The Art of a Risk-Adjusted Portfolio

We’re excited to talk to you about a conversation that we have with every client surrounding risk. Clients who are further away from retirement often don’t mind taking on more risk with retirement planning.

However, when you inch closer to retirement age, you want to do everything you can to secure your retirement, and maybe want to take on less risk.

A risk-adjusted portfolio is how we perform a balancing act between risk and growth to help you achieve peace of mind in retirement. This is our philosophy, but this doesn’t mean that it’s the right choice for everyone.

How We Determine Risk Tolerance

Imagine this scenario. The stock market goes up and you’re happy with the gains. However, economic issues cause the market or bonds to swing in the other direction and now you’re down 10, 15, or 20 percent.

At which level do you start to lose sleep at night?

Imagine that you have $1 million to invest and want to go with a moderate portfolio. Most clients believe that they would prefer this option. However, are you comfortable with:

• 20% – 25% losses?
• How about $200,000 – $250,000 losses?

Often, a percentage doesn’t sound that bad until you see the actual dollar amount. Losing $100,000 or 10% of loss is concerning. You may see these figures and be okay with this level of loss, but most of our clients do not have this much of a risk threshold before they begin to lose sleep.

If you’re uncomfortable with losing money at this level, we’ll recommend a risk-adjusted portfolio.

The Two Styles of Investing

Investing can come in two main styles with a bunch of deviations along the way.

Passive Management

Your passive management, such as a 401(k), is common for a lot of people just starting to think about their retirement. You funnel some money into the account, allot 50% to large caps, 25% to medium caps and 25% to small-cap stocks.

In terms of management, you may make a small adjustment quarterly or annually, but you don’t do much more management than that.

You contribute to the account and bet that, in the long run, the market will prevail. For all intents and purposes, this is a passive management strategy.?

Younger investors may be fine with passive investing because, in 30 years, they may not be retired. When you’re 55 or older, you don’t have the luxury of 30 years for market corrections.

Active Management

An active management strategy is more hands-on and may include active money managers and financial advisors.

Hedge funds may work to actively manage your account to outperform the stock market to the best of their ability. You may also have active management on the side of protecting against significant market drawdowns.

The active manager will make changes to the portfolio to move your money around and reduce your risk of losses.

During the pandemic, we actively managed our clients’ accounts and moved a lot of money to cash while the market suffered losses. Our clients ended up far better thanks to this approach when compared to the significant losses in the stock market.

Every strategy has years where it outcompetes the others and years when it underperforms the other.

We like to have a portfolio that has multiple parts:

• Tactical, which is risk on and risk off, depending on what’s happening in the market.
• Core, which is always invested, but what is invested can be rotated throughout the year. Rotations often occur quarterly.

You can cut your risk considerably by having a tactical and core approach. Risk-adjusted portfolios include multiple layers of investment that will help you reach your retirement goals. Our most common portfolio option is moderate growth.

What a Moderate Growth Portfolio Looks Like

Our moderate growth portfolio has many elements, including:

• Equity element. In the equity element, there are strategic, core and tactical investments. If we go into a period of high volatility, the core will remain invested because things are okay over time. The tactical area will begin to adjust to hedge risk by reducing equity exposure and moving toward fixed asset exposure.
• Structured notes. If you’re still not comfortable with the risks, we will move into structured notes. These notes are available to our clients due to our buying power. We negotiate with the banks, structure a note, and have a rate of return. Right now, the annualized return for these notes is 7% – 11%, so they’re much better than a CD or money rate. Structured notes have inherent risks, but they’re lower than most other options.

A breakdown of our moderate growth portfolio right now is:

• 38% in the core sleeve, always investing and rotating based on the equity market
• 38% in the tactical sleeve, which we can turn risk on and off as necessary
• 24% (max) in structured notes

Structured notes help smooth out a portfolio, especially when you have ups and downs like we’re seeing in 2023. These notes often include a coupon, which offers interest on the account every month.

If a scenario occurs where we need lower equity exposure, we may move into a moderately conservative portfolio that adds bonds or ETFs as a way to lower exposure. We would likely put 30% core, 30% tactical, 24% structured notes and 16% in fixed income.

Our most conservative portfolio will include:

• 20% core
• 20% tactical
• 24% banknotes
• 36% to fixed income

Clients who don’t want much risk in their portfolio benefit most from this type of portfolio. Many people don’t want 100% risk of the S&P 500, which, over the last 30 years, is a 58% drawdown.

You would lose $580,000 of your $1 million portfolio in the scenario above.

Risk will fluctuate throughout your retirement funding, but when you reach closer to the time when you can finally retire, it often makes sense to mitigate risk as much as possible. You have a dream retirement in mind, and we want to help you reach it.

It takes 15 – 20 minutes for us to have a risk tolerance assessment with you to help you understand what your personal risk preference is because it will let you have the most peace of mind.

Click here to schedule a call with us today to have us run a risk assessment for you.