Retirement Investing: Pitfalls of Following the Status Quo

There are overlooked risks for retirees who follow conventional wisdom.

Back in the 1950s Harry Markowitz founded Modern Portfolio Theory. It was out of his Modern Portfolio Theory that the idea of investment diversification, asset allocation, and the efficient frontier became mainstream and commonly accepted investment principles. His work was, and still is, widely praised and readily accepted as the standard by which investment managers build their portfolios. In fact, Mr. Markowitz's efforts were so meaningful he was awarded the Nobel Prize in 1990.

Modern Portfolio Theory has become one of the leading investment theories implemented by the majority of mainstream mutual funds and index funds that retirees invest their money into.

But here's the dirty little secret of Modern Portfolio Theory...

In 1991 Harry Markowitz admitted his theory was never meant to apply to individuals. He designed Modern Portfolio Theory not for the everyday investors, but instead for large institutions.

In an 1991 article in the Financial Services Review, Mr. Markowitz said:

"Professor Mandell, editor of Financial Services Review, invited me to contribute an article related to financial research for the individual for the first issue of this journal. Since the subject is not my specialty, it was uncharacteristically risky of me to have accepted the invitation. But an evening of reflection convinced me that there were clear differences in the central features of investment for institutions and investment for individuals, that these differences suggest differences in desirable research methodology, and that a note on these difference may be of value." Financial Services Review, 1991

You see, Modern Portfolio Theory focusses on addressing the answer to this question:

How do you grow a bucket of money when there's no need to take a distribution?

That's a problem. Because the majority of the retirees we help actually have to take distributions from their investment portfolio so they can meet their income needs.

Retirees who successfully reduce risk start by asking themselves the right questions.

It's important to avoid making the assumption that a theory, which was created in a static academic environment, will work successfully for retirees in the real world where stock market crashes, losses in bonds, and black swan events can do irreparable harm to your retirement.

So when it comes to crafting a more predictable and stable outcome, we have to start with a different a question:

How do you create steady income and protection?

When you retire your source of income from your job now has to be replaced by a new source of income.

For a lot of people that means becoming reliant on their 401(k) and IRA money to help them through retirement.

Therein lies the challenge...

How do you successfully take this money you've worked thirty plus years to accumulate, and invest it in such a way to ensure it's going to be there when you need it?

To adequately answer this question, investors must start with a financial retirement plan.

Start with a financial retirement plan.

A good financial plan will help you...

Avoid unnecessary risk
Identify what can be improved upon
Flesh out a prudent path forward

There's the risk that you give back all those years of hard work and investment profit in the absence of planning.

Right planning begins the important process of de-risking your retirement. For example, maybe your plan analysis shows us you're overweight technology stocks and you should consider spreading out into different sectors. Or maybe it shows us all your money is in a tax-deferred account, so we teach you about methods for shifting some of your money to tax-free accounts (which create a level of constant tax protection). Maybe you just need someone to help you learn about prudent investment techniques that generate stable income, so we stress-test a handful of different income strategies against your needs, goals, and resources so you can determine the most suitable approach.

What ultimately emerges out of our planning efforts is a steady path forward leveraging tools and strategies that generate sustainable income and minimize risk.

We're firm believers there's no one-size-fits-all strategy for retirees.

It's important to understand the different strategies for creating income and protection have unique advantages and disadvantages. As such, we typically recommend utilizing a prudent mix to reduce the risk of implementing just one single strategy.

Exactly how this plays out is going to vary from person-to-person. The reason why is because everyone's needs, goals, and circumstances are different. So as a rule, we never put retirees into a box and assume one cookie-cutter approach works for everyone.

Then overtime, as you move through retirement, adjustments will be considered and potentially made if your needs, goals, and circumstances change. To ensure any potential changes can be quickly accomplished, it's always prudent to maintain a healthy level of flexibility and liquidity.

In summary

Conventional investment approaches can easily breakdown for retirees.
Successful retirees learn how to create steady income from their investments and downside protection.
A financial retirement plan identifies red flags and shows you multiple approaches for improving your outlook.
Deploying a collective mix of suitable strategies tends to be safest.
Maintain adequate flexibility and liquidity— you never know what the future holds!

Hopefully the above was informative, easy to understand, and applicable to your situation. But if you have questions or if you're sensing you need help with your retirement planning, you can schedule a visit with us using our online calendar.

To schedule a check-in, existing clients can CLICK HERE or reach out to Aimee. And she'll be happy to coordinate everyone's calendars.

If you're new or you've been following us for a while but never had a chance to chat with us directly, you can CLICK HERE to book a free 45-minute meet-and-greet.