Retirement Planning Mistake #11

Although alluded to in this “mistake series,” an emphasis, or special attention needs to be given to portfolio volatility or risk management.  Even if we are tracking portfolio risk as identified by either the Information Ratio (IR), Sortino Ratio (SR) and/or Retirement Ratio (RR), we need to focus on protecting capital.  Imagine you retired in December of 2007 or just before the Great Recession.  After settling into retirement your portfolio begins to tank.  What do you do to prevent that 30% to 40% draw-down?  If you are invested in the market, there is no way to reduce losses to zero.  What we want to do is keep losses to a manageable level and by manageable that means you don’t need to go back to work.  How do we do this?

Within the Sample Allocation Sheet 7.1.3 there are several “kick-me-out-of-market” options.

• Sell the security if it is ranked below SHY.  In most of our portfolios we are using ETFs so we sell them when they are ranked below SHY.  Consider this your first line of defense.
• Sell the security when it is priced below its 195-Day Exponential Moving Average (EMA).  There is a high correlation between this event happening and the security dropping below SHY in the rankings table.
• Sell or closely monitor any security when the “Golden Cross” turns negative (cell is coded red).  The Golden Cross is the X/O column.  If the price of the 13-Day EMA is above the price of the 49-Day EMA, the Golden Cross is positive and the cell is shows up as green.  But when the 13-Day EMA price drops below the 49-Day EMA, the cell turns red.  This is an advanced warning that a sell may be eminent.

These three simple rules will keep investors out of major trouble when the bear market strikes.