Start digging clients’ retirement savings moat now
Things were very different when I started in this industry in 1981. Mortgage rates were 17% and money markets were paying 20%. I’ve experienced the single-day crash of 1987, the tech bubble of 2000-2002, the great recession of 2008-2009 and, obviously, the most recent COVID-19 bear market, which preceded the fastest market recovery in history.
I’d like to think I’ve learned a thing or two in my 40 years in the business. Yet, I amaze myself how often I get things wrong. Back in May it seemed obvious to me that COIVD-19 would be with us much longer than most experts predicted. I’ll put that conclusion in the “right” category. This led me to believe that the market recovery would be short-lived. Surely, once investors understood that the economy would be hampered by the virus into 2021, the rally would stall and we would revisit the lows. It pains me to admit it, but this view caused me to move heavily into cash back in late April. Sadly, that put me in the “wrong” category. And given how far the market has come, I can only hope that my prediction stays wrong.
As I contemplated this decision, I came to realize that, while logical, it was impacted by one other factor – I had recently turned 60. Without a doubt, you quantify the risk of an investment decision much differently the closer you get to retirement. The record 22% drop back on October 19, 1987 was certainly scary, but I had so little money invested and so many years in front of me, I really didn’t think that much about it. The tech bubble was the first bear market to seriously hurt my portfolio, but with at least two decades until retirement, it was relatively easy to shake off. Plus, we all knew that internet stocks had to come back to earth at some time — at least we did after the fact.
The 2008-2009 bear market was a completely different matter. While I knew I still had some time to recover, I remember one pervasive thought: given my age, I can’t afford to go through this again.
And that’s what kept going through my mind — only more so — last spring. If COVID did hang around for the entire year, unemployment would stay abnormally high and the market would eventually have to reflect that. The concept that low interest rates would make price-earnings ratios irrelevant, as recently suggested by Fed Chairman Powell, never occurred to me. My thought process was simple: the economy does not experience a V-shape recovery; therefore, the market goes back down and I’m now faced with the very scenario I wanted to avoid — a market correction that would delay my retirement. I’m quite sure many baby boomers, having been through all of the same market cycles, had a similar thought.
What keeps you up at night?
In “The Psychology of Money” by Morgan Housel — a book that should be mandatory reading for anyone saving for retirement — the author advises that you should “manage your money in a way that helps you sleep at night.” Therefore you must first understand what keeps you up at night. For me, that means safeguarding my retirement income portfolio by building a strong “moat” around it. Unless you have so much money that the loss of a few million dollars really doesn’t matter, the most commonly accepted method of doing this is to make sure you have a truly diversified portfolio.
This diversified portfolio must have enough liquidity to avoid the necessity of selling stocks when they are down. However, given today’s interest rates, that also means the expected return on a significant portion of your portfolio will be well below market norms, which in turn means I will need to accumulate more money to generate my desired income.
But what if you add a stream of guaranteed income to your retirement portfolio? Every advisor knows that it is much easier to manage a portfolio in retirement for someone that has a pension than for someone that does not. Knowing that a stable and predictable income stream will arrive each month no matter what the market does allows both the retiree and his or her advisor to worry less about the day-to-day, or even year-to-year, fluctuations of the market. It deepens the moat.
I, like many nearing retirement, will not have a pension to fall back on. If I did, I would likely have attempted to steer through 2020 more aggressively. I own both of the annuities I will need to create my moat, but unfortunately, I went into 2020 with them only partially funded. That in turn caused me to be overly conservative for much of the year. That’s a mistake I’m in the process of rectifying.
Do yourself and your clients a favor. Ask them how they’ve slept over the last nine months. If concerns about retirement are contributing to a lack of sleep, start building them a moat.