conservative investment strategy

I know! I don’t like rules either so let’s call this financial principle, “The Proposition of 100.” This suggestion is the starting point for building a conservative retirement portfolio that mitigates risk and creates a safe haven for a portion of your assets.

Ideally, as we age, our investment portfolios should move from a position of greater risk to one that includes less risk exposure. One methodology that successful planners employ to achieve this goal is to start with the number 100 and subtract your age (for couples, use the average of the two ages). The result is the maximum percentage of market risk (potential for investment loss due to factors that affect overall financial markets) you should undertake in your portfolio.

Here is an example: A 50-year-old with a $500,000 portfolio: 100-50=50%. 50% or $250,000 is the maximum suggested amount to be placed at risk in the market.

What do you do with the money you have not invested in the market? Determine how much cash you need and set aside the appropriate percentage for that purpose. Here’s a simple approach:

liquid cash investment approach

Finally, this leaves a remainder to be placed inside a safe money asset such as a fixed-index annuity (FIA) that can also have an income rider with it to provide future income that you can never outlive.

Fixed-Index Annuities – Protected

An Indexed Annuity’s interest rate is tied to an index such as the S&P 500. If the index goes up, the owner of the annuity is credited with a portion of the increase in the index and those gains are retained in the contract. If the index goes down, both the principal and previous years’ gains are retained, and the owner of the annuity loses no ground.

Using the example above with a balance of $250,000, I decide to place $50,000 (10% of portfolio) into cash equivalents and $200,000 (40% of portfolio) into principal-protected assets. FIAs on average yield better than CD rates.

Constructing a portfolio with market risk assets, cash equivalents, and fixed-index annuities decreases risk and lessens the probability of overwhelming financial setbacks.

Anyone who endured the stock market crash of 2008 understands the vulnerability that comes with being “all in.” Investors lacking the type of assets in their portfolios that could “not go down” were hit hard—losses averaging 30%.

fia values over time

Those with longer time horizons, years to recoup their losses, were shocked but not dismayed—time was on their side. But what about the people who were within five years of retiring? What was the impact of this crash on them and their families? Some sacrificed good health while the dreams of others and the retirements of most were shattered due in large part to the misallocation of assets.

While striving to accumulate wealth, investors place capital at risk in exchange for potential growth but as retirement approaches their objective must shift to risk reduction for the sake of asset preservation. The longer you have to prepare for retirement, generally, the more risk you are willing to bear with your investments. But as you look to step back from the workforce, you become less tolerant of investment losses, both practically and emotionally. No one wants to see, nor can many withstand, hard-earned retirement money lost just before it needs to be deployed. This dictates a strategy that is necessary to preserve assets for retirement, one that mitigates risk and is not ‘all in’

The Proposition of 100 is better than a suggestion, it is a sound approach to portfolio and retirement planning. It is a rule.