7 Steps to Protect Your Retirement

Filbrandt & Company Reports
Volume 21, Issue 2

Report Summary:

  • Risk mitigating tools most beneficial to you
  • Disciplined strategy you can use in all times
  • Ways to restore your retirement portfolio after volatility

2020 was one of the most unusual years any of us has seen, both in and out of the markets. Without discipline and a plan, your portfolio might not resemble its year-ago version. Even if it did survive without excessive damage, there are several action items to consider as we venture into the new year. Below is our list of seven key steps to protecting your retirement in 2021:

1. Revisit your mix of stocks and bonds

High-level asset allocation decisions have a major impact on your overall risk profile. During the market lows of last March, many of us were wondering if the risk level in our portfolios was appropriate. That was not the time to make changes. With the markets largely recovered, now would be a great time to realign your portfolio with your long-term goals and objectives. For example, if retirement is approaching or perhaps your risk appetite has waned, you may want to move to a less aggressive portfolio. Generally, these changes should be gradual in nature. Moving 5 to 10% of the portfolio at one time is reasonable.

2. Rebalance your sector allocations

Rebalancing is another word for “buy low, sell high,” and there are currently stocks at both ends of that spectrum. Large, technology-oriented stocks like Apple, Microsoft, Amazon, Facebook, and Google generated extremely strong returns, resulting in the S&P 500’s largest technology weighting in 20 years. Alternatively, many other stocks struggled to break even. Industries such as travel, service, energy, and finance bore the brunt of the economic shutdown. The disparity of returns likely caused significant changes in your portfolio mix. Rebalancing your portfolio among the various sectors is a timely risk mitigating tool.

3. Increase international exposure

Having completed the high-level adjustments discussed above, the next step is to look for tactical opportunities. Our definition of tactical is perhaps longer in duration than most. We believe these trades should look to capture trends lasting three to seven years. Focusing on shorter time frames can result in excessive trading, high expenses, and poor performance. One group of stocks that has deviated below the mean in terms of relative valuations is the international segment. For much of the past decade they have lagged the U.S. markets. This unusually long trend will eventually end and could reward patient investors. Additionally, the foreign markets are less concentrated in the technology-oriented stocks, thus providing further diversification benefits.

 4. Boost small-cap allocations

Small-cap stocks, much like international stocks, have not been this cheap relative to large-cap stocks in 20 years. The pandemic has been tough on a lot of small businesses. Investors need to think ahead as the businesses that survive may be in an excellent position to prosper in a new operating environment going forward. It pays to be a contrarian when it comes to long-term investing, and small caps have been ignored for years. Historically, small-cap stocks have generated better returns than large-cap stocks, so the underperformance of the last 20 years appears to be another trend that has become stretched. Allocations of 10 to 20% of equities are appropriate given their high volatility.

 5. Look to alternative strategies

The projected returns for portfolios balanced between stocks and bonds is expected to be considerably lower than historical norms over the next five years, in part, due to low bond yields. Investors may want to consider adding alternative investments to their portfolios to squeeze out incrementally higher returns. Alternative investments can be viewed as a “catch all” bucket for anything other than stocks and bonds. It is important to understand not only what you are buying, but also how correlated the performance is to the rest of your portfolio. Some alternative assets may increase your overall risk, while others offer diversification benefits. Assets such as convertible bonds, precious metals, real estate, private equities, and cryptocurrencies are strategies that may make sense at some point. Market fluctuations will continue to present opportunities, just as they have in the past.

6. Harvest losses during market corrections

Selling investments at depressed prices and using the proceeds to buy a similar asset is one of the easiest ways to add value to your portfolio. Locking in losses may sound counterintuitive, but the number that matters most is after-tax returns – in other words, how much do you get to keep? This is different than “selling low”; it is exchanging low. Realized losses can be used to offset gains from the sale of profitable investments. Harvesting losses during market corrections provides the flexibility to balance your portfolio whenever needed. Remain open to using market corrections to your advantage.

7. Replenish cash balances

We know the stock market will rise and fall over time. These fluctuations should not greatly impact a disciplined approach to investing. In fact, volatility creates opportunities such as those discussed above. Having to sell stocks during a major downturn, however, can cause real harm. If this past year caused you to spend some of your liquid savings, you may want to replenish those balances now. This will allow you to bridge the next stock market correction without being forced to sell at inopportune times. At Filbrandt, we advocate for a minimum of six months’ worth of expenditures, or an emergency fund, to be kept in a safe place such as a money market, savings, or CD account.

These tips will enhance your portfolio after being distorted by an erratic market. “Buy and hold” investing does not mean doing nothing. Make sure your portfolio is being managed appropriately. Some of the items discussed above will take some time, knowledge, and tools to implement. If you aren’t capable or willing to do it, hire someone you trust. You’ve worked too hard to let the market erode your life’s savings. Finally, note that none of the items involve market timing; they simply provide a framework for a disciplined strategy that can be applied repeatedly. 

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