By FPA member Darrin S. Cohen, CFP®, CRFA™
Last Updated: March 15, 2010
In competition, you are taught early and often that winning is the only thing that matters. But, when it comes to your retirement investments, not losing should be your primary focus. Not losing may seem like such a counter-intuitive approach to reaching your goals; however, especially when you are taking withdrawals from your investments, it can be critical to your success.
You have heard that over time, the market always performs. Therefore, you should simply set a course for your investments and watch the good and bad times play out. That would be just fine if you had an 80-year timeline for your investments. Although we are living well into our 80s on average, most of us only have about 20-30 years for our main investing horizon. Having just experienced the "lost decade," many now acknowledge that "buy and hold" investing alone is not the definitive answer.
There are other challenges. You know that you cannot predict the future or time the market. You have also learned that simply diversifying asset classes or sectors will not guarantee retirement success. In 2008, the financial markets were in such dire shape, there was no real good place to hide. Certificate of Deposits (CDs) and money markets were paying so little, and bonds were at great risk due to the possibility of rising interest rates and inflation. The stock market volatility was way too scary and risky for those already in or facing retirement.
So, now that we agree that not losing is critical, how do you go about doing it? Here are some places to start.
Consider not only diversifying asset types (stocks, bonds, etc.), but also diversifying money management strategies. Traditional buy-and-hold investing should not be abandoned, but it is important to also consider adding tactical asset managers to the mix. It is impossible to time the market, but asset managers can do a good job of making tactical shifts based on current market conditions. They will not always be right, and you must remember that there is never a guarantee that an investment strategy will produce positive results. But, if they are right 75-80 percent of the time, you may be better off.
Another approach to consider is quantitative rules-based investing. This technique removes all of the emotions of investing. A formula is simply plugged into a computer, and every month or every year, the computer determines which holdings are bought, sold, or held based on the formula.
Currently, many magazines and newspapers are touting the benefits of guaranteeing a portion of your income. In fact, Congress has even discussed the possibility of adding tax benefits to motivate people to purchase these guarantees. While doing so will increase your investment costs, you may want to consider it to cover the fixed monthly expenses that you require in order to live comfortably.
Whatever you decide, do keep diversifying. Go a step beyond stocks, bonds and cash, and diversify your money managers as well. By doing so, you might never get to brag to your neighbors about having the best investment performance; but more importantly, you could be the over-all winner by simply not losing.
FPA member Darrin S. Cohen, CFP®, CRFA™, is the Managing Partner and founder of Wealth Enhancement & Preservation. He is the treasurer for the Financial Planning Association of Georgia. He also serves as Vice President and Treasurer for HomeStretch, a North Fulton non-profit that assists working homeless families.