I was interviewed recently on The Rhode Show on Channel 12 to discuss the appropriate level of risk that our investments would be exposed to.  Needless to say, the acceptable level of risk is based on your age and the proximity to when you will need the money.  That need could be for college tuition, purchasing your home or investment property, or for many, saving for retirement.  

As our team specializes in guiding our clients towards their retirement, our focus is to reduce risk versus taking on too much risk.  Let's talk about some differences.

If you are younger, chances are you can withstand more volatility in the stock market.  Generally speaking, a younger person that is starting to invest in their company's retirement plan, should be more comfortable taking risk as that account is primarily going to support them in their retirement years.  Therefore, as a younger person, you should be better able to deal with the ups and downs of the stock market.  Obviously, that is not the case for some!

The more important part is that you continue to contribute into your retirement plan with every paycheck.  If possible, when the stock market does go down, you should increase your contributions.  This allows you to buy more shares at lower prices as the market is going down.   Once you see the market having a bad stretch, you should increase your contributions.

There is a simple rule of thumb still taught by the Certified Financial Planner(tm) Board of Standards, it's called the rule of 100[1].  Simply subtract your age from 100 and the result should be the maximum percentage that you should have at risk in the stock market.  Again, this is a "rule of thumb" and a good starting point.  As an example, let's use an age of 35, so, 100-35=65.  This simple rule suggests that a 35- year old would typically have 65% of their money invested in the stock market.

Another example would be someone that is 60 years of age; they would typically have about 40% of their money at risk in the stock market.  This is a "rule of thumb" so the actual amount that you put at risk in the market, based on this math, could vary.

You might be wondering what to do with the rest of the money.  Our philosophy is to put "guardrails" on the portion that is not invested in the stock market.  In this example, many stock brokers might recommend that 40% of your money be invested in bonds or other forms of fixed income.  That is the method used by many brokers and has been for decades.

About 3 1/2 years ago, Roger Ibbotson, Professor Emeritus at Yale, lead a team of researchers to determine if bonds were still the better option for the 40% in our example.  After studying about 90 years of stock market history[2], it appears that bonds may not be the best place for this money.

Specifically, they addressed the likelihood of interest rates going up in the future.  Interest rates have been down since the "great recession" in 2008.  The Fed has indicated that they will raise rates if they feel that inflation is getting too heated.  The projection as of this writing is that the Fed will raise rates in 2023, however, some think it could be as early as the fourth quarter of 2022, which is not that far away!

Why would rising interest rates be significant?  Historically, as interest rates go up, the market value of bonds goes down.  So, when interest rates go up, your bond market value, if you had to sell it, would be less.  This was the reason that the Yale report indicated that Fixed Index Annuities (FIAs) might be considered as an alternative to putting money into bonds.  

We prefer putting "guardrails" around our clients’ portfolio.  Would you drive over the Newport bridge if it had no guardrails?  I think most of us would not!  Having those guardrails in place provides us with comfort as we cross that bridge.  We feel that putting "guardrails" in place for your portfolio is also a good idea!

If we assume that interest rates will go up in the not-too-distant future, FIAs allow money to be placed in a protected contract that would not experience a loss if the stock market goes down in value.  These contracts allow you to track the market, and there are many different ways to do this without having direct stock market exposure.  The trade off for the protection provided by the insurance company is that you will not receive all of the stock market growth; in essence, there is a "cap" or a participation rate that determines the amount of gain you will achieve if the market goes up during your contract year.  The protections offered through these contracts are backed by the financial strength and claims paying ability of the insurance carrier.

We like to consider Fixed Index Annuities as the "guardrails" that allow our clients to track the stock market and share in the ups of the stock market without experiencing a loss if the stock market goes down.  These contracts are typically for longer periods of time which fit nicely into retirement planning as we hope you will be in retirement for many decades!  FIAs allow you to take out a percentage of money each year, after the first anniversary, with no penalty.  Surrender charges, or early withdrawal penalties, vary from company to company and typically reduce over the term of the contract.  Always ask for details when these contracts are being suggested by your advisor.

We feel that putting "guardrails" around your money is a prudent decision, especially given the length of time that the stock market has been going up.  The S&P 500 is up approximately 600% since the low in March of 2009.  Prudence suggests protecting some of those gains!

This content is provided for informational purposes only and is not intended to serve as the basis for financial decisions.  We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives.  Investing involves risk, including the potential loss of principal.  No investment strategy can guarantee a profit or protect against loss in periods of declining values.  Any references to lifetime income generally refer to fixed insurance products, never securities or investment products.  Insurance and annuity product guarantees are backed by the financial strength and claims paying ability of the issuing insurance company.  Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM).  AEWM and Massey and Associates, Inc. are not affiliated companies  989148-7/21

1. (Roger G. Ibbotson, January 2018)  Yale School of Management
   Fixed Indexed Annuities:  Consider the Alternative
   Zebra Capital Management
2. (Standards, 2013)  cfp.net   Standards of Professional Conduct