What is your investment strategy?
A sound investment strategy should be tied to your goals. Success is not beating an index. It’s achieving your objective. Objectives could be securing a comfortable retirement, buying a car, or paying for your child’s education. Everyone has different objectives, but at one time in everyone’s life the objective is the same. Everyone should wish for the same thing at the same time.
As you leave the workforce and transition into retirement, your primary objective should be to not lose a significant portion of your lifetime savings because that would mean sacrifice in retirement. Your objective should be to not lose money. Wishing for anything else could expose you to losses you can’t afford.
Losses in the Risk Zone can devastate lifestyles even if markets subsequently recover. The Risk Zone is the 5-10 years before and after retirement. As you approach retirement you make plans to spend what you can afford, and you get comfortable with those plans. But if you lose a large portion of the assets that support those plans, you’ll need to spend less. You can try to go back into the workforce, but that frequently doesn’t work.
So how should you protect your savings in the Risk Zone? There are a few choices. Some involve derivatives like buying put options, a form of portfolio insurance. But the cleanest and simplest approach is to hold mostly short term Treasury bills. In risk-reward arithmetic there is no low risk asset that can provide high returns, so protection comes with an opportunity cost. Your returns will be modest but your investments will be safe.
But safe investments probably won’t support the standard of living that you envision in retirement, so once you’re out of the Risk Zone, say 5 years after you retire, you can begin to re-risk. Over the next 30 years we advise gradually increasing your equity investing from very little to about 30-40%. This will help extend the life of your savings.
The pattern of investing described here is V-shaped, defending in the Risk Zone and re-risking beyond it. For a more in-depth description of this risk pattern, please read The Portfolio Size Effect And Using A Bond Tent To Navigate The Retirement Danger Zone.