Ongoing market volatility has left many investors grasping for an investment lifeline to help them stay afloat amidst stormy economic conditions. Conventional approaches to long-term investments follow the 60/40 model, which allocates 60% of your portfolio to stocks and 40% to bonds. But that strategy may no longer produce your desired results, as both asset classes have performed under their historical averages during the last two decades.
Bond yields historically had an inverse relationship with the stock market to help offset loss. But in 2022, inflation and other global economic factors caused both bonds and stocks to fall. Anyone relying on the 60/40 model is likely finding themselves in deep water. Modern market conditions require a fresh approach to long-term investing in order to properly protect your retirement savings.
Catch Up With the Times
When the 60/40 model was originally developed, the S&P 500 historically averaged a 12.1% return (from 1957-1999). Since 2000, the S&P 500 has averaged a 6.3% return. For anyone using the 60/40 model, 60% of their portfolio is now yielding half of its historical average.
Current investors are faced with slower worldwide economic growth, high inflation and rising interest rates, which demands an updated investment approach.
In addition, computer technology has allowed the stock market to move at lightning speed as billions of dollars are traded in nanoseconds, leading to more volatility. When the market crashed in 2020, stocks lost a third of their value in just 33 days. During the Great Depression, it took four years to see that same level of loss. Wall Street is a whole new ball game, and if you don’t adjust your investment tactics accordingly, you may find yourself trying to recover from unnecessary market losses.
Leverage Consistent Strategies to Offset Volatility
To make headway in a volatile market environment, investors need to create consistency in their investment approach to prevent emotions from getting in the way of decision-making. Buying low and selling high is counterintuitive to most people. To make it effortless, look to utilize dollar-cost averaging (DCA), which has you invest equal payments monthly. This allows you to buy into the market at different levels and smooths out the risk of buying “all-in” right before a big market drop or from missing out on an eventual upswing.
Seek out low-cost investments that will prevent “fee drag” from decreasing your long-term gains. Fees from brokers, advisers and fund companies can significantly reduce the value of your retirement account. ETFs and index funds are low-cost investment options that can lower your fee drag while still providing broad exposure to the market.
If you are within 10 years of retirement, consider “sweeping the gains” from your portfolio after significant profits in the market. Put those gains into a protected investment vehicle, like an annuity, to ensure you won’t lose all of your profit if the market drops when you want to retire. It takes only one bad market year like 2008 or 2022 to delay your retirement plans, but thinking proactively can provide significant protection and allow you to keep a portion of your gains.
Hedge Your Portfolio (Risk Management)
Portfolio hedging is a strategy to reduce investment risk and protect your portfolio against volatility and capital loss. A hedge is an investment intended to move in the opposite direction of a risky asset in your portfolio, providing inverse exposure.
Rather than being highly concentrated, you can hedge your portfolio by investing in at least a dozen different asset classes. This will prevent correlation between your assets, reducing the risk of all your investments dropping in tandem during volatile times. A broadly diversified portfolio consists of not only traditional equities, fixed-income and cash assets, but also real estate, precious metals, commodities and emerging markets.
One strategy you may want to consider is the use of options to mitigate risk in your portfolio. Options can provide protection from losing significant capital if structured properly. Of course, options are complicated and should be used only by a highly experienced investment professional, as they are leveraged instruments that can be used to increase or decrease risk in a portfolio. Everyone’s circumstances are different, and seeking a financial professional is highly advised.
Consider a Deferred Index Annuity
The stock market is a key component of your investment strategy, but it is a volatile one, so make sure to balance it out with safer options. Deferred index annuities give you equity exposure through the performance of index funds, like the S&P 500, while still protecting your principal and removing any downside risk.
A deferred index annuity can be customized with riders to fit your needs. For those who hope to retire within the next 10 years, consider adding a living benefit rider to provide guaranteed growth and guaranteed income for life. The protected account will grow by a guaranteed minimum rate, called the roll-up rate. Most current carriers typically offer a roll-up rate well above other fixed-income opportunities. At worst, your investment will earn this higher-than-average rate of return, but if the index fund yields greater gains than the roll-up rate, the protected account value will “lock in” the higher rate.
By providing a guaranteed income with opportunity for further growth, a deferred index annuity can bring peace of mind and certainty to your retirement income plan.
Deferred index annuities are almost like a “personal pension” that work alongside other fixed-income sources like Social Security. Choosing the right annuity for you can be complicated, so consult a financial professional to make sure your annuity plan aligns with your personal goals and values.
The only thing certain about the future is uncertainty: Market downturns are inevitable. But if you adjust your long-term investment strategy by investing consistently, hedging your portfolio and leveraging safer tools like deferred index annuities, you will be better equipped to weather the storms ahead.
Bradley Rosen is the owner and president of Longevity Financial, an independent financial professional with over 24 years of financial planning experience. Bradley provides each client with a customized Design for Life By Longevity FinancialⓇ plan that encompasses each part of their financial picture, including investments, insurance, taxes and legacy planning. He is passionate about creating longevity with one’s finances and prioritizing holistic health, both physically and financially. His unique approach to retirement planning is the result of watching both his grandmothers outlive their retirement income. For his dedication to educating and empowering women, he was awarded the Thelma Gibson Award in 2015. He has been featured in Forbes and on the local CBS, NBC and FOX TV news affiliates in his new hometown of Atlanta.
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