5 timeless investment planning lessons that remain relevant today

During the recent economic crisis, learning about ways to optimize your financial planning and investment strategy was critical for managing through uncertainty. However, as TIAA Chief Financial Planning Strategist Dan Keady, CFP®, often reminds investors, 2020 won't be the last time you can expect to encounter periods of economic uncertainty during your lifetime. Below, he shares five timeless investment planning lessons that not only helped investors weather the pandemic but remain relevant for your planning as the economy recovers.

1. Managing risk requires a disciplined process

If 2020 was about protecting your assets and adapting to change during uncertain times, this year is about refining those lessons as the economy recovers.

"Last year was an unusual example of all of the things people worry about happening, all in one year," Keady said. "However, it also demonstrated the value of a disciplined approach to asset management."

Keady says that "over the course of the decade-long bull market, that preceded the recession in 2020, most people weren't really thinking about risk-adjusted returns. As a result, many investors weren't aware that they'd taken on excessive levels of risk until the market experienced extreme volatility at the start of the COVID-19 pandemic."

According to Keady, the 34% drop in the S&P 500 in March of last year was a wake-up call for many that their risk tolerance had changed. It also had an emotional impact on many investors, causing them to move to cash at the wrong time.

"We saw many instances where the amount of risk people were taking was not aligned with their risk tolerance because they had not anchored themselves in a plan," Keady said. "This resulted in some people bailing out of the market entirely once the extreme volatility hit."

"Many investors thought they could stomach a 20% drop in portfolio value in exchange for more aggressive returns during the extended bull market," he said.

"However, when they experienced that drop in real time, they realized they weren’t comfortable with that level of risk."

While the markets recovered relatively quickly in 2020, the larger the loss people experienced, the greater the return necessary to recoup lost value. For example, as the chart shows, if you experienced a 20% drop on an investment portfolio valued at $100, the value of that portfolio would be reduced to $80. However, a subsequent of 20% gain on $80 would only bring the portfolio’s value to $96, not the $100 you started with. To get back to the original $100 would require a gain of 25% and that only brings you back to break-even.

Daily market update

Ideally, according to Keady, you want to put a strategy in place that aligns your goals, time line and risk tolerance well before a destabilizing market event occurs.

"This is where a disciplined process can really help," Keady said. "Our planning process dynamically simulates events and stress tests your strategy so you can make good decisions about how much risk you're willing to take without having to experience the impact on your portfolio. Extreme market events, like we saw in March, are built into the more than 500 scenarios we run when we create your plan."

Lesson learned

Anchoring yourself in a plan can help ensure risk-adjusted returns are aligned with your goals and investment time frame. This can identify vulnerabilities in your planning before extreme market events occur and help you to avoid the kind of emotional decision making that can derail your strategy over time.

2. Diversify for higher-quality returns

Most investors understand that to effectively manage risk, portfolio investments need to be spread among a well-diversified mix of securities that may include stocks of small and large companies, U.S.-based and international equities, short- and long-term bonds, and both international and domestic bonds.

Keady notes that diversification takes a number of factors into consideration, including the correlation between markets, asset classes and investment types; whether holdings are actively or passively managed; as well as your personal goals, risk tolerance and investment time frame, among other criteria. However, simply owning a lot of different assets is not enough. In addition to the number of securities you own, you want to determine if fund holdings overlap—resulting in double or triple ownership in the same investment types or asset classes, which can undermine your strategy.

"For example, if you own an index fund that invests in a large number of U.S. stocks, you may enjoy a degree of diversification across U.S.-based companies," Keady said. "However, when U.S. stocks fall all at once—that provides little overall protection for your portfolio."

According to Keady, diversification helps to preserve wealth by delivering higher-quality returns versus explicitly higher returns. "This relative stability is why, even when markets are down, a properly diversified portfolio can improve the likelihood of achieving your goals and provide a smoother ride along the way," he stated.

It's also critical to understand the role diversification plays in managing your exposure relative to the money managers you select.

"For example, a mutual fund manager with a strong track record in technology may be overweight in stocks that trade on the NASDAQ exchange, which lean heavily toward the technology sector, and underweight in other sectors such as finance, oil, and travel and leisure". "When the markets start to shift away from those top performing NASDAQ stocks, the same portfolio manager may struggle to outperform the broader market."

"If you only want a certain type of exposure, such as big tech, that may be a great way to get it," Keady said. "However, if you keep loading up there, you need to consider if that will still be a good decision two months or two years from now, or whenever the markets shift and start to favor a different segment of the market."

Lesson learned

Make sure that your strategy is not set up to simply chase returns but to provide a level of downside protection when the market shifts away from today’s top-performing sectors. Diversifying your investments across a wide variety of asset classes, investment types and money managers may improve the likelihood that you will experience a smoother ride along the path to your goals.1

3. Rebalance regularly to remain on track

As markets shift over time, a strategy that includes regular portfolio rebalancing is critical for managing risk. That's because market swings can throw your target allocation out of alignment with your goals and risk tolerance, creating the need to rebalance your portfolio.

Your "target allocation" refers to how you allocate your investments across different asset classes to achieve the balance between risk and return that you desire. When your target allocation becomes misaligned, you can rebalance by moving money from investments that take up a greater portion of your portfolio than desired into those that could use a boost—to get back to your target allocation.

"We know that a lot of people did not rebalance their portfolios for the entire length of the ten-year bull market leading into the economic crisis," said Keady. "Many investors simply put it off as the markets continued to go up—thinking they would get to it later—only to end up being exposed to more risk than they intended."

That can be problematic, he warns. For example, someone who was 50 when the bull market started in 2010 would be 61 now—just a few years from retirement.

"While they may have been comfortable with 60% of their portfolio allocated to equities, those who rode out the markets and didn't take time to rebalance over the course of the decade may have been looking at 80% in equities, before the market fell in March 2020," Keady said. "If they had harvested some of that appreciation by rebalancing over time, that would have lowered their exposure to volatility, as they prepare to retire in a few years."

Depending on the number of investments you have and the size of your portfolio, rebalancing can be challenging to do on your own. Your TIAA advisor can help you determine if and when your portfolio needs shoring up, so it remains aligned with your risk tolerance and long-term objectives. Keep in mind, rebalancing does not protect against loss or guarantee that an investor's goals will be met.

Lesson learned

Regular rebalancing helps to maintain a target allocation aligned with the risk-adjusted returns you seek. This helps to prevent your portfolio from becoming overweight in specific asset classes, such as stocks or bonds, during a rising market, which can reduce exposure to volatility when a market correction occurs.

4. Use fixed annuities and guaranteed income to create a buffer

Fixed annuities, which provide guaranteed income,can play a significant role in helping to create a buffer against market volatility for those still accumulating assets, as well as those taking income from their portfolios in retirement.

"While much attention last year has been focused on the severe stock market dip in March and the rebound that followed, many bond funds also fell during the stock market drop instead of going up in value," Keady said. "However during the same period, fixed annuities did not fall in value. Instead, they increased in value by the interest they earned."

According to Keady, that provided a lot of stability for people since their portfolios rose by the amount of interest they earned during that period. That continues to be important in the current environment where lower bond market returns are expected to persist for some time. He believes that the key to weathering any market or economic storm is having that "ballast" in the ship to help keep it afloat when rough seas are encountered.

"Being able to see guaranteed income in your portfolio during times of increased uncertainty can also provide a positive impact from a psychological perspective," he said. "For many people, that can help keep emotions in check when the markets become increasingly volatile."

Lesson learned

Guaranteed income can create a buffer against market losses, helping to buoy overall portfolio returns during a down market or periods of instability.

5. Manage your investment tax bill

Tax-loss harvesting is another important consideration, especially during periods of increased market volatility. Tax-loss harvesting is the process of selling individual securities in your portfolio that are trading below your purchase price to lock in the tax loss while simultaneously purchasing a similar security. By applying these losses against the gains, you effectively lower your investment tax burden.

Like rebalancing, tax-loss harvesting can be somewhat complex depending on the size of your portfolio and the degree of diversification you have in place. Enlisting the help of a tax professional and your financial advisor can help ensure your approach to managing your investment tax bill is fully aligned with your short- and long-term goals.

Lesson learned

Harvesting losses, especially during periods of increased volatility, can help smooth out returns while helping to offset taxes on both capital gains and income. In addition, losses can also be carried into the future indefinitely and used to offset future gains.

During the pandemic and the economic crisis that followed, many people realized how important it was to have access to a trusted advisor when things got complicated. Keady believes that a disciplined approach to managing investment assets will be critical in the years ahead to help remain on track toward your goals while keeping risk in check. Whether you're concerned about your income needs, tax exposure, charitable giving goals, or the impact that recent run-ups in the equities markets may have had on your portfolio, this is a great time to meet with your advisor to review your plan to help ensure you're still on course.

For more information on these and other strategies to help you optimize your planning and stay on course toward your important goals, schedule time to meet with your TIAA advisor today.

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1 Diversification is a technique to help reduce risk. It is not guaranteed to protect against loss. 

2 All guarantees are subject to the claims-paying ability of the issuer.

This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.

The views expressed in this material may change in response to changing economic and market conditions. Past performance is not indicative of future returns.

No strategy can eliminate or anticipate all market risks, and losses can occur.

Investment products may be subject to market and other risk factors. See the applicable product literature or visit TIAA.org for details.

Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment adviser.