Seeking Risk v. Managing Risk – I Have a Long Time to Invest, But Am I Putting My Savings Plans at Risk?

As savers and investors, there are several elements we can control and many others we cannot. Certainly market returns cannot be controlled, although their results matter a great deal. On the other hand, we can control our ability to save and how much portfolio risk we take; these are two areas that are very impactful in determining the long-term likelihood of a successful financial plan.

The focus of this article will be on integrating two previous SWP blog topics:

In the sections ahead, we’ll profile two individuals confronted by different but similar issues pertaining to saving and investing.

Let’s begin by visiting with Blake and Taylor. Here is some background:

  • Both are in their early thirties.
  • Each has the same initial time horizon of 21 years for saving and investing. At the end of this period, they will re-evaluate their pre- and post-retirement plans.
  • Both individuals earn the same annual gross salary of $125,000 and work for companies that provide a 401(k) retirement plan match.
  • Blake spends more than Taylor, so Taylor can save more in the 401(k) plan.

Table 1 below provides an overview of their respective savings, including projected totals over 21 years (note that Table 1 shows savings only; earnings are considered in the following section).

tb1

With a review of their savings plans complete, Blake and Taylor turn their focus to investing their hard-earned money. Given their age and time horizon, they feel they are willing and able to take more risk by investing aggressively in stocks within their respective 401(k) accounts. They’ve talked to some of their friends, and many have advised them to “just buy stock funds.” However, they remembered a recent 401(k) information session that highlighted the importance of diversification and managing risk. With access to an advisor through their 401(k) provider, they scheduled a meeting to review how risk and return may influence their long-term savings plans.

Table 2 below shows the output of three different hypothetical portfolios:

  1. Higher risk profile – Invested exclusively in a U.S. large-cap stock fund.
  2. Moderate risk profile – Invested 50%-70% in stock funds with the remainder in bond funds.
  3. Lower risk profile – Invested 30%-50% in stock funds with the remainder in bond funds.

Table 2 below includes two investment returns sequences: “Bad Start” and “Good Start.” The investment return sequence titled “Bad Start” is the actual return outcomes from 2000 to 2019, while the sequence titled “Good Start” is the same annual returns but in reverse order. During the early 2000’s the market performed very poorly, while in the last several years of that period, equity markets performed very well and generated above average historical returns.

tb2

The advisor explains that in the early years, losses on the smaller investment balance are far less impactful in dollar terms than the losses occurring later, on the much larger investment balance. She follows with, “losses are actually welcomed during the early period because it allows a saver to invest more at lower prices!”

Blake says, “So, it’s sort of like buying an investment when it is on sale?”

The advisor responds enthusiastically, “YES! Exactly…but unlike many online sale purchases, this one doesn’t follow with a load of junk e-mail after your purchase!”

The advisor then highlighted that this is the opposite of what happens in retirement when investors draw on their portfolios for income needs; when portfolio returns are worse to start, the withdrawals could have a distressing effect on the portfolio value versus if portfolio returns are better to start. That’s because there’s a compounding effect of withdrawing funds from a declining balance – exactly the opposite of buying during a sale.

After reviewing the analysis and talking with the advisor, Blake and Taylor recognize an opportunity to do more ‘fine-tuning’ for their own respective portfolios before deciding on the best path forward. It is clear to each of them now how risk can work against them and their well-intentioned savings plans.

Blake and Taylor’s story is not intended to suggest, or recommend, what the right level of savings or portfolio risk is; we understand everyone has different goals, objectives, and preferences. Rather, our goal is to highlight several key elements of the wealth-building process that play an important role in determining the likelihood of long-term success.

As illustrated in our story, saving and risk exposure have a meaningful impact on long-term outcomes. Notably, it may be the case that a relatively better savings plan allows an investor to assume considerably less risk without compromising the ability to meet their goals. Therefore, the elements Blake and Taylor can control end up creating real outcomes that matter later in life.

If you’re reaching a period in your career where you’re accumulating higher levels of savings, please reach out to your SWP advisor to review how these concepts may apply to you. We are always here to help.

Appendix:

tb3

Categories

This article contains general information that is not suitable for everyone. The information contained herein should not be constructed as personalized investment advice. Past performance is no guarantee of future results. Reading or utilizing this information does not create an advisory relationship. An advisory relationship can be established only after the following two events have been completed (1) our thorough review with you of all the relevant facts pertaining to a potential engagement; and (2) the execution of a Client Advisory Agreement. There is no guarantee that the views and opinions expressed in this article will come to pass.  Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

Strategic Wealth Partners (‘SWP’) is an SEC registered investment advisor with its principal place of business in the State of Illinois. The brochure is limited to the dissemination of general information pertaining to its investment advisory services, views on the market, and investment philosophy. Any subsequent, direct communication by SWP with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of SWP, please contact SWP or refer to the Investment Advisor Public Disclosure website (www.adviserinfo.sec.gov).

For additional information about SWP, including fees and services, send for our disclosure brochure as set forth on Form ADV from SWP using the contact information herein. Please read the disclosure brochure carefully before you invest or send money (http://www.stratwealth.com/legal).

Investments
Is It Still A Good Time For You To Invest?
People often ask me, “is now the right time to get into the market?” If I had a crystal ball that told me when to buy and when to sell, I probably would not be writing this piece! With the highest inflation numbers since the 1980s, concerns about an economy potentially in recession, and the most prolonged downturn in stocks since the Great Financial Crisis, there is no question that investors have been challenged this year. The good news is that there are always opportunities for long-term investors with the right plan. Whether you are an experienced investor, have recently come into cash, or are new to the financial markets, below I discuss some things to consider when asking if now is the right time to invest.
Read More
Investments
Retiring in a Volatile Market
This week has been another extremely turbulent one in the stock market. While it is never comforting to see large, red numbers, volatility can be even more uncomfortable for recent retirees or those considering retirement. A colleague of mine recently told me that he has seen more of his clients retire in the last two years than in his first ten years of working at SWP. This got me thinking a lot about the notion of retirement. Retirement is a huge life event and adding volatile markets can compound the feeling of uncertainty. In this article, I will share some of the concepts we have been discussing with our clients.
Read More
News
Strategic Wealth Partners Ranked In Milwaukee Business Journal’s Investment Management Firms List
Strategic Wealth Partners is proud to be listed in the Milwaukee Business Journal’s Investment Management Firms ranking. The list is ranked by firm assets under management from December 31, 2021. “We are so pleased to be included in this list of the largest investment advisors in the Milwaukee area. We first entered the Milwaukee market in 2018 because we saw tremendous potential to combine forces with some outstanding professionals,” says Principal and Co-Founder Neal Price. “Kathy Klein, Joe Thompson, and the entire Milwaukee team are best-in-class. We are excited to expand our presence and become the go-to firm for comprehensive wealth management services in the Milwaukee area.” “Our success comes from a solid and loyal client base who believes in our personalized solutions. Our work on behalf of our clients is far-reaching, but it all comes down to our unique process that is client focused, manages complexity, delivers simplicity, and guides our clients to their goals,” states Wealth Advisor Kathy Klein. Strategic Wealth Partners is an independently managed wealth management firm that has been partnering with clients since 2008 in Deerfield, IL, and since 2018 in Milwaukee, WI. For more information on services, please visit www.stratwealth.com.
Read More