Why You Can’t Just Set And Forget Retirement Investing

Ron Popeil of Ronco fame had an infomercial about a simple to use oven. There was a saying that he kept repeating throughout the 30 minutes show, “Set It And Forget It”. All you have to do was put a roast or chicken in, set-it-and-forget-it and voila, you’d have the perfect entre.

 

Most financial salespeople take the same approach to investing. Here’s their approach…

Are you 10 years away from retirement; needing to make up for lost ground? Just set it and forget it in this great mutual fund or annuity.

Are you retired but don’t need income? Just set it and forget it in this great mutual fund or annuity.

Are you retired and taking monthly distributions from your portfolio? Just set it and forget it in this great mutual fund or annuity.

They call this approach Buy and Hold. I call it Buy, hold and hope.

Like Ron Popeil, most financial salespeople believe that they are simple to use investments that, regardless of market environment, you just have to throw in your money, set-it-and-forget-it and you’ll get a perfect result every time.

If only it were that simple! But it isn’t. And that brings me to Common Sense Core Principal of Retirement Investing: In order to be successful, the strategy you use must be correctly matched to the current market cycle.

There’s no such thing as a good or bad investment, nor a good or bad investment strategy. Each has its own strengths and weaknesses. Successful investors recognize those strengths and weaknesses and then only use them in the type of markets they are best suited for.

We’ve all heard the terms Bull and Bear markets. In a Bull Market the markets are generally trending up whereas in Bear markets they generally trend down. There are also long-term and short-term market trends.

There are longer-term cycles that can last for a decade or more. These are referred to as Secular trends. Then there are shorter-term Bull or Bear market cycles that may last from a couple of months to a couple of years. These shorter cycles are called cyclical because they cycle back and forth.

So there are shorter-term Bull and Bear cycles within longer-term Bull and Bear trends.

The Buy, hold and hope strategy can work well when the markets are in a longer-term Bull trend. An example of that was the period between 1982 and 2000 when the Dow Jones Industrial Average generated a cumulative return of over 1000%. Those that correctly matched the buy and hold strategy with the type of market that it does best in did very well.

In a longer-term Bear market trend the same strategy turns into Buy, hold and SUFFER because secular Bear markets are characterized by extreme volatility and have more frequent and more severe ups and downs. Gains that are made can quickly be lost if you just buy and hold. 

2011 was a good example of that. The S&P 500 ended the year virtually the same place as where it started, but there were something like 6 different up and down moves greater than 15%. It was a roller coaster and few buy, hold and suffer investors were able to endure it as evidenced by the amount of money flowing out of stocks during that time. The buy and hold-type investors suffered not because the strategy they used was ‘bad’, but because it was not matched with the correct type of market.

A different approach is needed in a longer-term Bear market. The strategies used have to be more flexible and the account allocation needs to be dynamically adjusted more often. For instance, over the last couple of years, I anticipated that more conservative bond-oriented investments would do better than higher risk stock-oriented investments. So I dynamically adjusted my clients account allocations accordingly. During t time, bond-oriented returns have been greater than or similar to those of stocks but with minimal volatility. 

Just because we are in a Secular Bear Market, that doesn’t mean that stock-based investments shouldn’t be used, but that they should be used more sparingly and with greater caution. It means that they have to be tactically managed. Tactical management typically involves some type of pre-defined approach that helps identify when to enter the market and when to exit. Tactical-based strategies are better suited for cyclical Bull and Bear markets that might only last for a series of months instead of years.

For instance, one of the strategies I use is calendar-based. It is has been thoroughly academically researched and has been in use since the 1970’s. It moves into the market for about a week at a time, but on very specific dates based on things like tax reporting periods and holidays. Another manager I work with has used this strategy in his hedge fund for over a decade and, he reports that it didn’t have a losing year since 2001. Can you see how a strategy that remains in the safety of cash 72% of the time and is only exposed to the stock market 28% of time; yet has a history of capturing gains…can you see how that is better suited for a Bear market than the traditional buy, hold and suffer approach?

That doesn’t mean we shouldn’t ever use Buy, hold and hope. It just means that we have to realize that NO investment strategy is perfect. They all have strengths and weaknesses. So doesn’t it make sense that we should seek to match the strategy to the type of market we are in?

To wrap it up, retirement Investing is to recognize that it is vital that you adjust the type of investment strategy used to the type of market environment you are in. By the way, keep in mind that when I use the term ‘market’ I am not just referring to the stock market. There are many different kinds of markets—the US stock market, the US bond market, there are foreign stock and bond markets. There are currency markets and commodities markets—just to name a few. Typically, different markets cycle at different times, but the principal is the same—match the strategy used to the type of market it works best in.

Over the years, I’ve noticed that as investors have become more and more discouraged and that they have lowered their expectations of what a financial advisor should do for them. In my next blog post. I’m going to share the expectations that I would have if I needed to hire someone to help me manage my goose that laid the golden egg. And they are the expectations I would want my wife to have if something were to happen to me. I think you will find that these Common Sense expectations are anything but common nowadays.

Your posted comments on this and other questions are welcome.
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