The only thing certain about the state of the current market is uncertainty. Talk of recession is rampant, and many potential retirees are worried about their retirement prospects. You can’t blame them.
At the height of the Financial Crisis in 2008, many retirees and potential retirees saw half their portfolios wiped out in months. Those who depended on their 401(k)s and IRAs to get them through their retirements were suddenly faced with the daunting prospect of scrambling to compensate for losing half their retirement savings.
Sadly, this meant cutting back on expenses and going back to work or working beyond what they had planned. The relaxing retirement they had looked forward to now seemed out of reach.
There is nothing anyone can do about market volatility or recession, but there are steps potential retirees can take to plan for retirement and be prepared in an uncertain market. The best thing you can do to prepare for retirement in an uncertain market is to be willing to reassess your investment strategy.
Is your retirement portfolio built to withstand a downturn?
Are you clinging to a strategy that will doom your retirement in the next downturn?
Take the popular 60/40 strategy, for example. Rewind to the first half of 2022 when the S&P 500 Index dipped into bear market territory, dropping about 20%. During this span, the 60%/40% mix of stocks and bonds declined by 16%. The lesson is the next downturn will not be friendly to the 60/40 strategy. The key to surviving the next recession will be your ability to reassess and pivot if you have to.
Here are some pointers for planning for retirement in an uncertain market:
- It’s important to regularly reassess where you stand against your financial goals.
- Develop a retirement budget to determine essential expenses and income sources.
- Keep cash reserves available before and during retirement.
- Be flexible about your retirement. Working longer, part-time work or spending adjustments can help to keep you on track.
If you’re flexible about your retirement and willing to pivot your investment strategy, you will be more confident about your retirement prospects during the next downturn.
Preparing for retirement in uncertain times and during an impending recession will require you to assess what type of investment strategy is built to withstand uncertainty and volatility. The answer to that question lies with the types of investors who are resilient in the face of uncertainty – those investors who are always prepared for uncertainty.
So how are the portfolios of these investors built differently than those investors who are vulnerable to recession and unemployment? These savvy investors – some counted among the ultra-wealthy – allocate less to stocks and bonds and more to private alternatives. Why?
Cash-flowing private alternatives can shield your portfolio from uncertainty.
– Source: Cambridge Associates
The above chart establishes that portfolios allocated to alternatives generate higher returns than those not, and the more you allocate to alternatives, the higher the returns.
Private alternatives like cash-flowing private businesses (i.e., private equity) and passive commercial real estate (CRE) investments generate higher returns than traditional assets because of the twin benefits of income plus appreciation, but they do so with reduced risk.
That’s because private investments are not correlated to the broader markets and are therefore not susceptible to Wall Street volatility, prone to behavioral biases, the Internet, social media, and traditional media that drive herd behavior and market volatility.
You and your portfolio don’t have to be victims of the next recession or downturn.
Sophisticated investors shield themselves from uncertainty and potential loss of income from job loss or reduction by allocating to assets not susceptible to uncertainty. They invest in certainty. Assets like income-producing businesses and commercial real estate – particularly ones tied to essential goods and services (i.e., necessities) – are ideal hedges against downturns and inflation. Assets with prices that keep pace with or exceed inflation and are insulated from recession compensate for potential job losses or reductions.
When your passive income from these types of assets exceeds your expenses, you no longer have to rely on your job for income and no longer worry about a recession that can take that job away.
Planning for retirement in an uncertain market?
The first step is to reassess your current strategy and allocations. If you’re vulnerable, maybe it’s time to reassess and be flexible enough to switch to private alternatives.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.
