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Many people today, looking ahead toward retirement, are concerned about the continued volatility of the financial markets, especially in the past few years, and the effect that this will have on their own nest eggs. For most, the recent subprime mortgage fiasco, the failure of major financial institutions, and the resulting recession has already devalued their savings and investment assets to a significant degree.
Unfortunately, more pitfalls are certainly out there that could adversely affect the value of your portfolio: unbridled government spending, increased regulation, the relative strength of the dollar and the national economy, inflation, unemployment levels, the possibility of terrorist attacks, and much more.
In the face of these uncertainties, many brokers and financial planners continue to advocate the 40 year old practice of conventional asset allocation strategies for their clients, usually a roster of proportional investments in various stocks and bonds. But in a market where nearly all sectors tumbled, as happened in 2007-8, a “conservative” portfolio of 60% equities and 40% bonds lost approximately 20% of its value. Investors with a higher proportion of stocks suffered a far greater loss.
Worse yet, most of those who lost so much had no idea of the risks to which they were being exposed. The financial community routinely fails to tell investors that conventional asset allocation has failed to protect assets over the past two downturns.
Americans have now experienced a decade of disappointment – virtually no growth and some substantial losses. Yet most financial advisors all seem to parrot the same advice: “Hang in there; it’s going to come back.” In other words, “Buy, hold and pray.”
They assure investors that stocks must be the “bedrock” of their portfolios to offset inflation, in spite of the fact that statistics show that stocks have underperformed long-term U.S. Treasury Bonds for the past 5, 10, 15, 20 and 25 years.
So what is an aging investor to do? Financier Warren Buffett suggests that if they want to minimize the risk of a severe downturn, they might consider other investments like mutual funds, annuities or other vehicles if they trade only moderate amounts and are willing to pay small fees or commissions.
Annuities, for example, are designed as a risk management tool. If investors want to protect their principal and guarantee a moderate return, they can do that, for example, through a tax-deferred annuity and invest the growth portion of their money more aggressively.
My argument with conventional advice from brokers and advisors is that they often do not reveal the entire spectrum of plans that people actually have to choose from – like having dinner in a restaurant where you’re only shown a part of the full menu.
A bear market crisis or a prolonged slump need not entail the loss of a significant part of your retirement portfolio, if you make yourself aware of the full range of financial vehicles that are specifically designed to protect you from these adverse conditions, yet grow your funds in times of prosperity and don’t simply rely on glib formulas from brokers that have failed time and again.
In summary, demand full disclosure of the choices available – you do not have to risk your assets for the opportunity to grow your wealth. If you, or your financial advisor, can develop a plan that includes these contingencies, you will help ensure that your nest egg lasts a lifetime – your lifetime.
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Russell K. Jalbert, CFP®, one of the nation’s leading financial professionals, has advised successful individuals in the management and distribution of their wealth for more than 35 years with his company. For more information, visit Jalbert Financialor call 877-807-7233.
