Building a Strong Retirement Portfolio

Saving money for retirement may seem like a simple, practical and common-sense idea—and to a considerable extent, it is a relatively easy choice to make. There are many ways to grow retirement savings, but the choices an investor makes can have a significant impact when it comes to meeting income needs, especially for potential retirees.

The good news is that achieving financial security, comfort and prosperity in your retirement years is well within reach. But you need to begin planning for it now. And owning a retirement portfolio based on a solid long-term investment strategy may be the most effective way to help ensure that you have enough money when you retire.

The Guiding Principle Behind Every Retirement Portfolio

The mechanics of portfolio construction can be complex, because investing can involve a diverse array of financial products, asset classes and strategies that should be actively monitored and rebalanced over time. But the basic principle behind every retirement portfolio is simple: It is about attempting to reach one’s financial goals by pursuing desired returns while minimizing the possible risk of loss. Many factors are involved in managing portfolios, including:

  • Choosing the right types of investments for your goals. Knowing which types of investments may be appropriate for your goals is key to putting yourself on the path with the best chance of reaching them. Some asset classes have historically offered higher volatility along with higher returns over time, whereas others have offered lower volatility along with lower returns. Each can be a valuable part of a portfolio, depending on your goals.
  • Estimating the effects of economic, political and sentiment drivers on the market. Economic, political and sentiment considerations can influence which parts of the market will likely do best going forward. For instance, a financial crisis in one country or region could send stock prices tumbling, so if you are able to evaluate economic drivers for that region, forecast potential underperformance and reduce portfolio exposure accordingly, you can help improve your returns. Knowing how these “drivers” may affect your portfolio is a key factor in potentially outperforming the market.

These basic principles offer a starting point for constructing a well-designed portfolio. But a well-designed portfolio of investments must go several steps further.

Our Personalized Approach Toward Portfolio Management

Unlike many other firms, Fisher Investments takes a personalized, comprehensive approach for retirement portfolios. We factor in a client’s investing goals, investment time horizon, personal financial situation and more, creating a customized portfolio that matches the needs and goals of each client.

Our 70/20/10 Breakdown of a Portfolio’s Returns

We believe 70% of a portfolio’s long-term returns are attributable to the selection and allocation of assets. This is why we place considerable emphasis on selecting the right combination of stocks, bonds, cash and other securities for each portfolio.

Within that combination, we strategically emphasize parts of the market we expect to perform better overall. These “subasset allocation” decisions account for 20% of a portfolio’s performance. And finally, we focus on specific securities that we feel present strong opportunities for investment. This decision, we believe, accounts for 10% of a portfolio’s returns over time.

The Four Rules of Portfolio Management

Investing for retirement is a long-term commitment for most people. Sticking with an investment strategy over a period of years can be difficult at times. Your retirement portfolio will likely experience at least some of the market’s cyclical ups and downs that naturally occur over time. Our four basic rules of portfolio management can serve as a compass to help you understand where your investment stands in the larger scheme of things. It also helps keep your retirement plan moving in the right direction across a wide range of market conditions and environments.

Rule 1: Select a benchmark
A benchmark is a designated standard against which your portfolio’s performance can be compared. Benchmarks typically come in the form of a stock or bond index (or a blend of the two), depending on the right investments for your goals. For instance, if your investment goals require growth, you may select a broad, global index such as the MSCI World. The combination of assets in the benchmark can serve as a point of reference for your portfolio or investment strategy.

The main benefit of establishing a benchmark is to provide an objective means of measuring performance—a comparative way to determine if your investment strategy is working. An appropriate benchmark should be closely aligned with an investor’s goals and should reflect the type of investment strategy employed.

Rule 2: Analyze benchmark components to identify their risks and potential return
Once we have established a benchmark, we then analyze each component—in other words, each asset within the benchmark—to estimate its potential risk and return. Accomplishing this task requires a broad analysis of factors that may influence each component. These factors can range from domestic market sectors to large-scale geo-economic conditions. Completing this analysis marks an important step, as it helps put your portfolio in a position to add value relative to your benchmark.

Rule 3: Blend dissimilar securities to moderate risk
Once we determine the risk/return profile of each component, we can invest more heavily where expected returns are high (overweight) and investing more lightly where expected returns are low (underweight).

Because having an overweight portion of the investment portfolio increases benchmark risk—the probability of performing differently from your benchmark, and perhaps underperforming it—we look for securities that are less correlated (or oppositely correlated) to the overweight assets, incorporating them into the underweight portion of the portfolio. In other words, we blend dissimilar securities to maintain a counter strategy—a hedge if the overweight part of the portfolio performs less well than expected.

Rule 4: Always know you could be wrong
Finally, it is important to note that no matter how meticulous the approach, there is always the potential for human error. Fortunately, one of the most common errors investors make—namely, deviating from a long-term investment strategy to pursue fleeting market opportunities—is foreseeable and preventable. Chasing a “hot” sector or stock can significantly increase risks, because these actions would disrupt the delicate balance of the entire portfolio. Similarly, selling stocks that lose value may undermine their valuable long-term hedging function.

Remember that a sound investment strategy takes into account opportunities and risks over a longer time horizon and broad economic scope. Unless there are major changes in the underlying economic conditions to justify adjustments to a portfolio, the safest and most effective course of action is to maintain investment discipline.

Fisher Investments Emphasizes Transparency in Managing Client Portfolios

Not every investor will be familiar with the complex ins and outs of financial markets and portfolio investing. Transparency is key, as it helps our clients gain a comprehensive understanding of their portfolios’ strategic direction and performance.

Fisher Investments’ high-touch customer service offers the following features:

  • Direct support from an Investment Counselor who regularly checks in on your goals and updates you on portfolio status
  • Access to extensive, proprietary Fisher Investments research behind portfolio management decisions and updates on our economic outlook
  • Invitations to Fisher-sponsored client events designed to keep clients up-to-date on both our strategies and economic conditions

Looking ahead, keep in mind that your retirement marks the beginning of a new era in life, one that should provide you the time, comfort and financial freedom to pursue the things in life that might not have been possible during your busy working years. Our goal at Fisher Investments is to help you pursue that possible future.

To learn more about Fisher Investments’ retirement portfolio services, contact a specialist to request a meeting, or download our Retirement GPS, our interactive guide to financial planning in retirement.