All investors eventually reach the stage where the goal they’ve been saving for finally comes into view. It could be a couple who will need to start paying college tuition bills soon, or the worker who is five years out from retiring.
That’s when a financial need, goal or dream can really start to seem real. It’s also when you’re likely to hear clients say something like this:
“I know I need to invest, but I don’t want to lose what has taken me so long to save.”
The fact is, most investors nearing their goals want to take steps to protect their wealth so it’s there for them when they truly need it. Although managing wealth is not the same as playing a game, they do have one thing in common: You need a plan to play effective offense and defense to achieve your clients’ objectives so they come out on top.
The upshot: It makes sense to consider the financial threats that these “protect-phase” clients face and evaluate the effectiveness of your current risk mitigation strategies.
Armed with that information, you can determine if you are helping maximize your clients’ probability of reaching their goals—or if you need to enhance your risk mitigation and wealth protection capabilities.
The time to prepare for risk is now
Now is an ideal time to review both your clients’ risks and your own risk management efforts. To see why, consider a typical client whom you probably frequently advise: pre-retirees — most of whom are currently in their 50s:
+ They haven’t suffered a full-fledged bear market since 2009.
+ They may be wealthier than ever, thanks to the market’s returns since 2009 (a 384% return from 03/09/2009 through 02/28/2018 for the S&P 500 Total Return Index).
+ But they’re also likely more risk averse than they were back in 2009, due to being nearly a decade older and closer to the time they’ll need to start tapping their wealth.
Clearly it makes sense to take a hard look at your approach to risk mitigation now, before a major market downturn has clients panicking.
The 3 risks that successful risk reduction strategies address
To determine how well positioned you are to help clients who are in the “protect” stage of their goals-based investment journey, you first must recognize the three key risks that these investors must overcome to successfully fund their upcoming goals.
RISK #1: Losing significant amounts of wealth. The biggest threat to protect-stage clients’ ability to adequately fund their upcoming goals is not market volatility. It’s drawdown– the absolute dollar losses in their portfolios.
One reason: time. There simply may not be enough of it for these clients to recover from big portfolio losses, should they occur between now and the date that they need the money. Just think back to 2008. For clients on the cusp of retirement, it was the absolute dollar losses they suffered—and the time needed to recover—that mattered most.
Consider what is required for investors to recoup portfolio losses.
+ A portfolio that falls 10% needs to earn 11% to recover.
+ A 25% loss requires a 33% gain to get back to break-even.
+ A 50% loss requires a 100% gain to get back to the starting investment value.
Generating those types of gains over a timeframe of just a few years can be a tall order.