Why is it a good time to have a financial plan and to assess your investment risk level?

The US stock market has been climbing for nine years and is riding at record highs. It is easy to get comfortable and forget that markets do go down – sometimes a lot. The closer to retirement investors get, the more vulnerable they can become to market declines. Maintaining a prudent investment strategy during these phases of life is critical to retirement success – not to mention peace-of-mind. 

Research by Michael Finke, David Blanchett, CFA, and Michael Guillemette suggest there is a variable risk preference bias affecting investors. This is the inclination to take on more or less risk based on recent market performance. The stronger the recent performance, the more willing investors are to increase the level of risk in their portfolios — a pattern that runs counter to the buy low, sell high mentality, central to investing. What’s more, this research has shown the bias to affect older investors more than younger ones.

With the recent run up in the stock market, it is common to see pre-retirees or post-retirees coming into our office very heavily weighted to equities (stocks). These investments have undoubtedly provided great returns over the last decade, but now is a good time for pre-retirees and new retirees to take a close look at their investment risk level. If you are approaching or are in retirement, consider the following:

First, evaluate the risk you are taking with your portfolio and assess whether your financial plan can sustain a 20+ percent drop in markets. Looking at data going back to 1890, we have had 17 periods when the market fell at least 20 percent in real terms. That is about one event every seven years. The only way for investors to successfully weather severe bear markets is to have a plan that incorporates the virtual inevitability that they will occur.

Next, consider hiring a professional. A financial advisor can help structure a portfolio with the proper level of risk for your individual tolerance in-line with your unique goals and objectives and can help you avoid making emotional decisions. In addition, an advisor that focuses on holistic planning can help you tackle other critical retirement related questions such as: When should I retire? How much can I spend in retirement? When should I start taking Social Security?

If you are a current HFG Trust client, you are familiar with the "on track" analysis we run, which calculates your Capital Surplus (or Deficit) in today’s dollars and tells you whether your plan can withstand that 20 percent market drop. You also can rest assured that we are closely monitoring your investments, making sure that you are not exposed to excessive risk or subject to emotional decision-making. If you have friends or family that could benefit from our services, please feel free to share our contact information with them. Our advisors are always happy to help.

Now is an important time for all pre-retirees and those already retired to have a good handle on their financial plan and their investment risk level.


Megan Nichols, CFP ®

Financial Advisor



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