Drawdown years money management.
Even though retiring Boomers are a huge group with enormous clout and wealth, no one in the investment industry is talking about the fact they are headed for a big financial pothole.
The harsh reality is that everything that Baby Boomers have done to build wealth will be undone – if they keep doing what they have always done.
If you have assets that must contribute materially to your retirement income and you follow the traditional buy and hold investment philosophy touted by most of the investment industry then you’d either better be very lucky – or stop doing it.
As you near retirement, you need a different investment approach because ‘time’ has now shifted from being your friend to being your foe. How? It’s simple: you no longer have time to outwait the downturns.
The traditional investment philosophy you came to rely upon during your accumulation years is no longer good enough. The goal of most money managers is to provide you with a ‘better off’ outcome. Their recommendations are typically selected based on their relative performance to their peers. Yet, in their pursuit to outperform, many money managers often take on additional risk. They operate like huge impersonal machines – it’s not necessary to know who you are or what you want to do.
‘Better Off’ versus ‘Real Life Financial Success’
In your drawdown years, ‘Better Off’ is not good enough. Now your focus must be upon ‘Real Life Financial Success’ – the safe delivery of the funds you need, exactly when you need them.
You need a money manager who follows the same disciplined approach used to successfully manage an endowment or pension fund. The managers of these structures ensure they are constantly aware of exactly how much money is needed and precisely when it is needed. Their recommendations are selected based on their ability to consistently meet both short term and long term pay-out obligations. One of their primary jobs is to move assets between asset classes in such a way that they are able to distribute the cash where and when it is needed.
This is the kind of money management you need as you approach and enter retirement. If you do not use it and let unmanaged market gyrations be a part of your retirement planning you will be wrong and poorer more often than you will be right and wealthier.
The right kind of money manager will always have enough cash ready for your needs, while not forcing a fire sale on your longer-term assets. You will see in the “Investment Policy Statement” (IPS) good money managers provide, how percentages of assets migrate to cash from fixed income and equities in an orderly and methodical process.
How do you identify the right kind of manager? The really good drawdown managers can be recognized by 3 key characteristics:
- A good drawdown money manager is obsessed with avoiding risk. They recognize how hard it is to make up a loss in the absence of a long time frame.
- A good drawdown money manager is not concerned with relative performance. They do not care how they perform relative to their industry peers, only how they perform against your short term and long term demands for cash flow.
- A good drawdown money manager is aware of your planned year-by-year income needs. Having that information (as part of your investment policy statement) helps ensure that they are shifting allocations closer to cash as these drawdowns approach.
You will know you have found the right manager when they can say: “We acknowledge your drawdown requirements and your portfolio will be run according to a strict process and procedure to deliver to that requirement for the prescribed time-period.”
Now the question remains, when do you move from a manager that excels at accumulation to a manger that excels at drawdowns? The answer is: at least five years before you retire. The upside of waiting longer is much smaller than the devastation of getting caught in a downturn just before you begin to rely on these drawdowns to provide your retirement income.