The equity markets have scorned investors like young love
gone badly.
As a result investors are scared to get back in the
game. And herein lies what I like to
call the paradox of equities – in order
to get the larger returns needed to make it comfortably to and through
retirement, an investor needs to take on more risk, which thus increases the
chances of catastrophic portfolio loss, which in turn severely inhibits gaining
those larger returns.
A
recent NYT article a friend sent me outlines this in more detail. The gist of it is that the bulk of Americans are
under saved, regardless of income level and net worth and thus need higher
returns to meet their goals. For
example, if you have a $4m in savings, but are accustomed to spending $300K a
year it may not last through retirement.
If we assume a 5% return, that money runs out in about 22 years.
There are a few things that complicate the above calculation
and could cut that 22 years down even more – low
bond returns, unfavorable
longer-term equity valuation levels, timing
of initial investment, and large drawdowns earlier in retirement, among
other things.
This is where a good advisor can help seek balance in this
paradox by assisting a client in taking on the risk needed to get the returns
and meet their retirement goal. This can be accomplished as follows:
- Cash flow modeling to see if/when client runs out of $ and adjust accordingly
- Moderate AND contain portfolio risk
- Make sure the client is understands and is comfortable with the risk/return profile of his/her portfolio
- Prevent the client from making the psychological mistakes (e.g. go all in at the top and sell out at the bottom)
- Increase the after-tax rate of return. As is said, it’s not what you make, it’s what you keep.
- Most Underrated: an advisor can provide counsel to clients, who have questions about their portfolio, how it’s constructed, the market environment, etc. Getting piece of mind and being able to sleep at night is imperative to prevent some of the biggest mistakes investors make.
That list is by no means all encompassing; however, I do
think it provides and adequate short summary of things advisors MUST do to get
their client to and through retirement. In
most cases that involves taking on some sort of equity exposure, even if
equities are no longer as popular as they once were.
Past performance is no
guarantee of future results. Diversification does not guarantee a
profit or protect against a loss. International investing involves special
risks, including, but not limited to, the
possibility of substantial volatility due to currency fluctuation
and political uncertainties. The views and opinions expressed herein
are those of the author(s) noted and may or may not represent the views of
Capital Analysts, Inc. or Lincoln Investment.
