Aaron Cirksena is the founder and CEO of MDRN Capital.
As we enter a period of nearly certain economic volatility, many investors are growing concerned about the durability of their portfolios and looking for ways to batten down the hatches in advance of the storm. These worries are understandable—but frankly, this is an area where advanced preparedness is essential. Hedging against financial risk isn’t just important when facing an impending recession; rather, it’s something smart investors should be considering even in strong economic headwinds.
Unfortunately, many investors approach the market with a gambler’s mentality. Imagine you’re sitting at a blackjack table. If you’re winning, you want to stay, but at some point, it’s smart to pocket some of your winnings and walk away. (My wife is the one who reminds me to cash out, even while I’m tempted to keep playing.)
Investors often behave the same way. When the market is strong, they don’t want to hear about risk management. But when volatility hits, suddenly they panic and want to make big changes. Firms like ours tend to get an influx of clients during “bad” times—but really, it’s during the “good” times that they should be planning ahead and preparing.
The Benefit Of A Structured Approach
There’s a reason investors underperform compared to the market: Emotional decision-making hurts long-term returns. The time to reposition your portfolio isn’t when the market drops 25%—it’s when things are going well. And if you’re nearing retirement, you should already be thinking well ahead about protecting your income sources.
That’s why we recommend taking a structured approach. We start by determining how much money someone will need from their portfolio on an annual basis and then ensure they will have enough set aside for 15-20 years. That’s important because while short-term market movements are unpredictable, over a 15-20 year period, history tells us the market will almost always rally and turn upward again.
If we can protect a client’s withdrawals for that long, they can leave the rest of their portfolio invested, knowing that over the long haul, the market has historically provided strong returns—typically around 10% annually. This means their stock market money, if left untouched, will more than double over the next 10 years.
Factors To Consider Before Making Changes
In this current environment, investors who are thinking of making adjustments to their portfolios—for whatever reason—should consider the following:
1. Interest Rates: We’re in a higher-rate environment than we’ve been used to, but historically speaking, rates are still not that high. They may come down, but likely more slowly than originally expected. Investors need to be mindful of how that affects their portfolios.
2. Market Volatility: How much of your money is vulnerable to market fluctuations? To return to my blackjack analogy, it’s important not to leave all of your chips exposed at any point.
3. Time Horizon: What’s your timeline for needing that money? Some investors might have very few withdrawal needs, particularly if they collect pensions and social security. Others may need more immediate access to that money.
4. Diversification: A traditional mix of stocks and bonds hasn’t performed well over the past decade. Investors need to think beyond this outdated portfolio model.
Tools For A Well-Balanced Portfolio
For investors looking to create and sustain a well-diversified, resilient portfolio, certain financial instruments may help, depending on individual goals and needs:
• Money Market Accounts: These are good short-term options to provide liquidity. Fair warning: They are subject to rate changes. If the market goes down, your interest rate does, too, like a high-yield savings account.
• CDs: CDs are the next rung up the ladder, wherein you invest some money at whatever the current market rate is for a limited period. It might be a decent rate, but again, it’s going to be fairly short-term.
• Fixed Annuities: Similar to CDs, fixed annuities offer longer terms and slightly better rates and are issued by annuity companies rather than banks. You can get a three-year, five-year, seven-year or 10-year fixed annuity that will pay a CD rate of interest, somewhere in the 5-5.5% range, with some limited liquidity.
• Fixed Index Annuities: These provide principal protection while offering returns linked to a market index like the S&P 500—so a variable rate. Some are offering caps of 10% or more, meaning investors can participate in market gains without downside risk.
Having someone in place with a strategy is also of the utmost importance. Instead of a passive buy-and-hold approach, many investors benefit from tactical, real-time management that can better navigate market volatility.
Some Final Thoughts
Portfolio protection isn’t just something you think about when markets are bad—it’s something you should always have in mind. You don’t want to be scrambling to adjust when the market drops.
That gambler’s mentality—that when things are good, they’ll always remain that way—confounds many investors. It’s important for overall financial security not to be caught up in that mindset—that you know when to pick up and leave the table.
Take a long-term view. Ensure you have a plan in place, one that is aligned with your current and future financial needs.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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