Find Tuning Your Retirement Planning Vehicle

              It should start with our first job and really not end until after we are gone; but how much time does retirement planning actually get.  Moreover, how much less time do we end up implementing the plan?  Unfortunately, statistics tell us that, as a nation, we spend more time researching automobiles and even refrigerators than we do in guiding our retirement nest egg. 

              I think we all have a common goal: make as much as possible without losing as much as possible.  The method of long term investing, used by most investors, is at odds with this goal.  The market regularly goes through period of “bull” and “bear” markets.  Let’s take the recent market action as an example.  From the 2000 top, some stocks finally approached their former highs in 2006.  This means five plus year to break even with 2000 values.  Note importantly that I wrote “some”.  The darling of Wall Street and most mutual fund investors in 2000, the NASDAQ 100, is still about 50 percent off its highs.  This means that the average portfolio which is a mix of the large cap Dow Industrial type stocks and NASDAQ stocks is still at a loss five plus years after the top. 

              Proactive management is a smarter way to manage the money.  Think about your car for a minute.  It is recommended that you change your oil and rotate your tires every three or five thousand miles and tune up the engine maybe ever twenty five thousand.  This is designed to increase the performance and life of the engine and tires.  This idea can also be translated to your portfolio.  Regular portfolio adjustments (tune ups) can add to your performance and keep your nest egg running longer and smother.  This is proactive management and it come in different names for different strategies and different degrees of fine tuning.

                Yearly or quarterly asset allocation or reallocation is the mildest form of proactive management.  It has two basic forms static and dynamic allocation. 

                Static allocation models typically use a set formula bases on the investors age or growth goals.  All investors that are age 55 might have a balance 55 percent stock exposure and 45 percent bonds. (This implies invested asset only, not cash savings and emergency funds.)  This method is called the age rule of thumb and uses the investor’s age to allocate believing at as the investor gets older stock or growth becomes less important and believes that bonds entail less risk. (Remember the 35% decline in 1986 and the two month 15% decline in 2003 from which they have yet to recover.)   There are many other methods and formulas but all essentially use non market related (no real world) inputs to allocate the portfolio.  It’s usually better than nothing, but not always.

               Dynamic allocation is the more sophisticated approach.  These systems do rely on market or business cycle input.  The internal formulas can vary as much as there are investors; but, they all attempt to position the assets based on performance or expectancy.  These methods require more homework for sure listening to the engine (market) to determine what adjustment to make.  These strategies with typically out perform buy and hold (investing for the long term) at least on a risk adjusted basis.

              At the high end of dynamic asset allocation is the additional element of market timing or to a lesser extent trend following. Mutual fund companies have spend great time and effort to discourage any form of market timing (see Market Timing a Modern Day Witch Hunt); but in most forms it is truly the investors best friend. Here, based on market derived signal, some sectors of the market may be completely avoided.  For the conservative investor this allows for the avoiding markets in measurable down trends.   These trends can be measured by the day, week, month or years; so, it is important to align yourself with a professional manager with similar time frames.  By avoiding significant down market moves the investor eliminates significant risk and more importantly the precious element of TIME that is usually needed to recover from bear market declines.  This is the most significant element of the timing addition to proactive management.  In the case of the 2000-2003 decline where investors have just now or still waiting to breakeven the proactive portfolios that utilizes the trend following methods produced positive returns as soon as the end of 2003 and have build new profits on top of their 2000 values over the pursuing years.

               The more investors learn about these choices and the more they implement them the greater their ultimate reward and nest egg through retirement.  It does take some time and some research but the reward is significant to their future lifestyle and legacy.  You can improve the growth and get you to retirement quicker and help beat inflation once you retire.