Retirement Guys: Learn how to build an all-weather portfolioWritten by Nolan Baker Mark Clair | | firstname.lastname@example.org
Right now, the leaves are changing colors and starting to fall. We know that we have a little bit more time left before the season will change and the snow will start to fall. Every year we take this time to get ready for winter and prepare for the snow storms that will be coming. Then about the time we can’t handle any more winter, the snow begins to melt. The trees will begin to bud and we will once again come outside as spring will be right around the corner. For me, Nolan, my favorite time of the year is summer. I like warm weather, boating, relaxing in the water, and spending time off in the summer with my wife and children enjoying the sunshine. Living in Northwest, Ohio it is easy to prepare for the changes we have in our seasons since they are very predictable.
The seasons change as well when it comes to investing. The market and the economy goes through periods of times when everything is hot and times when it seems like the storms will never pass. Knowing how and when to prepare for the changes isn’t as easy as predicting the weather here in Northwest, Ohio. Because it can be difficult to predict stock market conditions, investors might want to consider building an all weather portfolio.
A common investment approach today is called asset allocation. The problem with a traditional asset allocation, buy and hold only strategy, is weathering through the good times and the storms can leave the average investor battered and beaten down. Traditional asset allocation generally goes up with the market and down with the market. It is like staying outside every day. Some days are warm and beautiful while other days are cold and stormy. Standing outside enduring the weather every day of the year can be a very difficult task for most people. This is why many people will choose to come inside when a storm hits and wait till the sun shines again before going back outside. When it comes to investing, this is what happens to many investors and why they sell low, getting out of the storm, and buy high, when the sun is shining, which can be very costly for the average investor.
In asset allocation investments are often measured using relative return. Relative return is looking at the performance of your accounts versus similar investments. Relative returns is like hearing, someone tell an Investor they are doing good because they are down only 20%, since the overall stock market is down 30%. Using relative returns, one might assume that an investment is poor when it is up 10% when the market is up 15%. Relative return is important when an investor is concerned about how everyone else is doing.
Building an all weather portfolio means looking at the investments from a whole new standpoint. It means creating a plan that is based upon what the individual is comfortable with and not worrying too much about everyone else. In terms of weather, it is like, staying inside your house and setting the temperature for what you are comfortable with so you are much less affected by what is happening outside. Spring, summer, fall, or winter, the thermostat is kept at 70 degrees all year round inside.
One of the primary goals of building an all weather type portfolio is to avoid significant losses and prolonged periods of time with poor performance. Although this strategy can be an option for every investor, it becomes more and more important for those who are close to or in retirement. All weather investment portfolios can be built using a variety of investments such as traditional investments like stocks, bonds, and mutual funds. But what makes all weather portfolios unique is these accounts often add in alternatives such as long-short strategies, futures, options, derivatives, arbitrage, leverage, and unconventional assets. The goal is often to pick several different investments that are all designed to make money, but choose investments that all work a bit different.
As with any investment approach; pro’s and con’s exist with any investment strategy. As we pointed out earlier, the primary goal of building an all weather portfolio would be to avoid significant and prolonged losses. A negative of an all weather portfolio is in a major market gain; many times this strategy will underperform broad stock market indexes. To find out more about how this investment approach might fit in with your current investment plan, talk with a licensed investment professional.
For more information about The Retirement Guys, tune in every Saturday at 1 PM on 1370 WSPD or visit www.retirementguysradio.com. Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. Diversification does not guarantee against market losses. It is a method used to help manage investment risk.
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