Heavyweight boxing champion Jack Dempsey was fond of saying, “The best defense is a good offense.” While that may be true for prizefighting, the exact opposite has been proven effective for those seeking protective growth and sustainable reoccurring income from their retirement assets. Unfortunately, because most investors have been focused on an aggressive “offense” during the accumulation of their assets, many are not aware that a conservative “defense” is more effective in the preservation and distribution of these assets.

Are you conservative or aggressive?

I ask this question of every new client as a basis for our discussion. Given my practice caters exclusively to those approaching or currently in retirement, I find the answer is almost always “conservative.” Yet, upon review of their portfolio, in many cases we find their allocation is not in alignment with their expectations. Why is this? While I can’t definitively answer that for everyone, I can tell you what I’ve learned from those I’ve spoken with.

Most have continued strategies that worked exceptionally well during the 1980s and 90s, hoping they would continue to provide ample growth to support their desired retirement income. However, to the dismay and disbelief of those coming to my office, these strategies have been less than successful in doing so during the past decade. Now we’re not talking about day trading or shorting the commodities futures exchange! No, these time-tested strategies have been the very bedrock of prudent retirement planning for generations. So what’s changed?

200 years of market history.

I’ve been in this business for over 25 years. Eleven years ago, I began to notice a shift in the market’s reactions that conflicted with the continued message of optimism coming from the Wall Street economists. In response, I decided to do some research to see if I could make sense of it all.

After reviewing over 200 years of stock market history, certain repeated and predictable patterns began to emerge. The markets would swing between periods of exceptional and negative returns, each lasting approximately 20 years or so. Moreover, I learned the Price to Earnings ratio (PE Ratio) for the market was typically above 30 just before it transitioned from positive to negative and below 10 just prior to switching back to positive.

What this told us was in March of 2000 the markets transitioned from the positive trend that encompassed the go-go period of the 1980s and 90s, to the negative period we’ve been experiencing for the past decade or so. While that’s great history, what does it mean going forward? If over 200 years of market history were to repeat itself, we should be looking at roughly another decade of lackluster performance.  Largely explaining why many traditional strategies we relied heavily on during the 1980s and 90s have become so ineffective.  Additionally, should this negative trend continue for another 10 years as history would suggest, there’s no reason to doubt these strategies would continue to disappoint.  This topic has been referenced extensively on the web, so it should not be considered research outside the realm of easily attainable public information.  Unfortunately, it’s rarely utilized.  That said, it has been the basis for my recommendations, and served clients well for the past 11 years.    

Asset allocation.

In addition to the reason stated above, spreading our dollars amongst several asset classes no longer reduces risk as it once did. Various classes (large & small stocks, bonds, foreign, domestic, etc.) tend to move in unison much more than in the past. That is to say, they are more positively rather than negatively correlated.

This was clearly seen in March of 2009 when many 2010 target date funds (funds designed to become less volatile as they approach their “target date”) had declined in line with the markets despite being just 1 year from their target. This was not the fault of the managers, as they had done what was expected of them. However, this was the proverbial last straw for me, proving asset allocation as we knew it was no more!

As mentioned, my practice caters to those approaching or currently in retirement, so I had to determine a more effective strategy as the old solutions were no longer considered,…“solutions”.

So what IS the solution?

While I’m not presumptuous enough to believe this to be THE solution, it is certainly one that has worked (in varied forms) for those clients I have served. Considering those nearing or in retirement are interested in capturing and protecting growth, while generating reliable, sustainable and reoccurring income, I had to make a few changes to conventional allocation wisdom. Rather than burden the entire portfolio with the task of supporting income amidst a volatile market, I began segmenting the assets based on various periods of time. The initial component would be charged with generating the desired income from a conservative fixed account for the first 10 years.

As we have seen over the past 12 years, even during periods of negative market performance, there are short bursts of growth. The trick is to capture and protect them.  Unfortunately traditional “buy and hold” allocation models have now proven ineffective at accomplishing this.  Therefore, the remaining assets would be allocated (generally speaking) among a combination of conservative and income generating investment options designed to do essentially just that. While I’d like to delve into further detail regarding this component of the allocation, regulatory oversight prohibits me from doing so in this general format.  However what I can say, is when designed effectively, this strategy has delivered significant peace of mind for clients during a time when conventional strategies have provided them anything but. Therefore, if you’d like to explore this further, I encourage you to drop me a line.

So are you conservative or aggressive, and does your portfolio match?

Should you be following strategies based on the previous positive market trend, you may be surprised at your answer. How you address it, could mean the difference between success and failure at a time when failure is most certainly NOT an option.

As you approach retirement, your portfolio and life circumstances are specific to you, and should be treated as such. Consult an advisor specifically focused in this area, rather than a generalist.

About the author:  Mark Kinney, Certified Financial PlannerTM, has been serving retirement investors since 1987, and is the founding partner of Toole Kinney & Co. Financial Services located in Lee, MA.  Should you wish to speak with Mark, he may be reached directly at (413) 243-2654 x25.

Advisory services and services offered through Lincoln Investment Planning, Inc., Registered Investment Advisor, Broker Dealer, Member FINRA/SIPC. www.lincolninvestment.com  

The views and opinions expressed in this article are those of the author noted and may or may not represent the views of Lincoln Investment Planning, Inc.  11/12