How smart investors stay invested without risking retirement

Transcript:Caroline WoodsIf you're close to retirement, listen up. My next guest will walk you through how to stay invested, but also how to manage risk. Clark Allen is Head of Product at Horizon, and he joins us now. Clark, thanks so much for being here.Clark AllenThanks. Happy to be here.Caroline WoodsSo, Clark, when markets are so close to record highs, a lot of investors near retirement might feel a little bit stuck. They don't want to miss out, but they're also nervous about giving back anything all of their gains. Is that what you're seeing?Clark AllenYeah absolutely. It's it's it's hard to not want to participate. But obviously with valuations at all time highs and markets continue to scream higher. It can be difficult to figure out what to do. And so, you know, we find investors looking for alternative solutions. They don't want to go to cash. They don't necessarily want fixed income because of the experience of 2022.And so they're looking for an alternative that's going to give them some risk management but still give them the opportunity for upside participation.Caroline WoodsSo for someone close to retirement, what's riskier staying invested right now or stepping aside.Clark AllenThat is a that is a loaded question that any time an advisor comes to talk to us, I always ask client comes to you, is looking to retire and says, I want to take all my money and put it into short term treasuries. Is that a safe or risky thing for that investor? Reality is, is is for some some investor that's thinks about volatility.That's the safest thing they could do. But when you have a 30 year problem of trying to make sure you don't outlive your money, investing in short term treasuries is very risky. And so we we believe and we preach that folks still need to stay invested. They need market participation because it's the only way you solve a 20 or 30 year retirement problem.But they need to do it in a risk managed way to make sure that over the long term, that they're not blowing up their portfolios with sequence of return risk or other potential risks that come with volatility that, that, that they frankly need in order to actually be able to stay retired.Caroline WoodsSo walk us through how people can stay invested. But in this risk managed way.Clark AllenYeah, absolutely. That's a and we've got a couple different approaches. One of the ones you know, we tend to lean into a lot is a tactical risk management approach. It looks to get market participation when it's available when the markets are trending and doing well. And we know that there's 5 or 10% pullbacks. And those are natural and normal and needed to be trained not just as an advisor, as an end client, to understand that a 5 or 10% pullback is not something we're looking to protect from or will never stay invested.And so this particular tactical risk management approach focuses more on catastrophic markets as the 2008 type scenario or 2020, where you can really blow up 30 or 40% of your portfolio. And so we have a tactical risk management approach around equity exposure, looking to get market participation. It's going to have some volatility and shallow drawdowns, but it's going to protect from that catastrophic market, which we believe is the biggest thing to try to protect from for these clients in retirement.Caroline WoodsTell us how it actually protects you from that. And what are some of the holdings in that?Clark AllenYeah. So the overall exposure of the portfolio is looking to be a sort of systematic multifactor portfolio. So, you know, the underlying exposure is an equity portfolio looking to get market participation when it's available. If the market begins to get into a catastrophic situation, it will begin to sell that equity portfolio and de-risk the portfolio into short term treasuries.It's not going to do it 100% to zero. It's going to do it in 10% chunks, because we're going to sort of lag down in similarly, as the market begins to recover, it's going to reinvest. So this gives, again the comfort for an advisor or client that in a catastrophic situation, you're going to have somebody doing something on your behalf and helping protect your portfolio.And additionally, we see advisors and client get scared in 2020. And they blow out of the market and try to go to short term treasuries. When do they buy back? So this again is a strategy that that gives you a systematic, it's entirely rules based system to decide when to reinvest and make sure that you're participating in that upside as the market recovers.But doing it in a way that's that's thoughtful.Caroline WoodsSo that's the catastrophic side. But for those who want a bit of extra growth while markets are still strong, how do they add upside without going overboard?Clark AllenYeah, there's a lot of advisors and clients saying, I want to participate in I how do I get some of this exposure. But they're concerned, right. We've seen the volatility over the last couple of weeks of AI exposure. And some of these companies hyperscalers seeing some volatility. So they say how do I participate in that. But I'm in retirement or near retirement.And this is where the approach we think about is is how do you smooth the ride. It's not necessarily a catastrophic market, but it's putting some defined risk, some options around a growth exposure and AI exposure to make sure there's participation, but that it's a smoother ride for that participation. Again, we understand that there's a lot of upside skew or a lot of upside opportunity for these AI exposures.And these retirement investors want some of that, but they need to do it in a way that smooths the ride and helps them stay invested, helps them get some of that exposure, but also make sure that they have money for the long term.Caroline WoodsSo how do investors near retirement get exposure to those growth areas without taking on too much risk? And if they haven't already been exposed to it yet, is it too late at this point?Clark AllenI would say it's not too late, but don't go chase the don't go chase the hyperscalers or the big names or the quantum names. Maybe use a broad based Nasdaq type exposure, but put some defined risk or some options around that. Think of that as like an evergreen buffer type approach or strategy, which gives them that. Again, some participation.It's going to give them some of that upside, but it's going to protect from some of those shallower drawdowns around the 5 to 15% range. And just overall it's going to smooth the ride. Still giving them participation in that upside. Again, it's not necessarily too late, but for them to go chase some of the really high flier names, it's probably not wise and are not prudent for them because frankly, it could blow up their portfolio and slow down their retirement and the goals they have.Caroline WoodsSo you have the horizon Nasdaq 100 Defined Risk ETF. How is that different than just investing in the Nasdaq 100?Clark AllenYeah, that that has Nasdaq exposure as the core piece of the portfolio. And that over around that portfolio we have sort of what we call an evergreen buffer type approach where you're buying a set of options to protect from the downside. You're paying for that with with some calls. And we call it evergreen because this isn't just single period buffers.It's a continuously rolled buffer strategy making sure that the path is smooth. It's a one stop stop solution. We have advisors that come to us and ask for model portfolios and ways to stay invested, and so we're able to give them one solution that gives them that QS exposure but protects those puts that we buy from the downside, smoothing the ride for clients and giving that them that I type exposure they're looking for that we frankly find predominantly in the Nasdaq 100.Caroline WoodsSo if someone near retirement is watching this and feels uncertain, what's the one thing they should review in their portfolio before making any changes?Clark AllenYeah, I mean, first off I would say I get it. We're at all time highs. There's things to be worried about. Bottom line is earnings are at all time highs. Rates are coming down which is going to be a frankly a tailwind to performance into next year. We see a lot of sort of green shoots a lot of opportunity going into next year.But all that to say, you shouldn't just go pile into these high names or pile into the high growth names. You need to find exposures, ETFs, solutions that are going to give you some risk management. If catastrophic markets come. They typically don't come from the places you think and they come at times you're not planning for. So it's not going to be a situation where you can buy exposures or buy the top of the market, and then think that you're going to be able to get out of the way before the catastrophe comes.So we would recommend advisors to go into their portfolio and clients to go into their portfolio and find those places that are really carrying, frankly, too much risk for their risk tolerance and begin to pare back some of those positions and put in solutions that are still going to give them market participation, but do it with some risk management around it.Caroline WoodsSo just finally, though, because it doesn't sound like you're really promoting cash, and you talked about fixed income not necessarily being the best place to be. So if you find that your portfolio is too risky, where are you actually deploying that cash that maybe you don't want in the equity market?Clark AllenYeah, that's where I'd say you go into risk management solutions. You find solutions that are maybe evergreen or buffer type strategies that give you some market participation. Again, I wouldn't say don't have any cash. Maybe you set aside some cash to meet your short term needs. But but frankly, for 4% yields on short term treasuries not going to support, 4 or 5% inflation adjusted spending over 20 years, bonds, even at 5%, are not going to support a 4 or 5% spending over 20 or 30 years.And so we would say, maybe don't just blow out of those equity positions and buy cash and bonds. Make sure your risk is appropriate, but find positions that are going to give you some risk management and make sure that you still participate in the long term growth, because we believe, you know, the durability of a financial plan over a long period of time, especially in and through retirement, is returns.You need return to support and replenish the spending that you're doing. And the only way you're going to get that, frankly, over the long term, on an inflation adjusted basis, is the equity risk premium. And right from our perspective.Caroline WoodsAll right. We'll leave it there. Clark Allen, Head of Product at Horizon. Thank you so much.Clark AllenThank you.