A lot of things could happen in 10 years. People could be riding in driverless cars. Families might be living in 3D-printed houses. Fans could watch the Atlanta Braves actually win the World Series again. And, investors could find the market at another all-time high.
The recent market volatility adds urgency to the task of honing your long-term investment strategy to determine if you are positioned to retire comfortably. Planning on retiring in 10 years? The stakes just got higher.
After all, in a decade, we’ll be 10 years away from today’s bull market, which is the longest we’ve seen since WWII. What will the Dow be doing in a decade? The S&P 500? The Fed? No one knows for sure, but to borrow that old Boy Scout adage, “Be prepared.”
Investors would do well to make sure they are prepared to weather the market for at least this benchmark of time, if not more.
My advice is to ask yourself this question: Am I prepared to weather a downturn? Meaning, are you defensive enough in your investment strategy to withstand market stumbles and tumbles?
Let me share a story with you on this point. Just a few weeks ago, I spoke to two separate clients about their portfolio. “Harris,” they both said, “we feel it’s a good time to up our risk since we aren’t expecting to see a recession of any sort for the next 12 to 14 months.” These clients are both already retired and were apparently experiencing the very real investor emotion of FOMO, or Fear of Missing Out.
My response: Whoa, hold your horses. Because these particular clients are already retired and relying on their investments to supplement their income, I advised them to focus on insulating their portfolio versus aiming to fatten it over the short term.
Take a look at how your investments are currently allocated. With the market’s growth over the past few years, you may be heavier in stocks than you realize. If you find you are stock-heavy, you may consider rebalancing by selling off some of these assets and reinvesting into fixed-income vehicles to get your allocation more balanced.
Some other areas to consider are high-yield bond and floating-rate bond exposure. Both of these bond types are incredibly sensitive to economic turbulence, tending to get hit harder if companies can no longer pay their loans.
A lot of investors in fixed-income mutual funds don’t even realize they have exposure to high-yield or floating-rate bonds. That’s because of the relatively low-yield environment of recent years; many mutual fund managers added these types of “higher yield” bonds to their mutual funds to boost the yield their investors receive. All well and good, in theory. But, if the real-world economy hits any bumps, this added risk could have a significant downside.
Another vehicle to consider is dividend-paying value stocks. When targeting value stocks that increase their dividends regularly, the dividend has a potential to grow even if the value of the stock goes down. And these types of companies tend to perform better than the more volatile growth stocks.
You may also want to consider targeting “high quality” stocks that have consistent revenues – they often weather a downturn. We’re talking about product sectors that people will still need in the event of a recession, like consumer staples, health care and the so-called “Sin Stocks,” or alcohol, tobacco, and sweets. The cyclical sectors of tech, luxury items, and industrials could prove riskier.
And let’s not forget about cold hard cash. You may want to increase your cash balance now so that if we do see a downturn, you don’t have to siphon your principal. Being able to live off of cash and the dividends and interest paid out of your portfolio makes for a happy investor.
Our bottom line on insulation is one word – diversification. Check your current allocation and make sure you feel comfortable with your spread of asset classes and sectors in case we hit a rocky road.
At the end of the day, as tempting as it might be to put your full portfolio into an offensive position, you’ll still want to try and position it to run some defense for your money. A good rule-of-thumb is to make sure you could withstand a typical 18-month recession. An even better measure is to be able to weather a three-year downturn, as we saw after the tech bust. Better safe than sorry. Are you positioned (as well as you can) to be safe for the next 10 years?
Keep this timeframe of 10 years in mind. It’s important. And don’t forget that there are affirmative things you can do to maximize your time before you retire. Like being a defensive investor. Like value stock investing. Like income investing. Like maxing out your 401(k) and/or IRA contributions.
Benjamin Disraeli once said, “I am prepared for the worst, but hope for the best.” I think that’s a great mantra for investors. No one knows what the future holds – we could continue to ride the bull or be thrown off course. As Blood Sweat & Tears sang, “What goes up must come down, spinnin’ wheel got to go ‘round.” Just make sure you’re not risking it all on the painted pony, or bull, as the case may be.