Bombproof Your Retirement Portfolio Now

Posted on November 17, 2014 at 9:43 AM PDT by

Record-setting markets got you down? You’re not alone. Anyone who remembers the dot-com days and the 2008 debacle rightly would be concerned.

Trouble is, we want the markets to go higher. It’s how your retirement portfolio grows, after all. Some of it is income from dividends and bonds, but a lot of the gains we expect from the markets come from plain old appreciation — higher stock prices.

That can feel like thin ice after a few years. We don’t want a stiff correction, and much less a bear market — or do we? After all, if you’re going to be buying stocks for years to come, lower prices are more attractive than higher prices.

retirement portfolio

A lot of advisors attack this problem with specific strategies meant to assure investors that they are “safe” from a market downturn. Here are a few of those strategies, in broad terms:

Flight to quality — After a few years of taking speculative positions in thinly traded shares, advisors wary of a crash might tell you to start buying more blue-chip stocks. They’ll go down, of course, but presumably less so than some of the riskier bets.

Macro events — Civil war, currency crashes, ebola…the financial news is full of sobering global headlines. They might affect your investments indirectly, or they might be the fuse that sets off a general retreat from risk. Advisors sometimes suggest specific shorting ideas to get ready for the worst, should it appear.

Value investing — When stock indexes go up, that doesn’t mean all stocks rise in tandem by the same ratio. Very good companies can get beaten down by factors beyond their control, or just investor ignorance. Some advisors specialize in buying just those firms whose prices they deem “in error” relative to their real value.

Building cash — You’ll hear this a lot from billionaires and their advisors, particularly on financial cable TV. This doesn’t mean they are selling, necessarily. Just not investing at the moment. Big portfolios generate a lot of cash all the time in the form of dividends and maturing bonds. They’re sitting on that cash for now, or so they claim.

Should you consider any of these strategies for a “bad but good” market that seems to inevitably rise? Of course not, and here’s why: Research has shown that, time and time again, these kinds of short-run strategies work for a while, then the market erases the advantages they might have offered.

Getting it wrong

One or two in 10 advisors might “guess right” on some breaking news event, and they look amazingly prescient in retrospect. You don’t really hear about the other eight advisors who got it wrong, or the 20 times that the currently “accurate” advisor got it wrong in the past. Same problem with value investing, shorting and market timing.

The more effective response to fears of an expensive market is to reconsider your own tolerance for risk. If you are in your 20s or 30s and have decades ahead to invest, be heavy in stocks. Any near-term losses will be made up, and you get to buy more, cheaper in the meantime.

If you are nearing retirement, you probably shouldn’t be heavily invested in stocks in any market. Unless you know you will have retirement income from a pension and Social Security that covers your cost of living, your portfolio likely shouldn’t look anything like that of a 20-year-old.

It’s common sense, I know, but the appropriate way to invest is according to your own, personal time horizon, not unpredictable stock market events.

If there was any other way to manage those risks reliably, that’s exactly what your advisor would do for you. Pretending otherwise is just irresponsible.