|
|
|
"We believe that Buy and Hold is an inherently risky investment strategy for retirees"
The financial powerhouses of Wall Street (brokerage firms, mutual fund families, etc.) would like you to believe that a passive, "buy and hold" strategy works best for all investors. It doesn't. Buy and Hold investing may be acceptable for an investor with a very long time horizon, or for an investor whose portfolio is large enough to weather the inevitable market swings without affecting their lifestyle. But for retired investors who depend on their portfolio for some or all of their income, Buy and Hold is a risky investment strategy. For these investors, preservation of capital is paramount, and that requires active management! Below are just a few of the reasons why:
Circumstances change in retirement. During the accumulation phase (before retirement) of our life, our primary objectives are current savings and tax-deferred growth. We can afford a higher tolerance for risk, since a longer time horizon provides plenty of time to recover from market declines. Everything changes, however, once we retire and begin taking distributions (whether voluntary or IRS-mandated Required Minimum Distributions). Now, market downturns can have an immediate impact on our lifestyle in the form of reduced income, so capital preservation needs to be our primary objective. Since we can't predict when these inevitable bear markets will occur, we need to have a strategy to manage this risk on an ongoing basis.
Bear Markets are inevitable. Since 1929, bear markets have occurred, on average, once every five years, with an average decline of over 39% and an average duration (beginning of decline to break even) of 3.5 years. Since a 65 year-old couple has a 75% probability that at least one spouse will live to age 91, they should expect to endure (on average) five bear markets during their retirement years. Since we can't predict when a bear market will occur, we need an investment strategy to manage this risk on an ongoing basis.
Market losses are hard to make up. Based on the statistics above, Buy and Hold investors spend a full two-thirds of their time in the market either suffering through market declines, or just trying to get back to break-even? It's harder to make up losses than most investors realize:
Withdrawals during a declining market can decimate a retirement portfolio. Each successive withdrawal becomes a larger and larger percentage of the portfolio value because the capital base is shrinking in size. These withdrawals, together with bear market losses, may reduce the portfolio value to the point that it can never recover, even after the market turns and starts to advance again.
Volatility reduces returns. Another disadvantage of Buy and Hold investing is the volatility investors must endure. Large swings in returns are not only psychologically nerve-wracking, they can also hurt performance. As volatility increases, compounded returns go down - and it's the compounded returns that you actually spend. Note in the table below that the simple average return of all three hypothetical portfolios is 5%. But only the portfolio (A) which experienced zero volatility, had a compounded return of 5%. As volatility increased in Portfolios B and C, compounded returns went down.
We believe in a more proactive, risk-management strategy - monitoring your portfolio carefully and making changes as current market conditions dictate. And we won't hesitate to hedge our portfolios or move entirely to cash to protect capital if we believe it is necessary. This risk management philosophy is the basis of our proprietary MarketGUARD Asset Management Service. |
©2010 Applegate Investment Management, LLC . All rights reserved.
|