Most People’s Retirement Portfolios Are Just Adrift
When we apply professional standards to the retirement portfolios of most people, they fall well short and actually are managed pretty terribly. Most people have no idea what the goals and aims of a good portfolio are though, so they just keep on investing year after year and when things don’t work out as well as they hoped they have no idea what really went wrong, usually blaming the market instead of the strategies that left them so vulnerable to the whims of the market.
The goals here are twofold, to look to drive performance and to manage risk appropriately. When you just leave your hard earned savings adrift on the sea of the market, without a rudder, where it will go whichever way the wind blows, you are really doing neither.
Those of means can invest in funds that are more properly managed such as a hedge fund but even hedge funds have limitations, due to having to manage people’s assets en masse, which makes making changes to their holdings quite difficult indeed. Liquidity is a relative thing, and a lot of markets are plenty liquid enough to move even a large individual portfolio around with ease, but when you have to do that with the portfolios of many investors, the sheer amounts involved become quite illiquid.
At least this form of management does have some direction though, they are set up to both drive performance and manage risk to a certain extent, something that the great majority of investors lack.
Dedicated portfolio management at least has the potential to do a better job at this, provided that the direction that is provided is good enough, although often times it is not. Quality really matters here and you don’t want to be paying big management fees to someone who really isn’t providing much more than the usual mutual fund investing provides, which you could provide yourself without hiring anyone.
We decide all of this ourselves though, in the end. We decide to go with a certain type of investment, such as mutual funds, and we also decide if and when to pull the plug, usually with very little advice actually other than buy this or that because that’s the investments I sell.
If we’re basically doing nothing though to help ourselves, which is what just going with the market ends up accomplishing, we at least can think about whether we can put together a better plan to achieve more and reduce our risk as well.
If We Need to Be Careful, Risk Management Needs to Come First
If you ask the most successful traders, they will all tell you that it managing risk properly must come first, and is the cornerstone of sound portfolio management. We are told in no uncertain terms that we need to be careful when it comes to our retirement portfolio, which is good advice indeed, but we then need to put this advice to work and actually manage our risks properly.
Ironically, we’re then told to use a strategy that does not have any risk controls at all in it, and where risk management not only doesn’t get enough due, it really doesn’t get addressed very well at all. Diversifying your investments among long positions for instance doesn’t do much to protect you when things move in the other direction. While a lot of people may think that this is all fine, it is because these people have a poor understanding of risk management.
This includes anyone who promotes the strategy of buy and hold investing. Now even with little or no risk management, there is a worse fate, which is the risk that may be present in seeking to actively manage risk but doing a poor job of it.
This is what these advisors want to caution us against, and the risk here when we mismanage our portfolios is indeed one that can be pretty large. In the wrong hands, if we do not know enough about what we are doing, we can indeed experience even larger drawdowns than the market can provide and even drive our portfolios and our retirement dreams into the ground.
Managing Your Own Affairs is a Real Challenge
Portfolio managers who manage mutual funds mostly underperform the market, and although they do have one hand tied behind their back by only being able to be long markets without the ability to either take the other side or stand down, this at least tells us that asset selection is a bigger challenge than people may think.
If this is so hard for professionals to do, this should not be something that individual investors should even be thinking about doing, although this is how a lot of people envision what their portfolio management will consist of, deciding between long positions of a chosen basket of investments.
When we look at the fate of most traders, those who aspire to trade at least, we see some pretty grim results overall. This shows that people do have a tendency to mess things up, even those who are at least somewhat serious about learning how to do this, at a level that easily surpasses the dedication that most longer term investors possess.
With that said, it is far easier to achieve results that are considerably superior to market results in both returns and risk management, provided one is skilled and experienced enough to devise a good plan and put it into action.
Why do so many traders fail though when it really isn’t that difficult to succeed? Why can’t everyday people direct their portfolios by using some simple strategies that have been proven to work and execute them properly, rather than the dabbling that we see a lot of people do that may end up producing decent results in bull markets but get shot down during pullbacks?
There are two main components of a sound strategy, whether it be with investing or trading, and that is having a sound plan in place and executing it properly. While we can come up with some plans that are sound enough, based upon timing markets, this does require some thought and one must get to the point where the strategy may be expected to achieve superior performance.
The second part of this, the execution part, is a lot more challenging than people realize, and many investors and traders have had great plans which, had they executed them properly, would have led to success, but instead they failed to execute them and ended up failing overall.
If we are prepared to dedicate ourselves enough to properly learn how to do this, and also get in plenty of practice prior to actually doing it full bore, then we can achieve our goals. If not, if we are not prepared, if we haven’t demonstrated that our plan will work to a reasonable degree, we may end up in a worse position pretty easily.
It really comes down to our being prepared to manage our own portfolios prior to actually trying to do it, and the right way to do this is to first learn how to time markets, and then make sure that we don’t jump into this too quickly. There are always lessons to be learned, and some of these lessons can only be learned in the heat of battle, and this is a battle that one can see themselves overwhelmed with by the pressures provided one isn’t equipped to deal with them.
If we can come up with plans that both seek to beat the market by a significant amount, and reduce our risk exposure by a good amount as well, we have at least shown that we are worthy of managing our own retirement portfolios, and may both expect a better lifestyle in retirement and also be more certain that we may achieve it.
If we are not ready to do this though, it’s not a good idea to simply jump in, as messing this up can be significantly worse than just doing nothing, just leaving things up to fate basically.
Leaving our retirement up to fate, even though we may reasonably expect things to keep going up along the road there, isn’t ideal either, but this may come down to choosing between lesser evils and this one is very often the lesser one.
Those who do understand how to beat the market by large amounts can look upon most investors and think that it would be so easy for them to do much better than they do, that a few simple rules and the discipline to follow them would be easy to implement, but most people have no idea how to time markets even with simple rules, and may not be prepared to bear the responsibility of executing such a plan.
If one is interested in doing this though, coming up with a strategy that is entirely rule based and not allowing for any discretion is the best way to go by far. It takes years of experience trading full time, over tens of thousands of trades or more, to develop the proper intuitive skills, and this is way beyond everyday investors.
One must have at least a rudimentary understanding of technical analysis to come up with such rules though, and perhaps even more importantly, realize that we do need to rely on technical analysis exclusively to be able to come up with such a plan.
Any other approach is indeed too difficult and too risky for individual investors to even be contemplating. The goal here needs to be to strive for simplicity, not involve complexities that are well beyond the investor’s ability and are a prescription for too much risk at the very least and often lead to failure.
This is a long way away from the way that most investors think, but those who are up to learn here can really help themselves once they do get a good feel of how such a strategy would help them and come up with the building blocks of a real plan to achieve it.