As we delve into the fourth quarter, this is a time when many investors begin to look at their portfolio to see how they have fared for the year. I might be going out on a limb, but I would suspect many investors know exactly how they have done—poorly! The market has seen some record breaking swings as of late, which has given many investors pause. The key word here is investors. For us at Henssler Financial, we define an investor as someone who invests for the long term and does not try to chase the market through excessive trading and market timing. An investor is also one who devises an investment strategy and has the moxie to stick to it through all market environments (given no real cause to make changes).
As clients and friends of Henssler, you have most likely heard us preach, either on our radio show, “Money Talks,” or in person, our general investment rule: Money you believe you will need within the next 10 years should be invested in fixed-income investments; money not needed within 10 years should be invested in growth investments. It is markets like the one we are currently experiencing that illustrate the need for a plan such as the Ten Year Rule. Clients who are living off their investments understand that they are not pressured to sell investments at these low levels; rather they have time on their side and can wait for the market to recover. In other words, by following the principals of our Ten Year Rule, our clients know that they will have 10 years of uninterrupted income provided by the fixed-income portion of their portfolio. Once the market recovers, we will then begin to replenish money withdrawn from the fixed-income side. This plan, brilliant in its simplicity, goes to great lengths in reducing investor anxiety.
Let’s look at an example to further illustrate my point: You are planning to retire in 10 years and would like to withdrawal about $30,000 annually from your investments in retirement. Currently your entire portfolio is invested in stocks or stock mutual funds; and we now know that we need to start building up the fixed-income side (in this example, $30,000 annually). Over the course of the next 10 years, we will take advantage of good markets and wait out the bad ones in an effort to ultimately put roughly $300,000 in fixed-income investments for retirement. Having this portion in fixed income not only provides for your income needs, but also minimizes market risk from the portion of your portfolio that you are relying on for income. Each year, both the income generated by the fixed-income securities and the principal from the bond maturing may be used to cover spending needs (in this example, “bond” represents the fixed-income security we deem appropriate for your portfolio). When structuring your Ten Year Rule portfolio, we take into account the interest, which may be taxable, and principal when solving for our target of $30,000 annually (indexed for inflation).
When the stock market is rolling along nicely and everything is rosy for investors, following the Ten Year Rule is easy. So how do we handle the transition from stocks to bonds in poor market conditions? This is the heart of The Ten Year Rule. We essentially do nothing in poor markets; we are not forced into selling in down markets because we have built in a time buffer and can afford to wait out the market.
The bottom line is that the Ten Year Rule gives you both flexibility and some sense of security as an investor in the stock market. If you are at or within that 10-year window, now is the time to begin thinking about selling stocks and buying fixed income; however, selling today is not the time. We would advise you to let the market work in your favor and not against you by waiting for some recovery. For those of you who need the money immediately and are fully invested in stocks, you are forced to sell in a down market and probably wish you had done some planning years ago.
Planning for retirement is vital to the success of your portfolio. Why risk your life’s work? Enjoy the fruits of your labor and seek the advice of a fee only adviser who will give you sound financial planning. For more information about Henssler Financial’s services or investment philosophy, please call 770-429-9166 or e-mail [email protected].