A recent blog post on 360WR offered a discussion about our investment philosophy relying on the concept of reversion to the mean (everything returns to its average). This past week delivered a new way of considering why. An interesting article in an industry journal poised the question – what fundamental investment philosophy our clients are relying on for their retirement security – “it will be different this time” or “reversion to the mean”?
If your journey with money is intended to provide financial security what’s the retirement security strategy and tactics? What are the choices? Should you plan on the current situation continuing indefinitely – the longest market expansion ever and the lowest interest rate trend ever which is a historical aberration – or plan for a repeat of historical market conditions – reversion to the mean?
The average interest rate from 1962 to 2007, on a 10 year US Treasury is 7% and are currently 3%. What would happen if bond rates rose from the current range to the historical average of 7%? The repricing of cash flows and assets will reduce their value 30-50%. Would that asset destruction endanger your retirement security?
Should you plan on interest rates being likely to return to their averages and protect your assets or plan that they will remain low indefinitely in a persistent historic aberration? Should you expect the longest sustained stock market expansion – an aberration – to continue indefinitely? Or should you harvest and shelter those longest term gains knowing the historical market conditions will ultimately prevail. Which approach offers you the most financial confidence and security?
If you seek a guide to retirement security from a proven economic principle there are 4 critical steps to take sooner than later –
- Remove interest rate risk from your fixed income allocation.
- Take equity profits.
- Use your financial, social and human capital capital to assemble a guaranteed income “floor”.
- Assemble your Mastermind Team to serve as your navigators, guides and executors.