Simply put, a buy and hold strategy is a passive investment strategy emphasizing long term growth over short term thinking or market timing. An investor who employs a buy-and-hold strategy actively selects stocks, but once in a position, is not concerned with shortterm price movements and technical indicators. This idea generally makes sense for the younger investor who is accumulating assets for retirement but doesn’t plan on spending them anytime soon. Younger investors usually have more time to make up for negative swings in the equity markets.

For example, during the recent 2008 market crash where the S&P500 lost 51% over less than a year and a half, many people were scared out of the market and locked in significant losses by selling off holdings. Those who lost the most got out of the market near the low and failed to participate in the big rebound that has followed over the past 8 years. Hanging in there paid off for these with a longer term focus and who did not need any of their invested assets during that time. But for the older investor who is at or near retirement this strategy may not work so well. For example, if you were fully invested in the bear market of 2008 and taking income, you may have had to take a 40% reduction in income to preserve your assets. “Buy and hold” may also be a bad idea if you don’t have a lot of money to invest as big pullbacks in equities can all but wipe you out, especially if you end up needing those funds while the market is down. Thus, many market commentators including the likes of Lou Dobbs after the crash in 2000-2002 have been quoted as saying “You shouldn’t invest money in the stock market you cannot afford to lose. Period!” This is especially true for retirees and those planning for retirement in the next few years.

During the retirement planning process you may have heard the term ”Monte Carlo Simulation.” Named after the famous casino in Monaco, this tool is “used to model the probability of different outcomes that cannot easily be predicted due to the intervention of random variables, ” such as the randomness of stock market returns. In the planning process this simulation tool is most commonly used to predict the likelihood of whether or not you will run out of assets in retirement. Some of the considerations in this computation include expected life span, market performance, asset allocation and income withdrawal rates.

One common strategy to make more certain your money lasts a lifetime has been the “4% rule.” The idea is that based on past market performance, a withdrawal rate of 4% annually would be a statistically safe amount to preserve your assets through retirement. Recently that number has been reduced to 2.8% due to the extended downside and unprecedented two major (-50%) market corrections in a period of less than 10 years apart. Based on the new numbers, if you had $1M in assets you would be safe to take out $28K per year assuming your retirement lasted 30 years. Surely most people are thinking; “that doesn’t sound like much”. So, what else is there if we don’t want to run out of money and want to use our investments to supplement guaranteed lifetime income? Most people are uneasy about a “probability of success rate” based on an uncertain sequence of market returns and interest rates.

A fairly new and ever more popular strategy is using a fixed indexed with a guaranteed lifetime income rider to create an income stream that will supplement other guaranteed retirement income streams such as pensions and social security. In this case, the annuity is linked to the market but you only participate in the upside which means you can’t lose money when the markets pull back. Since this is an insurance contract with secure assets and ample reserves, it is not a risky investment. Thus, the carrier is able to guarantee your income for as long as you live and pay out a rate as high as 5-6% or more depending on the company, contract terms and retiree’s age. If you haven’t heard your broker or advisor talk about these it’s probably because it is not a security and doesn’t usually fit under the “Wall Street umbrella” or typify the normal brokerage house model. Generally you can find these principal protected accounts and guaranteed income products through independent financial advisors who work as fiduciaries and have a legal obligation to put clients’ interests first.

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