Book Appointment

Investing Mistakes to Avoid

Season #2

As we find ourselves in the middle of 2023, the landscape of retirement investing has seen a seismic shift. We've watched the traditional 60-40 portfolio model — 60% in stocks and 40% in bonds or other low-risk assets — struggle to keep pace with current financial realities. It is not an overstatement to say that the dynamics of investing for retirement have changed fundamentally.

In the past, advisors suggested one of two approaches. Either they chased high-risk "bond-like" assets to compensate for the lackluster returns of traditional bonds, or they adhered to the 60-40 model, knowing full well that their clients' assets were not growing as fast as they should have. Neither approach is sufficient in the present climate.

2023 - The Year Everything Changed Forever

Enter 2023: we're looking at interest rates that have not only gone beyond the historical average for the Federal Reserve rate, but are also slated to rise further. Bonds, which have been a stable investment for the last decade, are not so stable anymore. Their prices are fluctuating greatly, making the goal of a low-volatility retirement portfolio more elusive.

Until a couple of years ago, many financial advisors, myself included, were perfectly content with having clients invest in target date funds, the asset allocation of which typically adheres to a 60-40 or 70-30 risk profile. But with the current upheaval in interest rates, I now advise clients to separate their investments. I recommend that they directly invest in equities for a portion of their portfolios and then directly in treasuries or another safe asset.

Indeed, many target date funds we have seen are taking on excessive risk. If we look at their growth charts over the past two years, they've experienced significant declines and have not fully participated in the recovery. It’s a bitter pill to swallow: if they didn't protect investors on the downside, they should at least help them capitalize on the upside. Unfortunately, across major firms, very few managed mutual funds are adequately managing risk, and almost all of them are failing to provide substantial returns.

The time for a more hands-on approach to retirement investing is now. Bonds, often considered a staple of a balanced portfolio, require a new perspective. Buying one-year or three-year treasuries is a common move among professional investors, but I encourage a much shorter-term approach.

In addition, it is crucial to consider the broader economic context. What if inflation remains at four or five percent for the next few years? What if four percent becomes the new normal for the next decade? These are questions that investors must seriously ponder, as the answers will significantly impact the bond and stock markets. Venture capitalists are already feeling the effects of changing interest rates, which are reshaping the dynamics of startup funding in Silicon Valley and beyond.

The realities of 2023 call for a forward-thinking approach to retirement investing. A buy-and-hold, set-it-and-forget-it mindset no longer suffices. Instead, investors must anticipate future economic conditions and adjust their portfolios accordingly. After all, it's not about what performed well in the past, but about what is poised to thrive in the future.

To that end, it is crucial to take control of your investment strategy, make informed decisions, and ensure that your retirement portfolio is not just surviving, but thriving in this new financial landscape. Only then can you rest easy knowing you are prepared for the future, whatever it may bring.

A Dangerous Time for Retirees

The current financial landscape can be seen as both precarious and advantageous for retirees, depending on the level of involvement they're willing to take in managing their investments.

Indeed, the situation is precarious in that passive participation in retirement plans, which has been the norm for many investors over the past few decades, is no longer sufficient. With the changing market dynamics, increasing taxes, and a lack of adaptability among professional advisors, it is essential for retirees to take a more active role in managing their retirement portfolios.

For years, the "by the book" approach to investing has served investors well. However, the financial environment we find ourselves in today is unlike anything we've experienced in the past. As the Wall Street Journal noted, the market has not experienced a bear market lasting this long since 1973. The traditional methods and statistics that have informed investment decisions for decades are now outdated, and investors must adapt.

This need for adaptation can also be seen as an advantage for retirees willing to take a more active role in managing their portfolios. By becoming active participants in their investments, retirees can make more informed decisions that are better suited to the unique challenges of today's financial climate. This allows them to protect their retirement savings and potentially capitalize on new opportunities.

What's The Solution

In these uncertain times, I recommend that clients approach their investments with a time horizon-based perspective rather than adhering to the traditional 60/40 rule.

First, divide your investments into three main buckets: immediate, intermediate, and long-term.

The immediate bucket should contain the funds you plan to use within the next couple of years. Given the current financial landscape, it's crucial to locate accounts that offer interest rates near or above the inflation rate, such as checking or money market accounts with an interest rate around 5%. This way, you can maintain your purchasing power for everyday essentials, despite rising costs.

The intermediate bucket should consist of investments you plan to utilize within three to five years. Here, you can afford a bit more volatility, but the focus should still be on stability. This could mean looking for CDs offering 6-7% returns or including some equities.

For the long-term bucket—funds you don't intend to touch for at least ten years—you have the luxury of time on your side. Over a ten-year period, the market's current fluctuations will likely become a blip in the grand scheme of things. In this bucket, you can afford to take on more risk, and you should aim for investments that not only recover but also grow over time.

In essence, the current financial climate requires us to shift away from the traditional investment wisdom of the 60/40 rule and towards a time horizon-focused approach. This allows us to adapt to the current market realities while still planning responsibly for our retirement years. It's important to realize that every investment decision should be based on individual circumstances and risk tolerance. Please consult with a financial advisor before making any significant changes to your retirement portfolio.