Raise your hand if you're a target-date retirement fund investor like me. This set-it-and-forget-it, 401K-type investment product is supposed to shift conservatively from stocks to bonds as you approach retirement age. But fund managers have been allocating more to stocks, citing their overall ability to outperform bonds over long periods of time. A typical 40-year-old's portfolio with BlackRock, for example, could now hold 95% in stocks, up from 80% previously.
What they're saying: “It will be interesting to see if investors are able to stick with the greater volatility in these portfolios or if they start selling, which could cause them to miss out on a rebound,” said Megan Pacholok, an analyst who follows target-date funds at Morningstar.
Why it matters: If you're still in your 30s (maybe even early 40s), no need to sweat the current pullback. Your timeline is in decades and your 401K has time to bounce back. But if you're approaching retirement now and just watched 30-40% of your retirement savings get wiped out in the first quarter of 2022, you might be second guessing your life choices right about now.
My thought bubble: What if there exists a happy medium between high risk, active investing and low risk, index fund investing that needs decades to grow your wealth?
I've been checking out certain option strategies that I think strike that perfect balance between capturing potential growth of stocks and still managing risk. There are ways to combine options into spreads that give you downside protection in exchange for capping the potential profit. This creates a hedge where you can still earn a fixed or variable return, as long as the stock price stays above your cushion, which you can set to any amount you'd like. Imagine not having to sweat a 20, 30, 40% drop in price. That's the power of defined risk outcomes.
Usually these are longer dated strategies, like 6-12 months, which may seem like an eternity to active traders, but in the long-term investing world that thinks in decades, this is nothing at all.
Skeptical cat is skeptical: As a long-time “long term investor” I never thought I would say “options trading” and “responsible investing” in the same sentence, but here I am. I set aside a small percentage of my investments to try this new approach and have to say I've been seeing success even during the recent downturn so chin up everyone, you still have options!
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