Traditional ways of minimizing risk with retirement investments have been upsetting and frustrating to investors. Investors have been told to add bond funds to their stock type mutual funds to mitigate risk in their portfolio. This mixture is intended to operate somewhat as an “insurance policy” against downside stock risk. Investors tell me that this has not worked for them. Many are leaving traditional investment managers who advocate this approach.
Why traditional methods work poorly
Many advisors still believe in broad allocations to different types of equities and bonds for retirement investments. There is a degree of protection there, but as a general rule, the more diverse the portfolio, the lower the returns. Downside risk is still higher than most investors are comfortable with. The best evidence of this is to talk with someone who is broadly diversified. The ones I speak to are generally not happy with their investment results.
I have done research into the reason most equity mutual funds perform poorly: They typically include investments in volatile sectors of the economy that exaggerate market swings and put a drag on investments. Good examples of this are stocks related to energy (oil). Based on the sector ETF XLE, for the last two years, oil stocks and indexes that include oil stocks have put a drag on broad market indexes. The S&P 500 Index, for example, has exposure to 39 energy related companies. No one tells the investor this. All the average person knows is that they are getting poor returns with higher volatility than they would like.
Why do advisors recommend stocks and mutual funds that perform poorly?
It is hard to speculate on the exact reason, but I frequently see the output of poor advice. Sometimes advisers are required to sell investment products that make their company (and in turn the adviser) the most money. Other times it may be because the underlying fund pays additional compensation to the adviser.
If there were a real answer to this dilemma, it could significantly help people preserve and grow their retirement assets. Many people’s retirement investments are unable to keep up with the market/inflation, putting them further behind on their financial goals than planned.
People find themselves with financial professionals who they want to trust but who put them into investments that perform poorly over time. When they look at their real rates of return, it leaves them dismayed and frustrated.
What concrete steps can a person take to minimize risk and potentially grow their retirement nest egg?
I saw this same dilemma and got the same poor advice when I sold my company and was looking for a way to protect and grow my own money. Based on my research and experience, I believe there are 4 simple steps you can take:
- Recognize you have a problem; avoiding it is not going to make it get better.
- Be willing to get away from the same old traditional answers that lead nowhere – except to shift some of your money from you to the financial adviser.
- Please call me. I can help you analyze what you have and why it may not be meeting your expectations. It probably has a lot to do with the types of mutual funds in which you are invested.
- While I cannot guarantee the performance of your portfolio, I can show you solutions that I created to potentially minimize risk. You can view the real time performance of my recommended portfolio strategies through this link to an outside third party vendor that tracks my performance: https://www.reppondinvestments.com/investment-strategies