“Buy-and-hold” is a classic investment adage that encourages you to hold stocks and other securities, and let them grow over time—riding out the ups and downs of the stock market. The thinking goes that if you just buy and hold for some future date, your assets are bound to accumulate, and you’ll experience overall gains throughout the years, no problem.
Granted, this does seem appealing when most savings accounts are paying 0.01% or less.
“Buy-and-hold” is a popular strategy with brokers and investment bankers, perhaps because it’s so easy to execute. Brokers take your money (minus their commissions), divvying it up between stocks and bonds. They make more commission every year you hold on to the securities, and the mutual fund companies make their fees, too. Win-win for them. Meanwhile, you wait.
It might work if you don’t need your money anytime soon. For example, if you don’t plan to retire for another 20+ years.
The risk is all on you.
Besides being easy for them, “buy-and-hold” also allows bankers and brokers to limit their liability. Before you buy, you first have to fill out a risk questionnaire. Effectively, the risk questionnaire is a sort of “get out of jail free” card, because if you lose money on your stock market investments, brokers and bankers can turn around and say it’s your fault. You can’t sue them; you chose the securities based on your risk questionnaire.
In fairness, many of these brokers and bankers are good people. It’s just that they are in a sales role, not a true advisory role. Even though you may perceive them to be giving advice (and they certainly encourage you to think so), they’re actually just selling investment products—the ones that their employer wants them to sell.
Their methods may work for young people in the accumulation stage of their lives, but “buy-and-hold” definitely does not work for retirement.
Real retirement strategies are created by fiduciaries.
The only advisors you should trust to give you unbiased financial advice, especially retirement planning advice, are fiduciaries. Real fiduciaries are required by law to put your best interests first and disclose all fees—including fees which might be hidden in the contract language of investment products.
Fiduciaries are independent and have no agreements with financial institutions to push certain products more than others. They have a legal duty to provide you with objective, financial advice that exceeds “suitability” standards. They do their due-diligence research to provide you with recommendations they feel confident will perform best for you based on your unique goals and situation.
Chances are, you’re not working with a fiduciary, because only 1.6% of all financial professionals are actual fiduciaries, according to Tony Robbins’ latest book Unshakeable. That’s only 5,000 fiduciaries out of 310,000+ “financial advisors” in the United States.
Minimize your risk in retirement.
When you’re 10+ years away from retirement, you need to minimize the chances of losing any of the money you’ve spent your lifetime socking away for the future. A fiduciary retirement planner will do everything possible to protect you from market risk, interest rate risk, credit risk, inflation risk, and sequence of returns risk.
How do those risks play out in retirement?
Market risk is fairly obvious. If markets drop and you need your money to live on in order to retire, well, too bad. You’re going to have to go back to work, or risk going broke. (Note: both stocks and bond funds are subject to market risk; there are other investment strategies that can work better for retirement.)
Interest rate risk includes the fact that if interest rates are raised by the Fed (which has already happened, with more raises planned throughout 2018-2020), because of their inverse relationship, prices for bonds will drop. (Yeah, bond funds are the go-to “safe” investments used by bankers and brokers for retirement. Yikes.)
Credit risk has to do with municipal bonds, which are in danger of default throughout the U.S. due to overextended pension obligations.
Inflation risk is fairly obvious. If the cost of living increases and you are on a fixed income in retirement, your buying power declines. A fiduciary will build cost-of-living increases right into your retirement income and distribution plan.
Sequence of returns risk can be thought of sort of like compounding interest—in reverse. If you are forced to take money out of fluctuating accounts during a market decline, it can take years to get back to breakeven. For instance, if the market goes down 50%, guess what rate of return is required to break even? Is it 50%? No, it’s actually 100%, and it could take you five to six years to get back to where you were. (Remember that percentages take a bigger bite out of larger amounts, so the larger the dollar amount in your accounts, the longer it will take to recover your money.)
Create a distribution retirement plan.
A real retirement plan is not a pie chart split between stocks and bonds. It’s an income and distribution plan, and it’s personalized, based on your unique situation and your goals.
A real retirement plan includes all of your sources of income, it includes a plan to cover health care and possible long-term care costs, it factors in inflation, and it deducts income taxes that will be due based on your income level and your RMDs (Required Minimum Distributions), which kick in at age 70.5. (The IRS mandates that you start withdrawing money from your tax-deferred retirement accounts like traditional IRAs and 401(k) plans, whether you need the money or not. A real retirement planner will help you find ways to minimize income taxes in retirement as much as possible—with advance tax planning.)
A fiduciary retirement planner will also help you with estate planning and wealth transfer in conjunction with an estate attorney.
When will you be able to retire? Do you have enough saved?
Most people don’t realize how much income they will need every month for the rest of their lives, they don’t know how much risk they should take with their assets, and they don’t know how much they will need to have saved in order to stop working. They trust their brokers and bankers pushing a “buy-and-hold” strategy, with its greater and greater emphasis on bond funds as they get older.
This is a recipe for disaster, because “buy-and-hold” caused a lot of people to lose everything and have to go back to work in the Great Recession of 2008, which lasted from December of 2007 to June of 2009. Keeping all of your retirement money at risk in the market—remember both stocks and bond funds are subject to market volatility—makes no sense, and there are options. In fact, these options actually require a lower dollar amount saved for retirement than the millions of dollars typically projected by brokers using the discredited 4% Rule.
Get in touch with a retirement fiduciary as soon as possible. It is vital to figure out your retirement plan sooner rather than later. If you put off retirement planning, then you could be in a position where all of your retirement assets in your current portfolio will take a huge market hit whenever the next stock market crash or correction happens. (That crash is already overdue based on historic data and economic indicators, and it could take years to recover from such a hit. Seriously. Don’t wait.)
