A Sobering Thought About Retirement Investing: Financial Advisors' Daily Digest

By SA Gil Weinreich :

The debate over the best investment strategy frequently takes the form of pitting one fancy-sounding theory (such as modern portfolio theory) against another (say, life-cycle investing). But at the risk of oversimplification, I think we could fairly boil the debate down to an aggressive vs. conservative approach. A week after the Dow hit the psychologically resonant 20,000 milestone, many investors are in a celebratory and risk-taking mood. So now's as suitable time as any to hear the conservative case - to at least grasp that there is an alternative. Michael Lonier, a financial advisor, makes that case in an article published today called, " Allocating Assets in a Retirement Plan ."

But don't assume that this advocate for investment conservativism shows the same restraint in his arguments as he does in his clients' portfolios. Indeed, Lonier takes a fairly aggressive line against proponents of the aggressive style, which he terms a "traditional investment portfolio" in the following, feisty excerpt:

Asset allocation in a traditional investment portfolio is related to how much pain the client can stand, and for how long. The higher the pain threshold and the longer the client can bear it, the higher the allocation to risky assets, and the higher the expected return. The acid test for this approach is the Monte Carlo analysis, which models how high the pain threshold has been set by showing the percentage of times the portfolio fails out of a sizable series of random runs, and the Monte Carlo model is Dr. No's dial for dialing up the amperage. In a sense, asset allocation in a traditional investment portfolio is akin to waterboarding. No wonder many people rank investing and financial advisors below going to the dentist! Or like a trip to AC.

While we're likely to hear a rebuttal from the feisty FAs in the "traditional" camp, let's for now consider the truths that both sides in this debate will likely agree on: namely, that investors don't earn a risk premium on their investments without taking risks. Both Lonier and "traditional" advisors allocate risk to their clients, the difference being that Lonier will only do that with the portion of the client's portfolio that is not already set aside for liquidity and income needs, which in many cases could leave a sum of zero for equity investing. The conservative view is that retirees simply cannot afford the risk of the loss of principal if their more immediate needs are not essentially guaranteed.

It seems to me that one obvious implication of this view - if we are being conservative with our resources (as opposed to "traditional") - is that the time to save and earn aggressively is before we get to that point of no return, retirement, when according to the conservative perspective those who are not already quite wealthy can no longer afford to take risk. A sobering thought.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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