Many investors, seeing disappointing returns for retirement accounts, turn to their financial advisors after the stock and bond market downturn in 2022 and ask, “Now what?
As contrary as it may seem to some, the short answer is to stay the course or make small adjustments. We turned to Dave Kloster of Thrivent Financial, who helps oversee 2,300 financial advisors; and John Foster, Senior Advisor and Investment Strategist at
JNBA Financial Advisor, for more information. Here are their responses, edited for space and clarity.
Q: What advice would you give to middle-class people concerned about retirement?
A: Despite negative returns in the broader equity and bond markets in 2022, “Thrivent recommends investors stay the course, take a long-term approach, and avoid the urge to panic and make big changes. to their plans,” Kloster said. “For example, exiting the stock market now can result in losses that could be recouped over time by staying invested. History also shows that bonds can recover and continue to play a key role in a diversified portfolio.”
Q: How does a financial plan guide investors through emotional ups and downs?
A: The plan developed by the client and the advisor should serve as the anchor.
“When people understand the purpose of their investments, it can be easier for them to stay on course and limit the temptation to react to short-term market movements,” Kloster said. “Making big adjustments in light of market conditions can be a mistake that could actually worsen investment performance over time. Business cycles come and go. You generally want to stay invested unless you’ve taken the calculated decision to exit a security and exit the market.”
Q: What about “rebalancing” your portfolio of stocks and bonds, including mutual funds?
A: A rebalancing bonus involves selling something that’s high in order to buy something that’s falling, such as selling stocks to buy more bonds or vice versa, depending on which class was up or down, said Foster. However, stocks and bonds are generally down this year, forcing investors to deepen their portfolios for a rebalancing premium.
Foster advises looking at equity holdings to make style-level changes or even sector-level changes.
“Value stocks are down single digits this year while growth stocks are down 30%,” Foster said. “There is a big difference between the Dow Jones and the Nasdaq. So you can get more out of it.”
Or you can take the rebalancing at the sector level: “Energy is up almost 60% while consumer cyclicals, companies like Target … are down 35%,” Foster said.
Q: How often should investors rebalance or assess their goals?
A: “I would say quarterly or semi-annually would probably be better,” Foster said.
Foster suggests investors periodically reassess their long-term goals and risk tolerance. New long-term goals or events like a significant change in income, starting a family, planning to buy a home, or impending retirement can be a good time to make these reassessments.
Investors with longer time horizons, those under 50 years, can consider an 80/20 portfolio consisting of 80% equities (which generally carry higher risk but offer the possibility of higher returns) and 20% fixed income securities including government, municipal or corporate bonds (generally less risky but offering less yield). But as investors approach retirement or important milestones, they can take less risk by adopting a 60/40 stock/bond portfolio.
Q: What about fixed income opportunities now that rates are rising?
A: “There might be people who say, you know what, if I can make 4% or 5% in fixed income, I’m comfortable with that,” Foster said. “There is the possibility of making money from bonds for the first time in a long time.”
Why? Interest rates are higher. In recent years, they were lower than the stock market return, so more money could be made on stocks than on bonds, he said.
Foster suggests government bonds, investment grade corporate bonds and mortgage-backed funds.
Q: Periodic rebalancing, selling and buying back into your asset allocation plan will change over time, right?
A: “Generally speaking, you will become more conservative as age and time horizon narrows,” Kloster said. “You want to be sure that the financial plan tells you how much [retirement] the money you need and when. This can be done at least once a year through asset allocation targets.
“Rebalancing will help you sell winners,” he said. “Annual rebalancing is a pretty low risk, even if you only have 5% [year-over-year asset shift]. And you don’t have the tax consequences in tax-deferred retirement accounts that you might have with a taxable account. Discipline brings you back to your [asset-allocation] target.”
Q: Most young savers with decades to invest are only invested in 401(k) or similar plans whose options are usually limited to mutual funds. How should they look at their portfolios?
A: “They should be looking to have large cap, small cap and international equity funds and then an appropriate amount of bond funds depending on the willingness to take risk and the time horizon. Individual stocks have certain advantages taxes versus funds, but those really can’t be leveraged in a 401(k),” Foster said.