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De-Risking Your Portfolio

by BlogIncome DistributionIncome PlanningInvestment PortfolioWealth

Planning for retirement can be confusing and a bit scary. How do you manage your money now so you can be well-prepared financially for retirement? And how do you ensure that your retirement income will last throughout your life? How can you de-risk your portfolio to avoid the volatile markets like we’re seeing now (and will definitely see again). With increased life expectancies, it’s critical that you weigh all your options and plan carefully. This paper will discuss traditional retirement strategies, as well as introduce you to a less conventional, but potentially more effective and efficient approach to help you reach your retirement goals.

The Problem

Often, “the way we’ve always done it” is no longer the best way to achieve something. In retirement planning, a traditional portfolio uses only conventional stock and bond investments. In this paper, we refer to this as the Traditional Asset Allocation 6040 Portfolio (TRAA 6040). The problem? Traditional stocks and bonds on their own are not efficient for 100% of a retirement income portfolio. They expose a retiree to lower return potential and higher risk.

The Solution

Historically, stocks and bonds have been the mainstay of a typical retirement portfolio. The Hybrid Income Portfolio (HIP) offers a change in product allocation to reduce portfolio risk and increase the rate of return potential. The HIP strategy uses a combination of Traditional Investments (stocks & bonds), Structured Investment Products (SIPs) and Fixed Indexed Annuities (FIAs).

In addition to adding SIPs and FIAs, other strategies should be incorporated to lead to a more efficient retirement outcome, including:

 

  • Social Security Timing: Using the proper strategy to maximize this guaranteed income source
  • Tax Planning: Reducing taxes in retirement to increase the net after-tax income annually
  • Prudent Use of Home Equity: Incorporating HECM loans as a tax-free income source or portfolio safety net
  • Alpha Portfolio Management: Using active and passive portfolio management in the proper asset classes to add Manager Alpha to potentially increase returns. Manager Alpha is the rate of return an investment manager creates above or below the respective benchmark or index.

Read more in our white paper, A Portfolio for a Changing Economy

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Volatility: What’s the Best Defense?

by BlogIncome PlanningInvestment PortfolioRetirement IncomeRetirement Income PlanningWealth

Thoughts and ideas on the recent market losses and volatility due to the Coronavirus scare, and general economic and political uncertainty. Recent panic caused by the spread of the Coronavirus (COVID-19) has led to a stock market decline and has many investors feeling anxious. While portfolios will see ups and downs and this is a normal part of investing, the recent sell-off was sharp. It is in times like these that our team can best serve you by providing perspective on how we see these issues playing out.

The Best Defense is a Strong Offense
Nobody knows where the market is heading. Therefore, we believe that research and pro-actively planning, and implementing strategies that factor in potential significant drops in the market is critical. This is a strong offensive play in the world of portfolio planning (especially for those closing in on retirement). And what we consider to be the best defense to market volatility.

When the market heads up, and we get by this event-driven volatility, having a portfolio that has allocations to global equities to take advantage of market growth is critical. And if the market continues to fall, it’s critical to protect your principal with allocations to Fixed Indexed Annuities.

Either way, this “Hybrid Income Portfolio” strategy balances protection and growth, regardless of where the market heads. This is especially significant now, as equity prices are coming off all-time highs and bond prices are also high, as their yields have fallen to all-time lows. As we have seen recently, market conditions can change quickly in both directions.

For these reasons and more, we believe a Hybrid Income Portfolio to be a powerful alternative to other portfolio strategies. It’s also backed by academic research and has proven itself time and time again.*

The Impact on the Global Economy
Though the impact on human life is at the forefront of everyone’s concerns, there are many uncertainties surrounding the potential impact of the virus to the global economy. The global economy was already fragile from the nearly two-year-long U.S.-China trade war and the spreading virus will likely impact economic growth. While more equity market weakness is possible as the virus continues to grow globally, the downside could be limited as governments and global central banks have possible tools to combat the potential death toll and economic impact.

From the human life perspective, China took severe steps to limit the spread of the virus including forced quarantines, limited social contact, and significant population testing. We expect other inflicted nations to follow suit. From an economic perspective, global central banks including the People’s Bank of China and the Bank of Korea have already increased monetary stimulus or plan to do so. As we have seen in the U.S., and, specifically the U.S. housing market, over the past year, easing monetary policy can provide a potential economic stopgap. Furthermore, in the U.S., given unemployment levels near 50-year lows, the consumer, the driver of the current economic expansion, remains in good shape. We do expect market uncertainty to continue but downside may be limited. We also think the impact to markets will vary by sector. Sectors related to travel, such as cruise lines, airlines, and hotels are already taking a hit. Online entertainment companies and streaming services are performing better.

The team here at Retire Smart Network will continue to monitor and update information about our nation’s financial and physical health. If you’d like to discuss your portfolio strategy with a retirement planner or have a question about any retirement/financial topic, simply reach out and we’ll make it happen.

P.S. Don’t forget the Best Defense is a Strong Offense when it comes to protecting your health too…proper hand washing, eating right, getting enough sleep, avoiding sick people, stocking up on meds, food, water and household supplies, and having an attitude of positivity and gratefulness. Worrying about health or finances isn’t a productive use of time. Embrace optimism and reach out to us at any time.

*Sources:

  1. Morningstar Analysis, June 23, 2017, Snapshot Report.
  2. Roger G. Ibbotson, PhD Chairman & Chief Investment Officer, Zebra Capital Management, LLC Professor Emeritus of Finance, Yale School of Management Email: ZebraEdge@Zebracapital.com, Fixed Indexed Annuities: Consider the Alternative, January 2018.
  3. Shift Away from Potential Risk and Toward Potential Return, Nationwide (Morningstar), 06/16.