40 INVESTMENT ADVISOR JULY/AUGUST 2020 | ThinkAdvisor.comthe current “globally diversified marketplace,” he explained, predicting thatlower returns across the globe are likelyto be the norm in the 21st Century.
BUFFER ASSETS, OTHER OPTIONS
To better manage volatility and longev-
ity in retirement, clients have basically
four options, according to Finke:
• Spend conservatively,
• Spend flexibly,
• Reduce volatility and
• Use buffer assets and avoid selling
Retirees often decreasetheir spending, some ofwhich is more flexible thanit was in their pre-retire-ment years, Finke explained.
Financial advisors shouldn’tassume retirees’ spendingwill be the same each year,though about 70% of a retiree’s budget is inflexible (asit is tied to food, healthcare, etc.).
Delaying Social Security is an optionthat can give clients more to spendin retirement, he noted. Clients whohave pensions also can withdraw moremoney safely from the portfolio thanthose who do not.
A buffer-asset strategy, meanwhile,could have helped counter what happened in March, when bonds fell at thesame time as stocks, according to Finke.A client with a $2 million portfolio containing S&P 500 stocks and intermediate bonds saw a 19.4% decline on March19, he said; but if that client had owneda cash-buffer asset instead of the intermediate bonds, the amount would havedeclined much less — only 11.2%.
“The key for us and the key for inves-
tors is to ask the question, what is the
right thing to invest in now?” Blanchett
said. “As the markets rose, risk aversion
fell. Then as the market fell, risk aver-
sion rose for older investors.”
Advisors have a key role to play in
this context, because they are “helping
investors stay the course,” he said. On
their own, investors are more likely to
make changes to their equity allocations
based on volatility; plus, older investors
tend to make the largest changes.
TIME DIVERSIFICATION DEBATE“Time diversification is the idea that if youhave a longer-term time horizon, stocksare a more attractive investment,” Finkesaid. However, some economists believerisk and time horizon shouldn’t matterwhen deciding on a portfolio, while others view stocks as somewhat less riskywhen held over a longer period of time,whether the client is risk averse or not.
“How you invest is critical for long-term outcomes,” Blanchett said. “In theory, you need to take on more risk if youwant a portfolio to last 30 or 40 years.”But the important question remains:How should the right level of risk in aportfolio be defined?
“If you’re going to overreact to the
market, like a lot of investors do … then
maybe you have to be more conserva-
tive,” Blanchett said. “The benefit of
being more aggressive for longer time
horizons has been increasing through-
out the 20th Century.”
Advisors should let clients see their
assets as different pools of money, in sepa-
rate cash, portfolio and annuity buckets, so
they can better understand the true impact
of market shocks, Blanchett suggested.
Finke agreed, pointing out: “Older
investors tend to underperform the mar-
ket” for reasons that include “they tend to
do the wrong things at the wrong time.”
For example, “In March, they were
far more likely to pull their money out
of stocks at the bottom of the mar-
ket,” he said. “They also become more
risk tolerant after stocks have risen in
value. So essentially what they’re doing
is they’re buying stocks when they’re
more expensive and they’re selling them
when they’re cheaper. That leads to con-
As a result, investors over age 70
have an average stock returns that are
3% less than those in their 40s and 50s,
Annuities, meanwhile, are a
“more efficient way of fund-
ing the safe spending” that
investors have in retire-
ment, according to Finke.
“The time to have bought
annuities was back in
December or January — back when your
equity portfolio had gone up in value
for the better part of a decade,” he said.
Also, it would have made sense to “take
some of those gains off the table and buy
yourself a guaranteed income with it.”
It seems that older investors “need to
be reminded of what risk means before
they invest in products that give them a
measure of safety, such as an annuity,”
he said. “So part of the advisor’s job is
to get clients to remember that risk is
real — even when risky assets seem like
they can only go up in value.”
Jeff Berman is a staff reporter at ThinkAdvisor.He can be reached at firstname.lastname@example.org.
A buffer-asset strategy could
have helped counter what
happened in March, when bonds
fell at the same time as stocks,
according to Michael Finke.