11/18/2015 (PRESS RELEASE JET) -- In a recent study by the Financial Services Institute and Strategy & Resources, downside protection strategies were ranked No. 2 among investment approaches.
But when it comes to retirement savings, Baby Boomers may not be protecting against the possible downside risk resulting from market volatility– something that many in the financial services field say could have an adverse effect on this generation’s retirement income.
The 2014 Global Investor Pulse survey by BlackRock showed that 27 percent of Americans are investing more in stocks today than five years ago.
But the MFS Investing Sentiment Insights Survey, conducted by global asset manager MFS Investment Management, showed that Baby Boomers report, on average, portfolio asset allocations of 40% equities, 14% bonds, and 21% cash.
Millennials, on the other hand, tend to have larger allocations to bond and cash than their much older counterparts.
Furthermore, 32% of baby boomers cited maximizing growth as their most important objective – a goal that runs counter to the traditional investing advice that takes a more conservative approach the closer one gets to retirement. Millennials on average are more concerned about this, with 29% citing protecting capital as their main retirement savings goal.
Darrell VanPamel, insurance producer and financial advisor, says he deals with a great deal of clients whose retirement income strategies are subject to unnecessary taxation and market volatility risk to income, and too much market risk overall. He stresses the need to focus on downside risk protection, especially in that three- to five-year window before retirement, and to continue to review downside protection throughout retirement.
“There has to be just as much, if not more, focus on downside risk than there is on growth,” VanPamel says. “Anybody can put a client in a Vanguard 500 fund and grow their money, but the finesse is how to incorporate that growth and put the client in control of the market – not the market in control of them.”
Jim MacDonald, president of Workplace Investing at Fidelity Investments, stated in a July 2015 release that the last recession – in which Generation X lost 45% of its median net wealth and Baby Boomers 28%, says the Pew Charitable Trusts’ “Retirement Security Across Generations: Are Americans Prepared for Their Golden Years?” -- taught consumers that asset allocation and not just diversification is an important part of any retirement strategy.
“One thing learned from the last two recessions is that having too much stock, based on target retirement age, in a retirement account can expose savings to unnecessary risk,” MacDonald says. “It’s the hidden danger that many workers are unaware of. This is especially true among workers nearing retirement, who should be taking steps to protect what they’ve worked so hard to save.”
Mr. VanPamel recalls a client who came to him at the end of 2007 with no downside protection from potential market volatility and 100% stock exposure. As she was nearing retirement, they adjusted her portfolio to include more conservative products, including annuities. Thanks to the strategies implemented to help reduce the impact of market volatility, the client had a positive gain to her portfolio in 2008.
What’s more, when she passed away in 2009, she was able to transfer a positive estate to her children.
“While consumers shouldn’t try to time the market,” says MacDonald, “checking accounts on a regular basis and ensuring portfolios are properly balanced can ensure allocation stays on track.”
Individual circumstances vary, and the current economy will affect each person differently, but one basic approach is to apply the “Rule of 100” to portfolio allocation: Subtract the client’s age from 100. The result is a general guideline for percentage of savings that should be invested into a stock and bond portfolio at that point in time. As an example, a 70 year old should have 70% of investible assets in conservative financial products and 30% stock exposure.