Wednesday, 17 October 2018

Most affluent investors approaching retirement want to preserve their wealth, not beat the market.

Don’t panic

The first step is not to panic and sell securities. The chances are that if an investment portfolio has been constructed from the outset with an individual’s specific risk appetite in mind, it should be strong enough to withstand market gyrations. “When we first talk to high-net-worth clients, we create a financial plan to help us understand their risk tolerance in relation to their goals,” says Scott Zindler, a Senior Vice President in Global Wealth with BBVA Investments. “We then customize a portfolio that maximizes their return for the amount of risk with which they are comfortable.”

For affluent investors who are approaching retirement, those risk and return objectives are usually conservative, which often means that they are much better placed to withstand market shocks than their younger counterparts. Unlike younger investors, they are usually not looking to match or exceed aggressive growth targets, which would require them to take on more risk and make a larger allocation to stocks.

“At this point in their lives, our clients have already made their money and don’t want to beat the market. They just want to grow their funds in a risk-adjusted manner so that they have enough for their dream retirement,” says Zindler. “If that means they need a four percent return, we’ll build them the best four percent return portfolio possible.”

To lower the risk and volatility, that portfolio should be well diversified, with the prudent use of assets such as individual bonds, bond funds, and fixed and variable annuities, so that clients are not so susceptible to fluctuations in the equities market. “Hopefully we’ve de-risked the portfolio enough with bonds and other securities so that by the time clients approach retirement, they are well positioned to ride out the storm,” says Zindler.

Update the plan

However, it is still important that investors check in with their financial consultant regularly to ensure that their financial plan continues to reflect their goals. “People need to have an ongoing dialogue with their advisors and constantly update the plan,” says Zindler. “We try to review and update our clients’ financial plans at least annually, but there’s obviously more communication when market conditions are tough. We try to take the emotion out of what is happening in the markets and keep clients moving forward.”

It’s not too late to make changes

Investors that are approaching retirement and still feel that they’ve taken on more risk than they can stomach in the face of tough market conditions should talk to their advisor about adjusting their portfolio. While it’s true that the more years that people have until retirement, the more opportunity they have to change course with their investments, it’s still possible to make alterations to stay on track.

“This is an ongoing process,” says Zindler. “We want to make sure that clients who are closer to retirement are comfortable with their allocations. He adds that while he might advise younger clients to view depressed stock markets as a buying opportunity, the general investment philosophy for those approaching retirement is that they should only buy high quality companies that can manage through challenging market and economic environments.

Manage your expectations

What about affluent investors who want to retire immediately? Even in a turbulent market environment, that is still perfectly possible if they are not reliant on high returns to live comfortably. “If a client has $1 million and wants to live on $100,000 a year, that means generating a 10 percent annual return, which is going to be tough in the current environment,” says Zindler. “However, if they have $5 million and want to live on $100,000 a year, that means generating a 2 percent return. That is very achievable.”

The bottom line? Investors should keep calm and keep communicating with their advisors. They may be better positioned than they think.

The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or financial advice. You should consult your legal, tax, or financial consultant about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates. 

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