Mitch's Mailbox

May 26th, 2022

Investing For Your Own Time Horizon

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Dennis W. from Fall River, MA asks: Good Morning Mitch, I follow your column and a few others and often hear investors are best served to focus on the long-term. I understand the reasoning, but my problem is that I don’t have much time! I turn 75 next year, so “focusing on the long term” is not something I can afford to do. What are your thoughts?

Mitch’s Response:

I appreciate your candor and understand exactly what you’re saying. The older we get, the shorter our life expectancy becomes, and shorter life expectancies generally mean shorter investment time horizons. 

I think the best way to address your concern here is to focus on asset allocation. For example, a 30-year-old who is working and trying to accumulate assets for retirement should be invested differently than a 75-year-old who doesn’t work and relies on portfolio withdrawals for income. The 30-year-old should have maximum exposure to equities relative to their risk tolerance, while the 75-year-old should have equity exposure that aligns with their risk tolerance, need for growth, and time horizon. In all likelihood, that means the 75-year-old will have less equity exposure than the 30-year-old.

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How Can You Protect Your Retirement Assets During a Potential Bear Market?
 
Concerns surrounding the current state of the market are high. Many investors may be questioning how to manage their investments if the market reaches bear market territory.

You can potentially avoid the most harmful hazards of a bear by making use of some useful tools I offer in our free guide – The Zacks Bear Market Survival Kit.1

This guide discusses some key tools to prepare for a bear market, including:

 
In this guide, you’ll get our viewpoint on the most important moves you can make to weather a recession. Don’t wait—if you have $500,000 or more to invest, get this guide before the storm hits.
 
The Zacks Bear Market Survival Kit1

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But that’s not always the case. Many people have goals and objectives that extend well beyond their lifetimes, something we see often in estate planning. If an investor is confident, they have financial security for life, and their goal is to pass assets to heirs, charities, foundations, etc., then the investment time horizon becomes much longer than life expectancy. Those assets are meant to work for the next 50 years, not 15 years. In these cases, focusing on the long-term would apply, even for a 75-year-old.

Let’s assume, however, that the assets in an investment portfolio are providing income for a retiree who expects to live for 10 years and does not have many estate planning goals. The asset allocation, in this case, should reflect a short time horizon and high-income need, which may mean having a higher fixed income allocation than equity allocation, and also a sizable cash buffer, perhaps 1-2 years’ worth of income needs.

Stocks have done well in most 10-year periods historically, but a relatively high fixed income allocation should temper the ups and downs and help smooth out returns over time. You should not expect to experience the same level of drawdown in your portfolio as you see in the market today, for instance, but you are also not likely to capture the full rebound on the upside.

Some readers may point out that stocks and bonds have been moving in lockstep in 2022, which may seem to nullify my previous point. Indeed, through the first quarter of 2022, the S&P 500 index was down roughly -13% while the Bloomberg U.S. Aggregate bond index—which is comprised mostly of U.S. Treasuries, mortgage-backed securities (the good kind), and investment-grade corporate bonds—had declined by -10%. Investors who rely on bonds and fixed income securities as a hedge against stock market volatility were understandably disappointed, and perhaps even a bit confused.

Does this mean bonds are no longer a good volatility hedge for the equity markets? Not in my view. I see this period as an anomaly, not a rule. The only other instance I can find when stocks and bonds declined significantly with a high correlation was in 1976. There was also a lockstep decline in 1994, but it was not earth-shattering – the S&P 500 fell 1.5% and bonds retreated 2.9%.2

“Focusing on the long term” does not necessarily mean the same thing for every investor. But in challenging times, I do think all investors should focus on their investment time horizon and remember that if your asset allocation is aligned with this horizon, and also aligned with your risk tolerance and growth/income needs, then volatility should not be feared or reacted to. It’s just part of the process. 

It’s important to remember that inflation and volatility are a natural (if unpleasant) part of the economic cycle. And for investors who are questioning if we are approaching or in a bear market, know that you can potentially avoid the most harmful hazards of one.

In our free guide, The Zacks Bear Market Survival Kit3, we provide key tools to help you prepare for a bear market, including:

If you have $500,000 or more to invest, get our free guide today. You’ll get our viewpoint on the most important moves you can make to weather a recession. Don’t wait—get this guide before the storm hits.

Disclosure

1 ZIM may amend or rescind the “The Zacks Bear Market Survival Kit.” guide for any reason and at ZIM’s discretion.

2 Wall Street Journal. May 3, 2022. https://www.wsj.com/articles/stocks-and-bonds-are-falling-in-lockstep-at-pace-unseen-in-decades-11651551170

3 ZIM may amend or rescind the “The Zacks Bear Market Survival Kit.” guide for any reason and at ZIM’s discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
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