The following is Part Two of a two-part blog post written by True Link Financial CEO Kai Stinchcombe. Kai chose to write this blog after numerous discussions with individuals asking what changes they should make to their current retirement investments given the election of Donald Trump and a shifting American political climate.
Presidents have the power to move financial markets. So, it’s no surprise that the latest election has many Americans wondering whether their own stock portfolio needs adjusting. This is particularly true for those who will soon be (or already are) relying on their investments to support them in retirement. In this two-part article, we’ll cover how the Trump presidency could impact the stock market and what retirees can do to prepare.
(If you missed Part One, click here.)
So far, we've said that a well-designed portfolio shouldn't need more than minor adjustments based on the latest election. But what exactly does that mean? In particular, how would you know if your portfolio is not well-designed for this type of event – and therefore does need to be adjusted?
The first thing to ask yourself is, "what's my level of tolerance for volatility (i.e., risk)?" Generally, your attitude toward volatility should be driven by your time horizon. Money you're using to pay your rent next month should be in a checking account because you can't afford for it to go up and down at all; money for college tuition or home renovation in five to ten years should be invested for low volatility but also has some time to ride out the bumps; and money that you're not planning to spend for twenty years or more, we believe, should be mostly in stocks because generally it will have more time to recover from any short term events. Your time horizon should drive your volatility tolerance, and your volatility tolerance should drive your level of exposure, i.e., how much your money is tied to the ups and downs of the market.
As a starting point, take a quick look at this helpful Planning Tool we built based on market-leading target date mutual funds from T Rowe Price and Vanguard. This represents a mainstream estimate about what is the appropriate amount of equity for a person your age to have in their overall portfolio.
Now that you've done that, there are three things to look for:
(1) Overexposure – if your equity percentage is "too high" you probably did very well over the last few months. But what goes up can also come down! You might have a higher risk tolerance than other people your age – maybe you have a pension and so can afford to take more risk with the savings, or maybe you're planning to leave most of it to your kids, so you have a very long time horizon. But if not, it might be worth adjusting the equity percentage downward so you can feel better about riding out any bumps that could occur over the next few years.
(2) Underexposure – if your equity percentage is "too low" relative to what the mainstream might recommend, you will do better than others if the economy tanks and worse than others if the economy grows. For some people, that's just fine, but if you're planning to use that money for medical care later in life, you’ll need your resources to grow. With 3.5% medical inflation, the cost of medical services are expected to double in 20 years. Make sure you're not making an emotional decision – it can be scary to watch a portfolio go up and down with the market, but over the long term it's often the wiser choice.
(3) Excessive risk for the reward you're getting – even if your equity percentage is on track, you might be taking on more risk or getting less reward than you should be. In some cases, when you accept market exposure you get a commensurate expected payoff (like when you put your money in the stock market). In other cases, you're taking a risk but getting nothing in return (like if you took your money to Vegas). In technical terms this is called an "efficiency analysis" – it answers the question: am I getting paid for every risk I'm taking, or are some of the risks being taken for no reason? Doing an efficiency analysis is a technical process, so you'll probably want to ask your financial advisor or financial planner for that. Or give us a call, and we’ll be happy to provide this assessment at no charge.
Trump's win was a surprise for pollsters and the market – and any time there's a surprise, it creates winners and losers. Some industries may do better, some may do worse, and it is probably safe to assume less overall certainty as a result of changes that the market doesn’t see coming.
A well-balanced, strategic portfolio is designed to weather unexpected events – a downturn, a crash, a political surprise, a change in fortune for one industry or another. While you can never eliminate risk, the goal is to take only efficient risks – ones that are calculated to increase the expected return of your portfolio – and to limit how many you’re taking. This is especially important for the majority of our clients, retirees who have accumulated savings throughout their lives and are now in what experts call the “decumulation phase” when the focus is on preserving and judiciously spending the capital they worked so hard to save.
If your portfolio is balanced properly, hang in there – you should have enough safer investments that you can meet your needs, and enough opportunity investments that allow you to participate when good things happen or give you time to recover when bad things happen. If you're not balanced properly, take this election as a reminder! Whether it was a pleasant or an unpleasant surprise for you, be aware that the market is always full of surprises and now might be the right time to make sure your investments are better prepared for whatever may come along.
Not sure if your portfolio is balanced appropriately for your retirement needs? We’re always happy to review your investments and provide recommendations on how you might adjust your holdings. You can learn more about our Retirement Planning Tool or reach out directly to one of our advisors.
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Examples provided within this article are only examples. They should not be utilized in any real-world scenarios as they are based on limited source information.
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