Mattson Financial Blog

Don’t Sink in the Swamp!

If the market goes up, we’re happy. If the market goes down, we try to stay ahead of it by riding it out, investing more, or ignoring it. Our grandparents had a much easier time. Many worked for a company, received a pension and Social Security, and maybe bought some stocks that paid a dividend.

With our parents, people changed jobs, became more mobile, kept their noses down, and worked. Some were told to buy land because it wouldn’t decrease in value and that they should get to know their banker. Handshakes and loans were dependable — until 2008. Today, it’s hard to find a bank that hasn’t been acquired by a larger group, and getting a mortgage is difficult for some. 

In any case, many baby boomers are reaching retirement and feeling like they are wading through a swamp. Some may ask, “If I invest here, am I going to sink a little? Am I going to go under up to my nose or worse? Will I lose everything? How do I ensure at least some of my assets last through retirement?”

So, what’s the answer? Many turn to diversification to target a risk level based upon their retirement goals, risk tolerance, and investment time horizon. Now, you may look at your portfolio and say, “Well, I’m diversified. I have several different mutual funds, so I’m good.”

This isn’t always true! In my opinion, being diversified with correlated assets, or assets that move up and down together — and are likely to be affected similarly by events — is not true diversification. Traditionally, stocks and bonds are considered to have a negative correlation because stocks are supposed to go up when bonds go down and vice versa. 

However, we’ve seen times when both go down together! Stocks and bonds can be an important part of a portfolio, but so should non-correlated assets, such as real estate, hedge funds, private equities, commodities, and foreign currency. So, what we suggest is to diversify your portfolio into assets with different correlation levels to diversify your income flow.

“But,” you say, “I don’t have a multi-million dollar portfolio to be able to diversify in all these categories.” You’re right, if you look at the individual issues, but with exchange-traded funds (ETFs), you can achieve that diversification. Buying ETFs allows for real-time trading and transparency holding exactly what you want in your portfolio. The fees are generally low, and they give you 20/20 vision of your assets, showing when and where to draw income from within your portfolio.

For a more predictable retirement income stream, an indexed annuity can be beneficial. With indexed annuities, you can create retirement income that you won’t outlive, with guarantees backed by the issuing insurance company. While these contracts are invested directly in a market index, they provide guaranteed minimums and protect against losses when the market goes down. When the market is up, you capture a portion of the gains depending on caps, spreads, and participation rates. 

Let’s take a look at a hypothetical example of a diversified portfolio. Let’s say you have a million dollars and you put $350,000, into an indexed annuity. Then you take another $350,000 and divide it between stocks and bonds at a 60/40 ratio in diversified ETFSs. Then you place $250,000 into non-correlated assets, divided between real estate, private equity, hedge funds, foreign currencies, and commodities, like gold. Then you hold the last $50,000 in cash for needs that may arise.

Assuming we experience another market decline, using the example above, if correlated assets decline, the non-correlated assets and fixed annuities would allow you to take income without taking from an account that is negative. If income is not needed, then the portfolio can be rebalanced by withdrawing from the positive non-correlated positions and buying while the market and correlated assets are down.

Continuing with the example, when the markets recover, you can take any of your gains and move them back to where they were disbursed from, thus rebalancing your portfolio into the same percentages without significant market losses. 

Think of it this way: If you invested in 2000 and 2008, what would your portfolio look like now? If you had only stocks and bonds, you may not have been able to buy low. The best you could have down was to get out of the market or hold and wait it out. By buying when the market is negative, you can get “back to even” faster and possibly attract more gains. And, more importantly, you can capture those gains for the future.

Fast forward to today — with vaccines arriving and companies reopening in force, there is definitely pent-up purchasing power with cash sitting on the sidelines. This, coupled with small-cap and mid-cap stock still in negative territory, opens up opportunities for upward movement in late spring/early summer. Volatility will still be a part of the equation, but “volatility” should be viewed in the long term as the new norm. 

Holding and waiting is another thing you should keep in mind, especially going into 2021. This is something Maria Bartimono on Fox Business has stated, and I agree with her. You should hold the current investing strategies that you are currently in. Until we know the direction of the new administration and Congress, we suggest a hold attitude.

For now, though, get out there and enjoy the swamp! Now you know where to walk and not sink! 

-Gary Mattson