&l;p&g;As a former Wall Street broker and now fee-based advisor of almost 30 years, my experience has shown that, if your retirement portfolio dramatically declined during the&a;nbsp;2000&a;ndash;02 and 2007&a;ndash;09 market drawdowns, these three things were likely true:
&l;/p&g;&l;ol&g;&l;li&g;It wasn&a;rsquo;t your fault.&l;/li&g;
&l;li&g;Your portfolio was designed to perform that way.&l;/li&g;
&l;li&g;It will likely do so again.&l;/li&g;
What do I mean? Without getting too technical, portfolios are typically designed to achieve&a;nbsp;either &l;em&g;relative&l;/em&g; returns or &l;em&g;absolute&l;/em&g; returns. Given that 95% of all individual investor portfolios are relative in nature, chances are yours is as well.&l;sup&g;1&l;/sup&g;&l;strong&g;&a;nbsp;&l;/strong&g;
Some portfolios are designed to achieve favorable performance &a;ldquo;relative to&a;rdquo; the market. So, despite the additional fees and your best efforts, this type of portfolio is designed to do nothing more than track the market, which means if the markets are up, so are you &a;ndash; and that&a;rsquo;s a good thing! Unfortunately, it also means when the markets are down, you are as well &a;ndash; and that&a;rsquo;s decidedly &l;em&g;not&l;/em&g; a good thing.
&l;strong&g;Here&a;rsquo;s the problem: As long as they&a;rsquo;re down less than the market, portfolios are deemed to have &a;ldquo;beaten the market&a;rdquo; &a;ndash; even if you lost money.&l;/strong&g;&a;nbsp;This means their measure of success may not be in alignment with yours. That said, it&a;rsquo;s not the fund manager&a;rsquo;s fault in most instances; they&a;rsquo;re simply restricted by the confines of the prospectus (the thick booklet you receive when you invest in a fund). Upon examination, you&a;rsquo;ll find that most retail investment platforms are required to remain, on average, about 80% fully invested,&a;nbsp;&l;strong&g;regardless of market conditions&l;/strong&g;.&l;a href=&q;https://www.ici.org/viewpoints/view_17_household_fund_investing&q; target=&q;_blank&q; rel=&q;nofollow&q; &g;&l;sup&g;1&l;/sup&g;&l;/a&g; This means that, if the S&a;amp;P 500 Large Company Stock Index is declining, and your large company stock mutual funds must remain at least 80% invested in this sector, short of selling out of the funds in an attempt to time the market, there&a;rsquo;s nothing either you or the manager can do to avoid a similar decline in your portfolio. &l;strong&g;I believe this very type of lackluster performance is what led an entire generation of investors to seek an alternative. &a;nbsp;&l;/strong&g;
The thought was that, if professional management (and their fees) performed no better than the market, why not turn 180 degrees, give up the ghost, and accept the ups and downs of the market by employing a &a;ldquo;buy-and-hold&a;rdquo; approach with low-cost index funds? By having fewer fees, they would retain more of the market upside captured in their portfolio. Unfortunately, it also meant capturing all of the market downside as well. The result was the same lackluster performance &a;hellip; just with lower fees.
While this strategy worked well during the go-go period of the &a;lsquo;80s and &a;lsquo;90s, the same has not been true since the turn of the century. &l;strong&g;In fact, my experience has shown this to be the primary reason retirement portfolios have been underwater for most of the last decade and a half.&l;/strong&g;&a;nbsp;Thankfully, there&a;rsquo;s an alternative that&a;rsquo;s been used by institutions for decades.
This refers to portfolios historically reserved for institutional investors, like pension plans, foundations, and large charities, and designed to achieve favorable performance&a;nbsp;&l;em&g;regardless of market conditions&l;/em&g;. These strategies&a;nbsp;are&a;nbsp;defined by a clear and simple philosophy:&a;nbsp;&l;strong&g;to help protect you&a;nbsp;from severe losses in down&a;nbsp;markets while providing quality participation in rising markets.&l;/strong&g;
&l;em&g;How do they do that?&l;/em&g; They start with portfolios comprised of mutual funds and ETFs from some of the best and most well-known firms in the industry. Firms you already know, like, and trust. They then utilize market-based quantitative algorithms to direct the portfolio&a;rsquo;s movements. These algorithms, which are designed to recognize and exploit positive or negative trends in the market, have had a history of&a;nbsp;significantly&a;nbsp;reducing&a;nbsp;downside risk while providing highly asymmetrical investment returns during negative&a;nbsp;markets.
Rather than attempting to &a;ldquo;time the market&a;rdquo; when a negative trend has been established, the models will either exit the market and go to cash&a;nbsp;to protect the portfolio or go inverse to profit from the decline. Conversely, when the markets begin to recover, and a healthy trend has been established, the portfolio is then re-engaged in the market. In short&l;strong&g;&l;em&g;, &l;/em&g;&l;/strong&g;they&a;rsquo;re defensive in bad markets yet opportunistic in good ones.
While past performance is no guarantee of future results, those utilizing such strategies were able to side-step much of the last two market declines, which is certainly compelling, given our current markets.&l;strong&g; And yes &a;hellip; they are now available to you, too.&l;/strong&g;
While there has been a significant migration toward absolute-return portfolios by individual investors over the past 15 years, they are still widely unknown to most.
&l;strong&g;Why is this important to you?&l;/strong&g;
While the standard &a;ldquo;buy-and-hold&a;rdquo; strategies employed by the majority of retail investment firms may have served you well while you were accumulating your assets, they can be anything but your friend once you&a;rsquo;ve amassed your pot of gold. Therefore, once you&a;rsquo;ve accumulated your nest egg, you must &a;ndash; let me stress that again &a;ndash; you &l;em&g;must&l;/em&g; employ tactical &a;ldquo;absolute-return&a;rdquo; strategies similar to those utilized by large pension plans and university endowments. The reason for this is they&a;rsquo;ve not only had a history of protecting investors from severe losses in down markets but have done so with 60-80% less risk and volatility than traditional buy-and-hold portfolio options offered by many &a;ldquo;establishment firms.&a;rdquo;
This is vitally important for two reasons:
&l;ol&g;&l;li&g;We don&a;rsquo;t know when or how deep the next decline will be.&l;/li&g;
&l;li&g;We don&a;rsquo;t know how long the recovery will take.&l;/li&g;
So, if you have accumulated assets and would rather not go through the pain and anguish of another 2008, along with the time it took to recover from those losses, you owe it to yourself to learn more.
To make my attorneys happy, it should be stated that these strategies are certainly not a guarantee against losses. However, when you consider that pension plans, charitable foundations, university endowments, as well as some of our country&a;rsquo;s wealthiest families have been employing these time-tested strategies for decades &a;hellip; maybe it&a;rsquo;s time you did so as well.
&l;em&g;This content was brought to you by Impact PartnersVoice. Investment advisory services offered through Horter Investment Management, LLC, a Registered Investment Advisor. Insurance and annuities offered through Mark D. Kinney, MA Insurance License #1729668. DT #480923-0519&l;/em&g;