Last weekend I ran my usual 5K race (I’m taking baby steps), and early in the race, as I was weaving in and around the pack, I started to picture how the rest of the race would go; how good I was feeling at the start, how I needed to conserve energy to avoid the mid-race slump, and the absolutely dreaded last half-mile. I knew from past races that if I could just power through that last half-mile and stay mentally tough I’d finish strong.
Investing and saving for retirement is a lot like running a marathon. I know, I know, investing as a “marathon, not a sprint” is a Wall Street cliché, but what I’m describing is how you feel during your life-long marathon of investing.
The Starting Line
At the start of any race, be it a 5K, a 10K in the mud, or a double-marathon, you’re on a high. You’re feeling good. Your endorphins are full-steam ahead. You’re pretty much convinced you can beat about every other competitor around you. You can see this play out in about every amateur race as some runners bolt from the starting line and then peter out by the mid-point, exhausting their energy reserves early on in the race. So, how is this different than investing during your 30s and 40s? Early on, in the accumulation phase of your investing race, you’re feeling pretty good about your 401(k) and IRA balances. You’re diligently saving as best you can by investing heavily in stocks or mutual funds and, while it’s far off, you think that you might just be able to win this race by staying the course.
Lesson One: Don’t get overly confident and decide to save less for the future. Time flies and that finish line is right around the corner. Young investors and savers should re-balance their portfolios at least annually using the “Rule of 100.” 100 minus your age equals the percentage of your portfolio you should have in equities. If you’re 35, you should have no more than 65 percent in equities with the remainder spread among bonds, commodities, cash, and so forth. At any age broad diversification is key, so spread your investments among as many markets as possible (e.g. global equities, global bonds, commodities, hard assets, currencies, etc.). The good news is that you rarely need to hire an advisor during this stage of your life because frankly accumulating a mountain of cash for retirement is far easier than what you will face next.
The Mid-Race Slump
Half-way through the race you start to feel some of the freshness wear off, and at times it may feel like a good idea to slow down a bit (or, depending how far behind you are, you may even feel like speeding up). Investors and savers in their 50s and 60s experience this very same feeling. The finish line (retirement) is starting to seem a lot closer and blowouts like the crash of 2008 can certainly take wind out of your sails leaving you with either a healthy dose of skepticism of the stock market or the intense desire to be more aggressive in order to play catch-up.
Lesson Two: This stage of investing is certainly more prone to catastrophic errors. Your investment strategy must shift from accumulation to preservation, and hiring the right advice giver will be the key (preferably someone that specializes in helping aspiring retirees prepare for retirement).
You’ll also need to tame the risk in your portfolio. If you’re 58 years old, you should only have about 42 percent of your savings in the stock market with the remainder earmarked for non-market-correlated income producing investments, secured floating income investments, and/or principal protected fixed income annuities.
That Last Half-Mile
Like life, every race has a finish line and the real winners are those who actually have a defined strategy for winning, instead of merely hoping they will make it. Real winners stay mentally tough and power through even when they think they just can’t take another step. I’m not saying it’s easy, but this is the attitude of a true champion.
Lesson Three: Have a strategy in place, not just hope. As you approach retirement, you face the daunting task of turning your sacred retirement savings into your own personal pension. Focus less on growth, and more on what can rob you of your lifestyle: market risk. Is an 8 percent return really worth the risk of losing 30 percent of your life savings? Put another way, if you earned 8 percent in your retirement would it change your lifestyle? Maybe not. What if you lost 30 percent? Definitely.
Robert Russell is the author of Retirement Held Hostage, CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to The Wall Street Journal, SmartMoney, & FOX Business.