This is a revised version of an article I authored last September originally published in the Portland Business Journal.
For soon-to-be retirees, recent retirees, and former business owners with fresh liquidity as a result of a recent business transition, there are two distinct mindsets for approaching the management of their investments: maximizing portfolio value or ensuring financial independence.
For most investors, these two objectives are in direct conflict with each other. In other words, investing for high growth often jeopardizes financial independence. Conversely, pursuing an investment strategy that preserves financial independence throughout various market cycles is rarely conducive for high-growth objectives.
This is important to understand as most investors’ primary financial goal is to retire and maintain their lifestyle throughout retirement, but most investors’ portfolios are not structured accordingly. Often their investment strategy is not consistent with their most important financial goal. In other words, many investors are unintentionally trying to maximize the value of their estate for their heirs while they jeopardize their own retirement. When I mention that to prospective clients they immediately recoil because that is certainly not their intention.
Risks of a growth-only focus
By investing for growth instead of investing to preserve financial independence, an investor introduces unnecessary uncertainty (and anxiety) into their lives. I illustrate this concept in my recent investment education video.
The former approach may allow for greater upside potential, but it is also far less predictable, more volatile and produces a much wider range of outcomes (i.e. greater uncertainty). Therefore, the growth approach will often have a greater number of potential scenarios where the retiree will be forced to cut back on their lifestyle or eliminate some financial goals altogether (e.g. travel).
I believe we should be particularly sensitive to this concept today given current market valuations that have been exceeded only once or twice since 1900 and that have historically resulted in 40%+ market declines. Past performance is no guarantee of future results. Each period is unique and can produce different outcomes.
Seeking an advisor’s help
It is the advisor’s responsibility to educate, prepare robust financial projections and perform stress tests necessary to inform the most appropriate strategy for their unique situation.
The most appropriate strategy is the one that delivers the greatest probability of achieving your financial objectives across many different scenarios and market outcomes. This implies that your advisor must intimately understand your unique circumstances.