- Many retirees and / or many of those close to retirement need to protect their existing Retirement Nest Egg.
- But some of these people do not have enough to meet their lifetime cash flow purchasing power needs using 100% Fixed Income.
- But typical stock eg stock index approaches might have unacceptably large possible losses aka "drawdowns."
- It might be in clients' best fiduciary interests to own some 100% stock index-based choices.
- 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:
- Within 5 years of retirement or already retired.
- Realistic lifetime projected income from a 100% fixed income retirement nest egg will not meet your own retirement goal(s.)
- 100% fixed income retirement nest egg might not maintain your purchasing power cash flow goal in retirement
- Therefore you will need some growth of your retirement nest egg to meet your goals.
- Protection of your accumulated nest egg is still critical.
Brief Review of Risk Concerns
- Upside Potential
- Ease of use
- Liquid every business day at market value
- Potential loss of principal
- Potential market value frequent fluctuation makes planning difficult
Brief bullets: Indexing
- Link below mentions Stanford Business School research suggesting some managers persistently outperform
- Indexes (indices) are numerous
- Index based on S & P 500 probably one of the best-known, along with Dow Jones Industrials.
- 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.
- Indexes are typically transparent if they track listed securities.
- So at the end of every business day a computer can theoretically adjust an investment to an index.
- Such a program over time typically is much less expensive to operate than hiring human Money Managers.
- 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:
- Buy different securities than those included in the index
- In the plan (hope?) that some of these securities outperform the securities in the index
- Since markets fluctuate broadly, instead of owning the underlying securities of an index 100% of the time:
- Sell out 100% of the holdings and only hold cash when broad market might decline
- Similarly, sell out some percentage less than 100% (e.g. 50%,) thereby resulting in a smaller loss during a declining market.
- Own the identical securities in the index
- But own them in different proportions than the index, trying to own more of the "winners."
- 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.
- Transparent. Not a "Black Box."
- 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
- Sponsor uses ETFs
A. After every business day ETF holdings can be seen on sponsor website
B. Complete transparency.
- No guarantee
- It is possible to lose principal
- It is also possible that the upside will underperform the underlying index