In the article Setting Your Investment Policy we established that stocks are a proven tool for funding long-term retirement goals, and that they are inherently volatile. These realities should be documented between a client and their advisor in a written Investment Policy Statement.
But surely there are risks, right? What is the biggest risk in retirement investing? Read on to find out.
Given the complexity in growing and adjusting a portfolio that may need to sustain a 30-40 year retirement, many investors choose to seek our professional advice. It's important to understand what an advisor can and should be doing in this role.
When we create Investment Policy Statements for clients, we carefully document what the client's cash withdrawal needs will be from the portfolio over the coming five years. This gives us very explicit objectives that must be met, and forces us to design the portfolio in a way that supports these retirement withdrawal needs. Importantly, these goals are documented while working alongside the client to understand their needs. It is a collaborative process, following the steps in The Partnering Process that we use with all new clients.
What Really Matters
An important aspect of The Partnering Process is establishing proper expectations. We are essentially establishing "what really matters" in a successful partnership. And it all comes back to written financial goals.
I've seen no better explanation of what really matters than that offered in the book Adaptive Asset Allocation by Butler, Philbrick and Gordillo.
"Those who judge their portfolio by its performance relative to some narrow benchmark are focusing on an issue that is largely irrelevant to their ultimate financial success.
"The only benchmark that you should care about is one that indicates whether or not you're on track to accomplish your financial goals.
"Risk is measured as the probability that you won't meet your financial goal. Investing should have the exclusive objective of minimizing this risk (emphasis added)."
Risk vs. Volatility
The statements above are very clear and provocative. And they are definitely not the widely accepted "wisdom" preached by the media, which incessantly drones on about how some stock index (e.g. the Dow or S&P 500) is doing right this minute. What difference does that matter to your own retirement goals? What retirement investors should actually be doing vs. what the media thinks they should be doing lead to profoundly different approaches.
Tying together the two points above from Establishing Objectives and What Really Matters leads us to this powerful statement:
Stocks aren't risky; they are volatile. Knowing the difference is key to retirement investing success.
Smart retirement investors understand the above truth and use this knowledge to build and manage their retirement portfolio. This truth sustains them when stocks are struggling, and it keeps them from jumping on the latest investing fad when things are going well. Patience truly is a virtue when it comes to retirement investing.
The media loves to tell us how risky stocks are, yet they are focusing on the wrong definition of risk. The media focus on minute to minute price volatility, with no long-term goals to against which to measure progress. If you have a long-term liability (i.e. monthly portfolio withdrawals over 30-40 years of retirement) then you need to match this with a long-term asset (i.e. a diversified basket of stocks from the world's best run companies). Use history and data to your advantage to capture returns that the media and short-term traders can't see in their myopic quest for instant gratification.
Is Your Portfolio Too "Risky"?
To repeat, "Risk is measured as the probability that you won't meet your financial goal." Properly assessing risk requires an understanding of one's goals and documenting these goals in a written investment plan. Have you done this with your advisor?
We've been helping clients prepare for, and thrive in retirement for over three decades. Our clients' continued financial success is exceeded only by their success at the game of life.
When we build retiree portfolios at Oxford, we seek a balance between Stability and Growth following the principles outlined in our proprietary Power of 5 Investing system. Our goal is to help clients achieve inflation-beating growth in their wealth, while managing through market downturns, ultimately helping clients leave a legacy to the people and places they love. Our system has been battle tested in 25+ years of market ups and downs and is ready for whatever the market can throw at it.
If you'd like to better understand the risk in your portfolio, click on the link below. We're happy to offer a free portfolio analysis.