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Add Active Risk Management to Low-Cost Indexing for Protection and Growth Possibilities

Add Active Risk Management to Low-Cost Indexing for Protection and Growth Possibilities

| May 08, 2020

Executive Summary

  1. Many retirees and / or many of those close to retirement need to protect their existing Retirement Nest Egg.
  2. But some of these people do not have enough to meet their lifetime cash flow purchasing power needs using 100% Fixed Income.
  3. But typical stock eg stock index approaches might have unacceptably large possible losses aka "drawdowns."
  4. It might be in clients' best fiduciary interests to own some 100% stock index-based choices.
  5. It might also be in the same clients' fiduciary best interests to also own some active risk management choices coexisting with the index choices.

Primary Audience for this post:

  1. Within 5 years of retirement or already retired.
  2. Realistic lifetime projected income from a 100% fixed income retirement nest egg will not meet your own retirement goal(s.) 
  3. 100% fixed income retirement nest egg might not maintain your purchasing power cash flow goal in retirement
  4. Therefore you will need some growth of your retirement nest egg to meet your goals.
  5. Protection of your accumulated nest egg is still critical.

Brief Review of Risk Concerns

Stocks Advantages

  1. Upside Potential
  2. Ease of use
  3. Understandable
  4. Transparent
  5. Liquid every business day at market value

Stocks Disadvantages

  1. Potential loss of principal
  2. Potential market value frequent fluctuation makes planning difficult

Brief bullets: Indexing

  1. Link below mentions Stanford Business School research suggesting some managers persistently outperform
  2. Indexes (indices) are numerous
  3. Index based on S & P 500 probably one of the best-known, along with Dow Jones Industrials.
  4. Ignoring the minutiae of "tracking error," if you choose an investment that tracks an index, your results typically will be extremely close to the results of an index.
  5. Indexes are typically transparent if they track listed securities.
  6. So at the end of every business day a computer can theoretically adjust an investment to an index.
  7. Such a program over time typically is much less expensive to operate than hiring human Money Managers.
  8. Therefore "low-cost indexing" is widespread.

Brief bullets: Active - Three approaches

To achieve a meaningfully better result than an index, there are might be only a small number of concepts that could theoretically be implemented:


  1. Buy different securities than those included in the index
  2. In the plan (hope?) that some of these securities outperform the securities in the index


  1. Since markets fluctuate broadly, instead of owning the underlying securities of an index 100% of the time:
  2. Sell out 100% of the holdings and only hold cash when broad market might decline
  3. Similarly, sell out some percentage less than 100% (e.g. 50%,) thereby resulting in a smaller loss during a declining market.


  1. Own the identical securities in the index
  2. But own them in different proportions than the index, trying to own more of the "winners."
  3. Similarly, own some but not all of the identical securities in the index, concentrating on your forecasted "winners."

Advantages & Disadvantages Example: Pacer Trend-Following (Timing using 200 day moving average)

  • See Linked PDF below.- Investing Based On Trends, Not Emotions
  • Note: Past Performance is not a guarantee of Future Results
  • Also: Because the future is uncertain, there is no guarantee that this or any particular strategy will actually work IRL - In Real Life - as it was designed to work.


  1. Transparent. Not a "Black Box."
  2. Sponsor explains
    A. What they do
    B. What metric they use to take actions
    C. Sponsor uses easy to understand metric - 200 day moving average
    D. See linked PDF
  3. Sponsor uses ETFs
    A. After every business day ETF holdings can be seen on sponsor website
    B. Complete transparency. 


  1. No guarantee
  2. It is possible to lose principal
  3. It is also possible that the upside will underperform the underlying index

The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors should consider their financial ability to continue to purchase through periods of low price levels. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Exchange traded funds (ETFs) and mutual funds are sold only by prospectus. Investing in ETFs and mutual funds is subject to risk and potential loss of principal. ETFs incur trading and commission costs similar to stocks and frequent trading can negate the lower cost structure of an ETF. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Investors should consider the investment objectives, risks and charges, and expenses of the fund carefully before investing. The prospectus contains this and other important information about the fund. Contact your registered representative of the issuing company to obtain a prospectus, which should be read carefully before investing or sending money. The return and principal value of fixed income securities fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value. All investing involves risk, including the possible loss of principal.  There is no assurance that any investment strategy will be successful. Guarantees are based on the claims paying ability of the issuer.

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