The Retirement Investor Squeeze: Keys to Investing in "the New Normal"

Christopher Mizer  |

In the first 3 installments of this series, we considered the reasons why investors that are in retirement, or close to retirement – like it or not - will need to allocate a portion of their assets to stocks. However, based on actual investor behavior, it is obvious that most investors are still not investing in stocks. Recent reports on money flows that track how the individual investor is actually investing reveal their lack of trust in the stock market. During this four-year rally to record highs evidence can be found in two data points: Fund flows and trading volume.

From 2008 through 2012, individual investors pulled about $153 billion from U.S. stock mutual funds and exchange-traded funds, according to data from mutual-fund tracker Lipper. As a result, most have not participated in the market’s bull run - even with the market approaching all time highs (again).

If not in stocks, then where is capital being invested? Money market and government bond funds still are attracting the bulk of the individual investors’ dollar.

In the past, labeling investors that are in or close to retirement as “conservative” may not have been very accurate. Prior to 2007, it wasn’t uncommon for “conservative” investors to have had as much as 70% to 80% of their portfolio in stocks. Historically, this would have been a much lower amount – maybe as much as 50%. But with the market in a long term bull cycle from the early 1980’s until 1999, yields on fixed income investments relatively low and Wall Street’s encouragement, for most of us, the stock market seemed to have the best risk/return profile. A “no-brainer”. Then, in astonishing fashion, the idea of risk returned in the autumn of 2008.

Another reason “conservative” investors were over weight in stocks: Investors may have assumed that by investing in “conservative” stocks, they would be immune to stock market volatility or at least not experience the same amount of loss. The reality: 80% of all stocks follow the general direction of the market - small-cap, mid-cap, large-cap, value or growth.

It is at this point when most individual investors probably realized, even more than the crash of October 1987 or the tech crash of 2000, that they did not truly understand the stock market and the risk that they were taking. For someone who had saved for 20 years in a 401(k) plan and accumulated a significant nest egg, the result of still having 70% or more of their retirement portfolio in stocks was devastating. It might have meant that retirement would need to postpone a few years or, in some cases, indefinitely. In fact, a study conducted in September of 2012 by Wells Fargo reported that:

Many investors who had experienced previous significant market corrections held onto their stock funds, assuming that the market was simply going through a “correction” and would eventually rebound. Advisors and brokers advised their clients to “hold on” because they had observed the same pattern themselves. Only, in the Fall of 2008, it was different.

For many of those closer to retirement, the pain of watching their retirement accounts loose 50% of their value in the months between the Fall of 2008 and spring of 2009 was unbearable. Many of those that sold at the bottom have never re-entered the stock market. And, like the generation that experienced the crash of 1929 and the ensuing Great Depression, some never will. Its possible that another generation of investors has turned their backs on stocks.

And, after all who can blame them? Keeping in mind the individual investor’s experience over the last 13 years, the choice between investing in stocks and higher volatility or investing in cash without the volatility, investors are opting for cash and bonds.

Bill Gross, PIMCO’s investment guru who coined the phrase, “the new normal”, has said that the days of “buy and hold” are over. He has advised investors to think tactically about their investments.

What does that mean for the individual investor?

Tactical allocation is different from asset allocation. Asset allocation focuses on where to invest: how much to invest in stocks, bonds, cash and, specifically, what kind of each asset class. In stocks, the choices might include small cap, large cap mid cap, foreign, domestic, value, growth, etc. In bonds: Corporate, government, foreign, high yield, short term, intermediate term, long term, etc.

Tactical allocation focuses on when to invest in the various asset classes. Rather than try to add to a portfolio’s return by re-allocating among the various types of assets, tactical allocation adds to portfolio returns by getting in and out of stocks or bonds based on three key principles: (1) Capital preservation as the primary goal for investors (2) “Buy and hold” doesn’t work. There are periods when investors should be fully invested, partially invested or not invested in stocks and (3) Moving in and out of the markets at the appropriate times will generate more return with less volatility.

How does the individual investor know when they should be invested in stocks and when to be on the sidelines? Who can you trust to let you know when to move in and out of stocks? How will you be notified that conditions have changed and its time to either get out of stocks, or, get back in?

Wall Street firms seem to have only one answer: just always be invested in stocks. Even after going through two corrections of 50% or more in the last 13 years, this advice is still their mantra.

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For Tactical Asset Allocation advice to be effective, it should be evaluated using 3 key criteria: It needs to be reliable, objective and, most importantly, timely.

A simple yardstick typically judges the reliability of an investment service: what has the historical return been for an investor that used a tactical investment strategy rather than a “buy and hold” approach? A tactical advisory service would need to have demonstrated that it has a successful track record of moving between stocks, bonds and cash. For most investors, generating a higher return than “buy and hold” strategies with lower volatility is their ultimate goal.

If your advisor makes more money when you are invested in stocks than when you are invested in cash, it would seem obvious that you will be told to stay invested in stocks, regardless of the investment environment. On the other hand, if the advice you are getting is based on a flat fee or a “subscription”, you can be confident that the advice is objective.

A flat fee or subscription-based Tactical investment service provides several advantages over commission or “sales” driven advice. First, your satisfaction and success is the key to the relationship, not the amount of money you make for the advisory service. On the other hand, most advisors and brokers evaluate their clients’ value based on how much the advisor earns on the relationship, not how much money the client earns. Second, if you aren’t satisfied, terminating the service is simple, since it doesn’t require you to transfer your account or change anything you like about your current investment relationships. Third, you aren’t required to automatically change your investment strategy based on the advice. You maintain control.

Eliminating conflict of interest is critical to how investors will evaluate their investment service providers in the post “buy and hold” investment world. This aspect of investment advice is listed as more important than any other concern that has traditionally given investors cause to be skeptical about the advice they get.

Timeliness refers to ensuring an investor is getting the information they need – when they need it. It is easy to get complacent with our investments, especially when the markets are going up. With volatility and complexity of investing becoming increasingly more challenging for investors, it’s not unusual for the investment environment to change abruptly and more frequently. When the markets are going up our emotional perspective tends to also be positive. It is when conditions change and our expectations and emotions are under pressure – that timeliness of information is critical.

“Why doesn’t anyone ever to tell me when to get out?” This is the number one complaint of individual investors. It is tied to the issue of objectivity: Brokers and advisors make money when you are invested in their products that have higher expenses and fees, such as stock funds. Cash, as far as the brokerage firms are concerned, is a loss leader for them. So, as far as the brokerage firms are concerned, an investor who is invested in cash, is not desirable. Even if being in cash is the right place to be, for example, during a correction.

Another reason investors don’t get alerts to “get out” is the impracticality of alerting thousands of customers to sell, or, on the other hand, to get back in. A broker can’t make thousands of phone calls and explain what is going on, even if they wanted to.

Finally, a solution for the individual investor

Today’s technology has provided us with the ability to combine reliability, objectivity and timeliness into one, unique solution. utilizes a proven tactical allocation model to notify our subscribers when their retirement account should be 100% in stocks 50% in stocks or 100% in cash.

We have developed a Tactical allocation advisory service that uses technology to communicate to clients using email, text or voice mail messages. The service can effectively and instantly let clients know whether to be in or out of the market based on current conditions and provide commentary to explain why the action being prescribed is appropriate.

Why focus on retirement accounts? Because taking profits in your retirement account has no tax consequence. Ironically, Wall Street spends millions of dollars encouraging us to “trade” our personal accounts and spends even more money convincing us not to trade our retirement accounts. Retirement accounts are the bread and butter of the investment industry. They prefer that you leave your retirement account alone and trade your personal account because this generates more revenue for them.

As a subscriber, you have access to the website and daily emails with market commentary and the Tactical Retirement Investment Management (TRIM) Dashboard. The TRIM Dashboard is updated daily and provides an easy to understand signal (RED – “market in correction”: maintain 100% in cash for that portion of your portfolio normally invested in stocks) YELLOW – “market attempting uptrend” or “market under pressure” – maintain a 50% allocation to stocks for that portion of your portfolio normally invested in stocks; GREEN – “market in confirmed uptrend”: maintain 100% of your normal allocation to stocks.

Spyglass uses a patented system that notifies our subscribers immediately with a voice mail and text message to your mobile device if the Dashboard changes, based on current market conditions.

No guesswork. No emotions. No conflicts. No high pressure sales pitches.

For those investors who want to:

Avoid the ups and downs of the market that, after years of saving for retirement has delivered a “break even” or negative return;

Take advantage of market volatility to preserve principal during downturns and participate in the upturns;

Receive timely and proactive advice on when to be invested in stocks and when to be in cash;

Improve their outcome at retirement; Please visit:

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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