Note: This article is courtesy of Iris.xyz
By Mark Petersen
Be different. Think different. Act different.
It seems everyone’s mantra these days has something to do with being anything but traditional. And for good reason. In such a fast-shrinking world, there’s more of just about everything. More people. More products. More competition. As a result, standing out from the crowd requires more than simply having a great product, industry expertise, or even decades of proven results. This reality is changing “business as usual” for everyone from manufacturers to film studios to (you guessed it) financial advisors.
In our industry, it wasn’t that long ago that standing out from the crowd didn’t matter quite so much. Before the Great Recession, as long as you built in a bit of diversification and took the time to rebalance assets once a year, you could build investment portfolios using a standard 60/40 mix of stocks and bonds and expect to see an annual return of anywhere from 8% to 10%. With that level of success, investors were generally happy with the guidance they were given, and no one was complaining.
But oh how times have changed! In today’s environment, that old rule of thumb is not only outdated, it could threaten your ability to adhere to new fiduciary standards. The reasons include a fierce combination of three factors that have changed how advisors need to approach portfolio construction in order to achieve optimal outcomes.
Like it or not, we live in a smaller, more connected world. From an investment management perspective, this means vehicles that were traditionally uncorrelated have reversed course. (For more on how changes in correlation are impacting returns, see Bill Acheson’s blog Looking for the right alternative investments? Be sure you’re dipping your toes in the right place!) This means that stocks and bonds in almost every category are more correlated than in the past. And while this means that if the market is up, everything is up, it also means that when the inevitable downturn comes, the value of a portfolio using the old 60/40 model will plummet.
2. Changing Demographics
Remember when Baby Boomers were still in mid-career and busy throwing assets into their retirement portfolios? Those were the glory days when a simple discussion about the power of dollar cost averaging got every investor excited about the future and the promise of a ballooning nest egg to support their “golden” years. But now that Baby Boomers are pulling assets out of their portfolios, dollar cost averaging is working in reverse—a situation that’s made even worse by extreme market volatility and some residual post-recession investing blues. Plus, with life spans increasing, those portfolios have to last longer than ever.
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