Retirement Income Investment – Perspectives and Discipline

Every investment bears some degree of risk. Every investor is eager to manage the risks associated with the market movement. That sense of anxiety especially has  strong impact on the people who have been working hard to save and invest for the retirement during the market downturn. Vivid examples happened during the recession after the housing bubble busted and the period when market shown great volatility like a couple of days ago. This article is not intended to teach people how to invest, but to share an important aspect of retirement income, that is to have long term perspective and accordingly discipline.

Let’s start with two types of investment on the opposite ends. When my parents saved for retirement, basically they deposited them into bank. The money was safe, but unfortunately did not grow (or grew at rather small pace with very low interest rate).  Unfortunately that did not work because the inflation quickly eroded the purchasing power. On the other end, some investors can bet on specific stock or derivatives. That can provide very handsome return when the bet is correct, or big loss the other way around. Often time, this type of investors are seeking the return for relative short time horizon. Unlike either of them, most of current retirement income investors, by default, opt to the 401K programs offered by the employesr. In most cases, the 401K programs by default direct the contributions to  “target date fund”. Such mutual funds adapt so called “glide path” investment strategy. It would change the asset allocation of the employee based how far from his (her) retirement age. It starts with more equity exposure (more risky and higher return) to generate growth. Once the employee gets closer to retirement, this strategy gradually shifts more and more share of assets to fixed income (less risky and lower return). Even within equity exposure, the mutual funds would invest in a basket of equities to diversify the risks.The performance of the mutual fund managers are measured by how much and how often they can beat the market index ( such as S&P 500 index). For many reasons, the managers cannot always beat the market with very few exceptions. Bernard Madoff caused the alarm to some fund managers before his case blew up. The sole reason was that he consistently beat the market broad index no matter market went up or down. He was suspected to either have a very advanced and sophisticated algorithm or trade on inside information. It turned that he was running Ponzi scheme. With that said, most fully dedicated and sophisticated fund managers cannot guarantee always beating the market, not mentioning the normal retirement income investors. From another angle, investors trade on the information, either the valuation of a specific company or broader economy (or something else). When specific information reach to the public (i.e. most retirement income investors), it becomes outdated already because the fund managers or other institutional investors already adjust their positions according to the information either due to their ability to access the information faster (with resource to research) or their ability to trade faster. At that time, theoretically the price of a specific securities, such as stock, already reflect such information before the individual investors start to trade.

All above has one purpose: the normal retirement income investors should establish a long term perspectives and discipline. They should understand in long horizon, the market will generate positive return over the years. During the time with market downturn or strong volatility like last week, doing something (i.e. cash out) most likely will do more harm than staying put. Nevertheless, it does not mean that investors always need to be passive. They should have certain strategies based on their unique financial needs. For example, when one has experienced a lasting period of positive returns, he or she should consider locking in these returns by shifting to fixed income (bonds) or even purchasing variable annuities with minimum return guarantee (especially helpful to near retirement individuals). We are not sure when the market will go down, but we are sure that there will be another downturn (or recession), at least I think so.