Another possibility is switching to alternatives and commodities that have a product backing the investment, rather than tying up most assets in equities.
High-net-worth investors, most with more than $200,000 in annual income, seem to be switching to private equity, real estate, hedge funds, infrastructure and natural resources, as well as commodities, according to Millennium Trust in Oak Brook, Ill., which deals with high-net-worth investors as well as mass affluent households. Less than half of the 500 high-net-worth investors in a recent Millennium Trust survey invested new money in individual stocks in 2018, which is a 10% decline from the previous year.
“High-net-worth investors are not going to leave equities completely, but they are looking for diversification,” says Gary Anetsberger, CEO at Millennium Trust. “The benefit of alternatives is that they do not correlate to the stock market and they provide protection if there is a downturn. The investors are trying to balance their portfolios for different economic scenarios” to preserve money into retirement.
The most common way for the mass affluent to save for retirement is through workplace-sponsored plans such as 401(k)s or IRAs. The number of companies offering retirement plans has remained relatively steady since the mid-2000s, and stood at 66% of employers in 2017, according to “A Retirement Security Retrospective: 2007 Versus 2017” by the Transamerica Center for Retirement Studies.
However, Catherine Collinson, CEO and president of nonprofits at the Transamerica Center for Retirement Studies and the Transamerica Institute, says American workers have faced myriad challenges over the last decade: “high rates of unemployment, dramatic shifts in home values, volatility in the financial markets, and the double-edged sword of a low interest rate environment that provides for favorable lending rates but nominal investment returns on savings accounts and other conservative investments,” which workers need when they are facing retirement, says Collinson.
Employees’ confidence in their ability to retire hit bottom during the recession before rebounding for several years. However, it has stalled since about 2014 when 61% of workers indicated they were confident that they would be able to fully retire with a comfortable lifestyle, including 16% who were very confident and 45% who were somewhat confident, Collinson says. The Transamerica survey included 6,372 employees.
The percentage of workers who reported having some form of retirement strategy slightly increased from 53% in 2007 to 61% in 2017. Nevertheless, in 2017, only 15% of workers had a written retirement strategy, while the other 46% had an unwritten retirement strategy, Collinson says.
This is not sufficient. “Relatively few people are familiar with what they are invested in. They should prepare themselves for surprises” if a recession hits, she adds. There has to be a plan and it has to be designed for the long term.
Dan Keady, chief financial planning strategist at TIAA, notes that traditional wisdom says investors should stay the course, diversify and rebalance periodically in order to succeed at investing. However, many retirement savers do not want to do that.
“There is more to it than that,” Keady says. “The 40-year-old can keep buying equities in a downturn and enjoy the fruits of that later; he has time to let it recover.” The 60-year-old, on the other hand, may not have time to do that—but neither should he try to take safe haven in cash or all bonds.