It’s easy to understand why people want to be more conservative with their investments as they move closer to their retirement, however, what they need to do is more important than what they want to do with their financial assets.
What do I mean? People become fearful that another big downturn in the market once they retire that will damage their retirement. They feel that it is the best thing to move money out of stocks or stock mutual funds to bonds or other fixed type of investments with “safety”. Friends, safe isn’t always safe. Over the short term, safe is safe. Putting your money in cash will preserve your hard-earned money without any loss to principal – essentially, you have all the money you put in plus a little interest. Risky over the short time can be risky. However, over 15-year periods of time or longer, safe becomes risky and risky becomes safer. Look at any historical ledger on investment returns and you can see that safe investments like bonds or cash lose out to inflation or has a very small real returns. Risky investments, on the other hand, have dramatically outpaced inflation and even with stock market downturns, risky investments do so much better at preserving your principal and building wealth over time for you than safe investments do.
It still amazes me though that people I talk to (not my clients) still gravitate towards being safe. That’s when I go into education mode to help them see what they need to see. No one has ever lost a penny in a stock market meltdown if they stayed invested. Yes, their statement value decreased, but no realized loss would have been recognized. Had they sold out into the downturn, they would have caused irreparable damage to their financial future by realizing losses. In practice, I usually try to keep, even my oldest clients, in a portfolio with not less than 60% stock type investments.
Why? I help people with what they need to do, not necessarily what they want to do. When we were kids, our parents used to tell us that they were doing “this”, whatever this was for you, was for your own good. When I advise my clients, I’m letting them know that by practice and affirmation we are continuing to invest this way for their own good. Being safe ultimately erodes the principal and the principal is the very thing clients need to maintain to generate the income they need. Risky over the long term isn’t risky anymore, it becomes safer because we are able to maintain the principal so much better in stocks than in bonds.
Don’t get me wrong. I’m not against using bonds, but I use them more for a mitigation tool rather than a growth tool. But if they are used as a portfolio builder, you might as well retire your investment portfolio when you retire. As you can tell, I don’t advocate this stance. I advocate for the clients that still have 20, 30, or more years left to live before they die. Their portfolio must outlive them, but it probably won’t happen if people do what they want to do instead of what they need to do.
When I’m talking to clients in my office, we talk about the retirement risks; the need for nursing care or a medical catastrophe. These are two big risks we must plan for, however there is one risk that is often overlooked and that is inflation. If inflation runs at 3% annually, it takes about 24 years to erode your dollar by 50%. In other words, to maintain a $100,000 standard of living today, you’ll have to have $200,000 annually 24 years from now. This, to me, is the big risk that needs to be addressed. People are living longer and, as far as it depends on me, I must do what the client needs (they hire me to do this), not what they want to do which is unknowingly killing their portfolios with a death by a thousand cuts. Slowly but surely, inflation will win out.
Finally, good investment behavior is necessary so that emotions don’t cloud judgement and create irreparable damage to your financial life. Good behavior involves, selling into strength and buying into weakness instead of selling into weakness. There is nothing wrong with people adding to their investments while the stocks are moving up. The biggest gains, just like buying real estate, come from buying when everyone else is running for the exits. Warren Buffett said, “Be fearful when everyone else is greedy and be greedy when everyone else is fearful”. This is a perfect saying because it explains my sell-into-strength and buy-into-weakness practice of helping my clients. Wisdom is proven right by her children, so listen to wisdom by doing what you need to do through good behavior rather than what you want to do through bad behavior. Because you retire doesn’t mean your investment portfolio should too.