RETIREMENT: A Look Back and Ahead

As 2012 comes to a close, it’s important to take some time and reflect on some of the economic events and market forces that affected our financial lives this year.

Retirement Ahead

European banking and sovereign debt crises, uncertain fiscal and tax policies here in the U.S., and massive global central bank monetary policy accommodation, all impacted both the equity and bond markets. Meanwhile record low interest rates punished savers and those who rely on interest payments for a portion of their spendable income.

Many professional money managers positioned their portfolios in anticipation of a market downturn, thinking economic weakness, along with a global slowdown and poor market fundamentals would push asset prices down. While their thesis was correct, the market reaction was far from it, as we saw a double-digit gain in the S&P 500.

More importantly, I believe, is to look back at what your individual strategy accomplished this past year. Did your strategy shelter you from the uncertainty? Did your portfolio grow with the market? Did your emotions interfere with rational, logical thinking about the best course of action given the events unfolding during the year, or were you crippled with fear and unable to take action?

It’s no crime to say you were wrong or even ill-prepared for what transpired, as 2012 was a difficult year for market participants. If highly educated, experienced money managers, with access to tremendous resources have difficulty navigating today’s capital markets, how are laymen supposed to make the right decision with their hard-earned retirement nest eggs?

So what will 2013 bring for investors, savers, and the capital markets? The simplest answer is, much of the same. The problems facing the market in 2012 remain for the most part. Uncertainty in Europe, a mess in Washington, and corporations that face slowing growth against a backdrop of increased taxes and lower government spending.

Meanwhile, the housing market is recovering, corporations have ample capital to invest, and lower energy prices due to a developing U.S. oil and gas industry should boost the economy. So how does one position a portfolio or create a strategy in light of that uncertain future?

There are a few key points that must be built into any plan.

Any investment strategy, whether designed for maximum growth or for creating lifetime income, must first protect against any downturn in the markets. It’s much easier to grow, even slowly, when you aren’t faced with having to recover losses. Simply put, it’s easier to move up when you start on level ground, rather than in a hole. As an added bonus, this will remove “emotion” from the decision-making process, thus improving results, and creating greater peace of mind.

Additionally, any investment strategy must protect you from undue taxation, both now and in the future. Simply deferring or delaying taxes is not a viable solution. While owning great companies, having access to brilliant money managers, or being a lucky market timer may produce extraordinary results in a portfolio, it really doesn’t make much difference in the long run, if, when you want to access and spend that portfolio, a large portion has to be turned over to Uncle Sam. Investors should focus more on the macro-strategy and much less on which stocks or mutual funds they own.

Again, if through some magical investment nirvana, you owned nothing but the top-performing stocks, bonds, commodities, etc, but were heavily taxed, you are no better off than one owning lesser performers in a more tax-prudent manner.

In reality, being in the “right investment” is secondary to being in the “right strategy,” which will accomplish both of these critical points: Protect against market losses and minimize the effect of taxes.

Darren Vilardo is an independent financial adviser specializing in retirement income planning and the owner of Inland Retirement Advisors in Rancho Cucamonga. Vilardo can be reached at 888-944-6266.