Risk zones can damage your retirement plans

Risk Zone Asset Management

Investment risk zones represent one of your biggest financial threats.

It is a type of financial risk that is often described as hidden because it hasn’t happened yet. And, when it does happen it is usually too late to respond to it.

Financial advisors do not pay enough attention to the potential impact of risk zones on your financial security and the achievement of your goals. That’s because risk is a negative topic that most advisors would rather avoid. They prefer to talk about performance – a positive topic.

Ignoring risk zones can have catastrophic consequences (see example below).

This article describes risk zones and how GlidePath can manage this risk for you.

What is a Zone?

A zone is a particular period of time when you are “transitioning” from one financial phase of your life (working years) to the next phase (retirement years). This is the “Zone” in Risk Zone Asset Management.

What is the Risk?

The Risk is a serious market decline while you are in the Zone. We will use a simple example to describe what happened in 2008.

Let’s assume you planned to retire on 12/31/08 with $1 million in your 401k and IRA that was 100% invested in the stock market. The S&P500 declined 37% during 2008. At the end of the year your $1,000,000 of assets had declined in value to $630,000.

What is the Impact of the Risk?

What happens next? The decline in the value of our assets forces you to make some onerous choices:

  • Defer your retirement date
  • Take a part-time job
  • Reduce your standard of living
  • Sell assets that do not produce income

Waiting for your assets to recover their lost market value may take years of positive performance. That’s because the math works against you. It takes 63% appreciation to offset a 37% decline because you have a reduced asset base. That amount of appreciation does not cover investment expenses, inflation, or other forms of erosion.

How Long Do Risk Zones Last?

A Risk Zone lasts for the duration of a down market, which is typically one to three years: 2008-2009, 2000-2003.

A more conservative approach is to bracket the zone with a couple of extra years because no one can predict the next Bear Market, much less its magnitude and duration.

For example, a conservative Risk Zone strategy might be three to five years before and after the target date – for example, the date you plan to retire.

The more dependent you are on the assets the longer your risk zone should be.

The GlidePath Difference

GlidePath’s Investment Committee is very aware of the risk you are exposed to when you are in a Zone (transition period).

In this case, let’s assume you are transitioning from working years to retirement years in 2025.

If you want to be more conservative, we recommend bracketing 2025 with five years on each side (2020-2030). If you want to be a little more aggressive, we could use three years (2022-2028) on both sides of your targeted retirement date.

How Does GlidePath Manage Risk in the Zone?

We reduce your exposure to common stocks and more aggressive bonds (longer maturities, lower quality) while you are in the zone.

We simultaneously increase your allocations to more conservative investments (CDs, T-Bills, shorter maturity bonds) while you are in the zone.

What Happens After the Risk Zone?

We re-allocate your assets based on your return objective, investment horizon, and tolerance for risk.

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