Topic 2 – Lessons Learned from 2008

Please watch this video before proceeding to the next topic and marking as “Completed”

And in this next slide, what I’m going to show you is an example of why we can’t use asset allocation as we get into our retirement years. Simply because we can’t control what our investments do, if we’re invested in the market without some form of defensive management mechanism added to those investments. So let’s take a look at this slide and take us back to 2008 and see what happened with a term called draw-down in most people’s investment portfolios. In this slide, we see the lessons that were learned from 2008. Let’s talk about a hypothetical example where you were in 2007, invested in a target date retirement fund that was targeted for 2010. In other words, we had about three years before retirement. Now draw-down as a term that most people don’t understand in the investment world, but what it talks about is an investments peak to trough losses, when the investment is at its highest measured down to its lowest point.

And in this graph, we see that in October of 2007, the high part of the us stock market, this particular target date fund had a point value on October of 2007 at $23.99 cents a share. Remember that it’s a target date fund, so it’s supposed to be managed so that as we get closer to retirement or that three years now for this hypothetical investor. From 2007 to 2010, we have to use asset allocation to bring back the risk in that portfolio to get ready for retirement. This target date fund is supposed to be managed to do that. But as we see from October of 2007 to February of 2009, not only did the stock market tumble, but also bond investing, and this particular target date fund had a percentage of bonds invested into it.

Now, while the S and P 500 may have dropped close to 50% during this same time period, and had drawdown in the same amount, the peak to trough investment returns for this target date fund were a negative 34.3%. So in our hypothetical example, if you had a hundred thousand dollars and we had a peak to trough loss from 2007 to 2009, we just lost approximately one third of our a hundred thousand dollars or in an example of a hundred thousand dollars, we just lost $34,300. Now, let me ask you this. When you got that form of financial advice that said, you’ll be okay in a target date fund, because asset allocation will move you from stocks into bonds as you get closer to retirement. But then you still see your account balance drop $34,000 on a hundred thousand dollars of invested money. Is that a position that you want to be in going right into your retirement years? I think most people would answer not. And it’s the reason why most people have decided that asset allocation does not work as we get closer to retirement for our incoming planning years. And this is a great example of how a portfolio can be stress tested for risk.