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Manage Risk and Allocate Smartly

Is there another way to manage risk than having a buy and hold strategy? Maybe if you allocate smartly.

William Bengen, the financial advisor who came up with the 4% rule of thumb for retirement withdrawals, has warned investors and advisors to manage risk now by moving to cash. In an interview with Think Advisor, Bengen says now is the time for caution. This market environment is unique given low interest rates, high inflation and high stock market valuations—a perfect storm. Bonds can no longer protect you as interest rate hikes will eat your bond portfolio for lunch. You need to manage downside risk and buy and hold is currently not an effective strategy given the huge risks in the current market. Read the interview to learn more about how Bengen sees things.

While taking Todd Tresidder’s expectancy wealth planning course, I have learned that there are many different investing strategies. Buy and hold is only one strategy. It is a great strategy for bull markets, but it’s a terrible strategy for bear markets because it exposes your portfolio to massive losses. Now, if you are young in your twenties or thirties, you have many years to recover from those losses. But if you are in your forties or older, you may not have time to recover from large market declines. So, you may prefer to switch to a strategy that effectively manages downside risk. I can’t think of many near or recent retirees who would feel happy or comfortable seeing their lifetime of savings get halved just when they are about to start drawing down on it!  This is a real possibility, and we must prepare for it.

For decades, the traditional 60/40 buy and hold portfolio has worked well because bonds have been in a long-term bull market as interest rates have come down from their highs in the 1970s. This has been a tremendous tailwind for bonds. Now, the reverse is true as bonds are seeing losses unprecedented in history which may well continue as the Fed raises interest rates to combat rising inflation. This makes bonds a risky investment at the moment (with the exception of the ibond which is pegged to inflation and currently paying about 9.2%). [Unfortunately, you can only invest $10,000 a year in an ibond per family member. So, it is unlikely to save you now if you haven’t been buying ibonds for years.] 

As CFA Michael Gayed says, “Every strategy has its period where it doesn’t work as well as hoped. 2022 has been one of those periods (for buy and hold).”

What is an investor to do? I’m not a financial advisor so I can’t advise you. Like Bengen, I have moved most of my investments to cash to ride out the current storm. I am in my fifties. So, I don’t have a long runway for my investments.

The critical years that determine your lifestyle for the rest of your life are the 10-15 years before retirement which can have a massive impact on the size of your portfolio. Ideally, you want your investments to double or quadruple in that time so you have a larger portfolio of invested assets to live on. Then, the first 10 years of retirement are also important. For example, a bad bear market could dramatically decrease the amount you can spend over the rest of your lifetime. These are the crucial years where active risk management is important.

This risk even has a name: sequence of returns risk.

If stocks crash shortly before or after your retirement date, your portfolio simply may not have sufficient time to recover. It is more difficult to recover from a bear market if you are steadily withdrawing from your portfolio in retirement. This is a huge and thorny problem for retirement planning. You can’t possibly know in advance what will happen in the stock and bond markets. So, you need an alternative strategy to buy and hold or you need to have so many invested assets that you can afford to weather occasional massive 50-70% downturns. (That said, my very wealthy clients who have $10 million+ are not one bit happy about losing $5 million. In some ways, they are more risk averse because they want to preserve their wealth. It isn’t true that once you have real wealth, you are more relaxed. If anything, you worry more because you have much more to lose!)

What no one can know is just how long this bear market and high inflation will last, let alone how bad it might get. So, rather than rely on speculation, I take advantage of a very different investment strategy called tactical asset allocation. These are active strategies managed by computer algorithms–not active day traders or brokers–that trade once or twice a month.

I’m not particularly computer savvy. So, I let the team at Allocatesmartly.com do the hard work, and I pay them a modest fee for this incredibly valuable service. They have collected and tested the top asset allocation strategies and built a website that allows you to track them and create your own custom portfolio. This has been a massive time saver for me and has given me peace of mind. 

I learned about Allocate Smartly in one of Todd Tresidder’s newsletters. Knowing Todd’s integrity, I was excited because I knew that this could solve my pre-retirement dilemma—how to invest without losing my shirt! Right now, I’d really love to have another doubling. However, what is more important is that I can’t afford a big loss. That would set us back years in our plans for an early retirement.

Initially, I signed up for the free version at Allocate Smartly and thought that would be sufficient. However, I found it complex. Despite knowing a fair bit about tactical asset allocation strategies, I struggled to make it work and didn’t have the time to figure it out. Then, I realized that to free up my mental space and not think so much about our investments, I needed an automated system I could easily use and trust. So, I signed up for the paid version to access the best strategies. I used Todd’s affiliate link so I could get his free course explaining in detail exactly how to use the Allocate Smartly website. 

I should have done this right from the start. The folks at Allocate Smartly are super smart engineers. They designed the site for that audience, not for mere mortals like me. Thankfully, Todd is an excellent interpreter and I’ve since set up my accounts and chosen my portfolio combinations and am off and running.

What I’ve noticed is that while I used to check my accounts on a daily basis, I am now so much more relaxed and check twice monthly when the Allocate Smartly system reminds me. I’ve also unsubscribed from loads of financial newsletters because I now have a system that operates automatically. It moves my money in and out of investments without any concern for the current news. This is great as financial news can be hugely distracting. Also, you often hear one pundit saying one thing and another saying the opposite; yet, both have seemingly cogent arguments. Now, I have sidestepped this fracas and freed my brain for more creative pursuits. Hooray! 

Staying informed on financial markets is also time consuming. Yet, before Allocate Smartly, I felt it essential given my responsibility to manage the family investments. Now I know our family investments are positioned to weather this storm with equanimity.

The system will let me know how and when to get back into the market. So, I don’t have to worry about missing the upside. More importantly, I’m protected from major losses on the downside with an automatic sell discipline. There is no thought or painful decision making required. I also have a portion of the portfolio in a buy and hold position to diversify by investment strategy. That, too, is part of the system. As a result, it is easy to account for and see how it impacts the returns.

Due to the complexity, I’d recommend signing up for Allocate Smartly with Todd Tresidder’s link so you can get the free email course that explains how to understand and use the Allocate Smartly website. Just so you know, I’m not an affiliate and receive no commission for recommending these services or courses from Todd nor Allocate Smartly.

Now that I’ve completed Todd’s free email course, it is very easy to use Allocate Smartly. In fact, it is fully automated once you have set up your portfolio choices. I highly recommend taking advantage of this valuable freebie as it adds nothing to your cost of using Allocate Smartly and vastly improves the experience. 

Resources:

  • Allocate Smartly is the investment software solution that includes two of Todd’s top investment systems. Learn how to sleep peacefully and secure your financial future in good times and bad. I use the same system to manage my own money and am very happy with the results.
  • LifeCoach.com’s FIRE Course–the basic course to get you on the path to financial freedom.
  • For advanced investing, try Todd’s Expectancy Wealth Planning master course. It shows you how to maximize the expected growth of your wealth in every market condition regardless of epochal change. 

 

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