Protecting your purchasing power means that for the 20, 30 or even 40 years you might spend in retirement, you need some income growth. The Conventional Wisdom which might, among other things, include a low-cost stock index fund. But an index fund, by its stated goal, must remain fully invested even during downtrends. So a stock fund with more flexibility might offer some additional growth potential and additional diversification as opposed to only owning a stock index fund.
Primary Audience for this post:
- Within 5 years of retirement or already retired.
- Currently very low interest rates make it difficult or impossible to meet purchasing power goal with 100% fixed income.
- Therefore you will need some growth from your retirement nest egg.
- Protection of your nest egg is still critical.
Stock Index Funds have recently provided good growth ...
But Index Funds must stay fully invested and, sadly, stocks are subject to Market Loss ("Drawdown")
"More importantly though, while all the crashes prior to today have their respective bottoms marked with red, we have no clue whether we are anywhere near the bottom for the coronavirus crash." Source: Of Dollars and Data
Unlike an S & P 500 Index whose charter requires being fully invested, ClearBridge Select Fund management is unconstrained so has the ability per prospectus to proactively move away from a potentially catastrophic loss trend.
Keep in mind the flexibility management has:
- "The fund seeks to achieve its investment objective by taking an unconstrained approach"
- "The fund uses a focused approach of investing in a smaller number of issuers"
- "The fund is classified as "non-diversified," which means it may invest a larger percentage of its assets in a smaller number of issuers than a diversified fund."
Source: ClearBridge Select Fund Summary Prospectus, Page 5
Bruce's Commentary: The unconstrained approach means management does not have to stay fully invested and is allowed to move away from a potentially damaging downward trend. On the upside, management can concentrate more on their highest convictions rather than be required to own all 500~ or so names in the same proportion as an index.
Disclosure: As also mentioned below,
- Past performance does not guarantee future results.
- All investing involves risk including the possible loss of principal
Advantages & Disadvantages:
"Diversification Means Everything Is Not All Moving In the Same Direction at the Same Time"
This concept is of critical importance for retirees and pre-retirees. Many simply would be in big financial trouble if everything they owned went down all at once.
Vanguard item shown above: 2018: -4.42%
ClearBridge item shown above 2018 +10.49
What to do? Diversify ... e.g.
- Social Security and / or Pension and / or annuity for predictable monthly cash flow
- One or more active management strategies to participate in stock market gains while potentially having smaller capital losses.
- Fixed Income of perhaps more than one kind to generate additional income