereby being in cash before the markets crashed. Here is the truth about market timing that many people don’t realize.  In order to have market timing actually work in your favor, you need to make two correct calls:  the exact right time to get out of the markets, and the exact right time to get back in!  The odds of making two correct calls?  Probably very unlikely.


Interestingly, most people understand this concept:  don’t put all your eggs in one basket.  However we see people get this wrong with some frequency!  Every well-diversified portfolio should have certain building blocks included:  for example, U.S. Stock, International Stock, Emerging Markets, Short and Long term Bonds, etc.  You need to hold each building block in a thoughtful percentage, more of some, less of others, depending on your need for return and your tolerance for risk.  Oftentimes, people hold many different mutual funds and believe they are diversified.  What they don’t understand is that under the hood of these funds, many own the same core components.   We diversify to help smooth out the ride;  there is little consistency in which building blocks will be the market leader or laggard from year to year.  Owning a thoughtful piece of each allows you to benefit from the leaders while not getting "killed" by the losers.


Once you have made your Assset Allocation decision, let’s say for example, you have decided you would like to be a moderate investor with a portfolio of 60% stock and 40% bond.  Due to market performance, these percentages will shift.  Take the year 2017 where stocks outperformed bonds.  Your 60/40 portfolio may end the year at a 70% stock, 30% bond allocation.  Rebalancing is a process for selling the higher performing asset class, in this case stocks , and buying the lower performing, in this case bonds, to bring your portfolio back to its original allocation.  What does this accomplish?  Well first off, we have  a process in place for when we buy and when we sell that is quantitative in nature. You have also a process in place to restore (or bring back into alignment) your selected risk level. Lastly, when you rebalance, you will essentially sell when things are up and buy when things are low, exactly what you want to do!   

When it comes to investing and creating a growing stream of retirement income, there is no magic pill or crystal ball. For the first time, your investments and your income become intertwined.   It is our belief that seeking qualified professional advice, incorporating the outlined investment fundamentals above, along with time in the market and good behavior will be what serves you best.  To learn more, contact us.

* Source: Brinson, Hood, and Beebower (BHB) (1986)

**Source: Dalbar, Inc., Quantitative Analysis of Investor Behavior, December 2015. The bar chart depicts the average annually compounded returns of equity indices vs. equity mutual fund investors based on the length of time shareholders actually remain invested in a fund and the historic performance of the fund’s appropriate index. Past performance is no guarantee of future results. Investors cannot invest directly in an index.

The views depicted in this material are for information purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual. All investing involves risk, including the possible loss of principal.  There is no assurance that any investment strategy will be successful.