Preparing for retirement involves identifying your long-term investing goals, selecting an appropriate asset allocation to achieve those goals and saving over many years. You should know how to allocate the assets you hold in your retirement accounts to increase the likelihood of meeting your longer-term goals. You also should seek to make sure your money lasts your entire investment time horizon—the amount of time you need your assets to last.
Determining your investment time horizon is the first step to developing your asset allocation strategy. Your investment time horizon is how long you need your money to last. It doesn’t end on your retirement date. It doesn’t end when you elect to take social security. Your time horizon may even extend beyond your lifespan, if you’d like to leave behind money to others after you pass away.
Many people misunderstand their actual investment time horizon in retirement and use strategies that often don’t reflect realistic return expectations. They may rollover their 401(k)s and overly rely on investment products that don’t reflect their needs, or tilt too heavily toward conservative assets such as bonds. Relying on age-old cookie-cutter strategies—such as subtracting your age from 100 (or 120) to determine your stock allocation in retirement— may not be appropriate for you. Everyone has different financial needs, and a one-size-fits-all approach may lead to you running out of money during retirement or otherwise not reaching your goals.
At Fisher Investments, we believe stocks are often appropriate for investors with longer investment time horizons. The pain and panic associated with the short-term volatility in stocks can be curbed with a long-term investor mindset. Bear markets are inevitable, but every bear market has been followed by a bull market, and over time stock market gains have far exceeded shorter-term declines. While many investors may believe negative parts of the market cycle are the biggest risk to their finances, we believe one of the biggest risks is avoiding the stock exposure you may need to get to your goals.
It’s common for advisors to determine asset allocation by what’s performing well now, selecting other stocks with similar attributes, and universally applying this concept for all of their clients.
At Fisher Investments, we believe in a top-down approach for asset allocation. The top-down approach allows us to customize your assets for your investment time horizon and needs during retirement. With a thorough understanding of your needs, we can develop a strategic asset allocation plan that helps you get the most out of retirement. Once we determine your strategic asset allocation, we may make tactical adjustments over time to best capture returns over different parts of the market cycle.
Your strategic asset allocation means selecting asset classes appropriate for your goals. For many investors, it’s appropriate to a plan to invest for a long time—life expectancies have increased dramatically over the years, and it’s reasonable to assume that should continue. When it comes to investing, it’s typically better to over-prepare than to run out of money in your most vulnerable years.
Once you establish your investment time horizon, the next step is to create a portfolio strategy. At Fisher Investments, we believe no one investor or adviser can effectively analyze tens of thousands of individual securities, so we believe a top-down approach is typically the most effective.
Your comprehensive asset allocation strategy should be the guide for your investing decisions, and help keep you disciplined along the way. Your portfolio strategy is the core plan to develop your portfolio, and doesn’t account for market conditions.
The most important tactical portfolio management decision is your asset allocation. As a default, your portfolio’s asset allocation should typically be your strategic asset allocation, but we believe it is possible to enhance returns and reduce risk by making forecasts and changing asset allocation accordingly. This approach is generally driven by the market cycle. For instance, if we believe there is more bull market ahead, we would recommend clients stay maximally invested in stocks relative to their individual asset allocation. However, if we believe the worst part of a bear market is on the horizon, we may recommend a more market-neutral asset allocation. This could involve investing in less economically sensitive stock sectors, bonds, cash or other assets to mitigate the impact of falling stock prices.
While strategic asset allocation focuses on major categories of asset classes (bonds, equities, cash and other securities) choosing portfolio sub-asset classes involves determining which factors within assets you believe will do best going forward. These factors include country, sector, company size (for instance, large cap or small cap) and valuation.
Within bonds, these sub-asset-allocation factors include duration, issuer type (for instance, governments or corporations), credit quality and whether you are investing within a taxable or tax-advantaged account. Fixed income investments include US Treasurys, corporate bonds, municipal bonds and more.
Sub-asset allocation and tactical asset allocation are both informed by the three main types of drivers affecting stock market fluctuations, which are economic, political, and sentiment.
Stocks generally don’t rise in a straight line over time. They tend to have sustained periods of increases, followed by shorter periods of sustained declines. While there are no universally agreed-upon definitions, the major parts of the market cycle can be classified as follows:
Of course, there are other movements in the market cycle as well. For instance, a stock market correction is frequently a sentiment-driven market decline of 10% to 20%. These can occur at any time, for any reason or no reason at all, but they tend to recover more quickly than bear markets.
Bear markets can be deceptive, and can easily be misidentified as a correction to the inexperienced investor. Bear markets generally start slow, with a gradual decline over the following months, and eventually exceeds -20%. Often the sharpest declines in a bear market happen in the last third of its duration. Because accurately identifying a bear market is one of the most difficult things an investor can do—and because veering from your strategic asset allocation can introduce significant risk—we believe it’s often wise to get professional help from a financial adviser before making significant portfolio changes.
Fisher Investments focuses on our clients’ longer-term goals, and we believe our disciplined investment process helps us evaluate the market cycle and make strategic and tactical portfolio decisions for our clients. If you’d like to learn more about our investing process and how it could benefit you, contact us to find out more.
i Source: FactSet, as of 04/03/2018.