By Allen Ostrofe
This article first appeared in The Union on July 26, 2016. Click to view PDF.

Rob and Lynn, from Palos Verdes, California, contacted a financial advisor, expressing nervousness about their current investment allocation, particularly as they near retirement. Their current portfolio is approximately 60 percent in bonds and 40 percent in a low-cost mutual fund replicating the performance of the Standard & Poor’s 500 Index.

After experiencing significant volatility in August/September (2015) and again only three months later, a similar reaction in January/February (2016) was cause for concern for Rob and Lynn.

Most recently, in June, we had the British European Union Exit (BREXIT) vote that pushed their concerns over the edge and decided it was time to take action. Their objective?

They wish to have less volatility going into retirement and are considering two scenarios:

Make a drastic strategic change. Sell all of their stocks and bonds. In this case, pay the potential taxes, and invest where they have little to no markets’ exposure.
Make a minor tactical change. Sell only 10>20% of their stocks and bonds, and invest in ETFs and other alternative asset classes. Doing so may provide broader diversification and potentially help reduce their volatility.

Some short definitions of the asset classes we are describing above:

Certificates of Deposit. CDs are FDIC insured and offer a fixed rate of return, whereas both principal and yield of investment securities do have risk and may fluctuate with changes in market conditions.
Treasury Bonds. In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer‐ term securities). Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Fixed Annuities. Annuity guarantees are based on the claims-paying ability of the issuer.
Exchange Traded Funds. ”ETFs” are readily marketable securities. There is no time commitment, and they can reflect different specific market sectors. “ETFs” are not suitable for all investors and they will fluctuate with changes in market condition.

Rob and Lynn summarized what they understood to be the differences:

SELL ALL (strategic change) — and place all assets into CD’s, Treasuries or Fixed Annuities. Some analysts might argue that this could potentially reduce volatility. Although in today’s interest rate environment this strategy carries the risk that it could leave Rob & Lynn with an ongoing return less than inflation, resulting in a reduction in purchasing power (lower risk portfolio).
SELL 10>20 percent (tactical change) — ”weed out” some of the lackluster stock and bond performers, and purchase “alternatives.” This diversification can help them spread risk throughout their portfolio, so that investments that do poorly may be balanced by others that do relatively better. While this may provide an opportunity for growth, diversification cannot ensure a profit or prevention of loss in times of declining values (higher risk portfolio).

Rob and Lynn made their decision, and now feel their investments better reflect their risk/emotional tolerance to current and future markets’ climate. Clients should not be “boxed” into investment strategies where one size fits all. Sometimes small periodic changes are better than big emotional ones. Why not check your portfolio with a Certified Financial Planner® TODAY?

Rob and Lynn are a fictitious couple. Example used as a hypothetical illustration only, not indicative of any particular investment experience and may not be representative of the experience of clients. Actual results will vary. NPC does not render tax advice.

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Allen Ostrofe, MBA, CFP®, Accredited Investment Fiduciary® is President of Ostrofe Financial Consultants, Inc., a S.E.C. Fee-based Registered Investment Advisor. Securities and Advisory Services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Advisor. Ostrofe Financial and NPC are separate and unrelated companies. For questions or suggestions, visit ostrofefinancial.com. Bra nch address: 565 Brunswick Road, Ste. 15, Grass Valley.