Money Matters: Does your retirement strategy mitigate risk?

By Manuel Marques

The Daily Record Newswire

Imagine taking an important trip to a special destination, the dream of your lifetime.

You’ve planned carefully, scheduled accordingly and are eager to celebrate your arrival.

The plane takes off and, halfway through the journey, you encounter a serious storm, maybe even a hurricane.

The pilot announces to the crew and passengers: “I am very sorry. We are flying into a severe storm; and this plane cannot change altitude to fly over it. We cannot change our direction to fly around it, and we cannot go back. We are over the ocean, so there is no safe landing. We are going to attempt to fly directly into the storm and hope for the best. Buckle up.”

Let’s compare the crisis that pilot faces with your existing retirement plan. Historically, and in the recent past, many investors experienced market turbulence that affected their ability to retire as planned.

You wouldn’t want to fly in a plane that did not allow the pilot to appropriately navigate a storm, but many people invest retirement assets using a strategy that would make it difficult to navigate the unforeseeable risks in the market.

What is long-term? When does it arrive?

Traditionally, most investment strategies lacked the same flexibility that our fictitious pilot and airplane were also missing.

As long as managers are held strictly to their investment diversification guidelines, portfolios cannot adjust risk exposure based on indicators from their instruments or take into account the changing climate conditions.

The prevailing investment approach of many financial advisors and Wall Street has been to create diverse portfolios for investors that would not change much over time. It’s based on the belief that, no matter how severe the storm, investors will achieve adequate returns over the long term.

Unfortunately, depending on the timing of your retirement in conjunction with the market conditions for the same period, you may encounter a less than desirable outcome given our inability to navigate appropriately.

The past 10 years in the stock market, arguably, have disproved the popular belief that the best way to make money in stocks is to buy and hold indefinitely. The notion that you can just put your money anywhere and count on prices being higher in five or 10 years is a myth.

Have we learned any lessons in the last decade? Are we now more prepared to prevent disaster? The answer depends on three important factors:

• Financial advisor’s role critical
It’s always best to seek the guidance of a financial advisor to help you select investments that will provide adequate growth opportunities and mitigate the sometimes not-so-short-term market risk. That becomes increasingly important the closer you get to retirement age, as your ability to tolerate market drops diminishes.

•Targeted retirement approach
Target the date when you wish to retire and put as much as possible into your IRA, 401(k), 403(b) or 457 retirement account. Through those tax-deferred plans, you have the potential to maximize your savings.
Once you’ve set money aside for retirement, plan to use it only for that purpose. Avoid the temptation to take early distributions or loans against it. Your retirement account should be viewed as just that, not as liquid savings or an emergency fund.

• Ability to adjust risk
Again, with the help of a qualified financial advisor, make sure your investment selection includes strategies that will allow portfolio managers to adjust risk exposure to equities as the market dictates.

Employees are saving money on a tax-deferred basis and using a broad range of investment options to reach their retirement destination. No one may be watching out for market turbulence and investment safety if conditions change, however. If you happen to be one of those people, don’t wait for the next storm.

Manny Marques is senior manager, partner relations, at EPIC Advisors Inc., a full-service retirement plan service provider with an emphasis on 401(k) plans. He can be reached at (585) 232-9060.

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