What’s Your Risk Reduction Plan for 2020?
This year started just like the last ended. The stock market continued to climb early in January and the prospect of the bull market reaching new highs in 2020 was a real possibility. I’ve talked to several people who had a lot of fun watching assets grow substantially during the second half of 2019. What a change from the prior year! Last January, most people were lamenting the losses of solid 2017 gains. And so it goes with the stock market. However cliché it may seem, the comparisons to a roller coaster are appropriate.
Even after all the talk last year about the economy slowing down there are several indicators suggesting the expansion could continue. A new negotiated trade deal with China, the USMCA with Canada and Mexico and Brexit finally set to happen before you all read this. Wall Street likes certainty and these are just a few of the uncertainties that caused skepticism in regards to whether the economy would continue to grow. Regardless of where you stand on the benefits or risks of current events, having things settled gives the business community confidence to operate without fear of rules changing.
Now this is not the place to talk about all the economic indicators or make assumptions on how current events will affect your assets but I do want to remind people that most corrections happen because of things that hadn’t been predicted. The virus in China is the perfect example of something no one expected that causes enough panic to roil markets and stall economic expansion. Uncertainty has and always will be the greatest threat to stability and continued growth in the markets and economy.
The key to succeeding in retirement is not to predict these events but to insulate yourself from the fallout. You all know where I stand on the issue. I sell annuities and you signed up to receive information about how to use them. That’s not what I’m going to write about this week. Some of you have annuities and some of you are still thinking about it. Many of those still thinking about it may never make the change but that doesn’t eliminate the need to protect assets. So I decided to give you a couple ideas for asset protection that don’t involve annuities.
If you’re new to the site and would like to read about my justification for using annuities just click the green button at the top that says “Newsletter” and you can go see just about everything I’ve written on the subject. For the rest of you, it doesn’t matter if you’re the type that will never use an annuity or person who already has one but wants more protection without the commitment.
One by one I’ll go through all the options and let you know what might be a good idea and what might not.
Money Market or Savings
There’s nothing wrong with simply taking some gains and waiting on the sidelines for a while. I’ve seen plenty of people, motivated to make a move but paralyzed by over-analysis who got stuck because market positions deteriorated before a decisions could be made. If you are worried about a long term market correction but have no confidence in a an option that requires a commitment then pull some money out of equities and keep it secure for a while. Even a stop loss can be how you get there if you don’t want to try timing it. Retirement accounts might look good but you honestly don’t have any money until you sell the holdings and sometimes you beat the market by staying out of it.
This has always been the favorite way to reduce risk in retirement and regardless of what I say that probably won’t change any time soon. But I’ll try again. There’s nothing wrong with protecting money and getting steady interest with bonds but you need to understand the risks and/or limitations. Values fluctuate with interest rates so individual bonds must be held to maturity as selling with rising rates will create losses that defy the reasons for protecting money in the first place. Bond funds are the number one culprit because you have no control over buying and selling. A lot of news was made last year with the bond rally. It only happened because rates dropped making asset values go higher. It was some relief for those who rode the rates up from the lows of 2015 and saw steadily shrinking values along the way. With rates back down and bond values back up, there’s not much opportunity. Interest payments are consistent so that’s a benefit but rising rates could make bonds a longer commitment than you think.
Options trading in most ways is actually even more speculative than staying exposed to the stock market. But people who want to keep chasing growth can use puts, covered calls and other options strategies to create profit that can offset losses during a correction. The problem here is that I think a lot of people who don’t know what they are doing give this a shot anyway. For most it’s like playing poker at a table full of pros. Successful options trading take knowledge, experience and skill so be diligent, humble and do your homework before executing the first trade. I have a close friend who made his fortune trading options for an institutional firm on Wall Street. He laughs when I tell him about anyone who thinks they can just open up an account and start playing the game. It’s not impossible and I do know people who have successfully entered this market but it isn’t for the faint of heart. And just like anything else it costs you something to do it so you have the weight the cost against potential gains to determine whether the risk is worth it.
Here’s a recent trend that is probably the best way to stabilize assets and stay in the market. Lots of asset managers, in light of low bond rates, are recommending dividend paying stocks as an alternative. Blue chips have a long history of consistent dividend payments. The asset value doesn’t grow much but it typically doesn’t drop much either. Last week I read a report that indicated 40% of all growth in the stock of S&P 500 companies came from dividends in the last ten years. It doesn’t mean you have to get into individual stock picking as there are plenty of low cost funds with diversified holdings of quality dividend stocks. It will take a little research but this one’s not that hard and there are plenty of deals out there to be had.
I could keep adding more but then I would veer off toward things like true diversification and modern portfolio theory. I sure as hell didn’t want to bore you by talking about CDs. The truth is that any idea that protects money and keeps you in the stock market takes work so you have to pay someone to do it or set aside plenty of time to make sure it’s done right. It all comes at a cost and none of it is without risk. It just has to be done with a cost you can afford and a risk that’s acceptable.
If you have any other ideas you think are worth mentioning leave a comment below. If it’s a good alternative to using annuities in retirement then I’d be happy for the extra education and you may be helping others on the list as well. Don’t be shy and let me know what you think.
Until next week…