The keys to investing this decade are very different from the last decade!
If you are reading this you likely fall into one of four categories:
- You are within 10 years of retirement
- You are already retired
- You are a financial advisor who caters to one or both of the first two groups
- You are a future beneficiary of someone in the first two groups, and want to make sure they don’t slip up between now and the time you are in charge of the family’s wealth
- Regardless of which of the four categories you identify with, here is a bottom-line, to-the-point, itemized list of the very top priorities for you during this new decade. After all, if you are a Baby Boomer, you are running out of time to reliably go back and make what you made all over again.That means you need to think of your portfolio differently than 10 years ago. And, given the recent good fortune provided by the U.S. stock and bond markets, you need to think very differently than you did just a year ago.Ready? Here’s what you need to know.
Prioritize absolute return over relative returnIn the bull market decades (like the last one), investors became index-trackers. If they used an active money manager instead of an index fund, that manager was considered a failure if they did not consistently exceed the return of the relevant index.How many times have you heard something like “90% of active managers don’t beat the S&P 500”? Do folks consider that a big reason they don’t beat it is that they are not trying to? Or, put another way, many investment approaches do not aim to have the potential to go up or down 40% in a year. But the S&P 500 sure does.
Adopt a secular bear market mentality…just in caseMany investors are still stuck in the past, believing that investing in stocks is some kind of automatic wealth-production system. Financial media that try to market the sizzle of investing do not make this perception easier to combat.After all, secular bear markets are an enemy of Wall Street. Trading activity drops as investor fatigue sets in; clients get impatient and job cuts accelerate.
Understand what the end of the bond bull market meansInterest rates generally fell from 1980-2019. As a result, bond investments posted their best returns in history. Even if rates continue to fall over the next decade, they are now starting from a much lower rate level. That means that the bond gains many have seen as a birthright for nearly four decades will not be matched. It changes the whole way we look at bond investing.
Be realistic about the inevitability of U.S. Deficits (Government and Consumer)The hefty tab run up by the U.S. government over the years is a cause for some concern, and the media covers this regularly. The plight of the consumer is potentially much worse.Credit card debt has become the currency of choice for many families. We marvel at how long people have stretched the proverbial rubber band of borrowed money. When the band breaks, this could have a ripple effect on the financial system. Rather than downplay it, advisors should be stirring up the conversation about it, and including their clients.
Understand how the new market “players” impact your retirement goalsHigh-frequency trading firms, algorithms, hedge funds and other methods of investing have changed the way everyone else must now approach investing hard-earned wealth. Information travels in a flash, and the traditional, fundamentals-driven investor is at great risk of being collateral damage.What financial pros can do to help them is very straightforward. They need to understand the threat these new “players” have on financial markets and security prices, and incorporate into their portfolios the type of safeguards that protect clients from quickly ending up outside their comfort zone.
A recent “for instance”The most recent example of what is at risk was in December of 2018. The S&P 500 fell over 15% in 3 weeks, capping off a decline of about 20% in less than 3 months. The market recovered, as it often does.But there will be a time when “buy the dips” doesn’t work. That is when the client’s portfolio, and therefore, their confidence in you, will be at risk.Take good care of what you have built. Do not extrapolate your good fortune into the future, and do not think you are smarter than you are. I have been humbled enough in 34 years in the investment business to know better. But if you have spent your days doing something other than watching other folks’ money, it is natural to crowd out critical threats because the noise of exuberance is so very loud these days.The S&P 500 is near all-time highs, and bond rates are near all-time lows. It’s time to heighten your attention to both the risks and rewards offered by such a unique period in our financial lives.