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The Impact Asset Correlation Can Have On Your Retirement

Most clients and prospects I speak with are familiar with the idea that one should reduce the amount of risk with their investments as they near retirement, which generally speaking, is a true statement. The concept of reducing risk becomes even more important if one is to retire into a declining market. I would categorize a declining market as one similar to what was experienced in the years 2000-2002 and then again in 2007-2009. In my opinion, taking "less risk" could produce a more enjoyable retirement. To take less risk one might consider adding non-correlated assets to their investment allocation.

The scenario below assumes two people retired, Investor A (dark blue line) and investor B (light blue line). Both retired on 1/1/1999 with a $1m investment portfolio and proceeded to take a 4% withdrawal each year. Over the next 17 years two significant market declines were experienced. Investor A is invested in a non-correlated mix of investments while investor B is invested only in the S&P 500.

Hypothetical: Newpointe Wealth, LLC 05/18/2017

As one can see each portfolio ends at almost at the exact same point, however the experience of each retiree would have been dramatically different. Investing has an emotional component. Portfolio declines can be emotionally draining to an investor and decision making can be based on emotion, especially when one sees their portfolio value in decline. Investor A saw their $1m decline to $840k, whereas investor B saw their $1m portfolio decline far more to almost $410k. Based on these numbers one could argue that each investor had a different emotional experience. Investor B, may have been more vulnerable to emotional decision making while investor A might have been more likely to stick to the plan.

Your retirement plan is composed of many different components and managing the investment portion appropriately is certainly one of them. If you are considering retirement, remember to consider the correlation of your holdings, it might literally change your retirement experience.

If you would like help understanding the correlation of your investment portfolio and how it might impact your financial plan, please email me. If you would like to learn more about myself and Newpointe Wealth, please visit my page

Disclosure: This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal.

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