Russell Adaptive Investing™ for retired investors

Russell Adaptive Investing

Every day 10,000 baby boomers in the U.S. turn 651 . That reality is forcing all of us in the financial services industry to change how we face the problem of investing in retirement.

Investing in retirement is a different investment problem than accumulating assets over a long horizon before retirement. How do you do more than offer retirees the same old investment approaches wrapped in new slogans?

Focus on the relevant risks

A key change is to evolve the definition of risk at the heart of traditional investment approaches. In these approaches, like mean variance optimization, risk is defined in terms of standard deviation. This measures portfolio volatility.

While volatility is still important to retirees, it is dwarfed by the fundamental risk most of them need to manage. That is the risk of not meeting their spending goals. Call it the risk of running out of money before they run out of life. The bumpiness of their ride isn’t as important as where they end up.

Assets and liabilities

To manage this risk more effectively, you need to consider not just the assets in the portfolio, but also the goals those assets need to support. You need to introduce liabilities into the equation. Retirement investing is fundamentally an asset-liability problem.

The Funded Ratio is an institutional investing concept with great relevance for retail investors. It’s the present value of a portfolio (assets) divided by the present value of the goals it must support (liabilities). Most significantly, the funded ratio measures an investor’s risk capacity rather than his risk tolerance. It provides

  1. A yardstick to measure the feasibility of an investor’s spending plan relative to his resources.
  2. A way to monitor—and then adapt—a portfolio’s asset allocation through time. This bases the asset allocation on risk capacity rather than risk tolerance as defined by a questionnaire.

Retirement investing should be about funded ratio management. Adaptive Investing creates an ongoing cycle of monitoring and adjustment that can help meet investor needs for sustainable withdrawals, predictability, and the flexibility to respond to changing circumstances.

As more investors enter retirement, those of you who address these needs will not only better serve your clients—you’ll also strengthen your business through the increased value you provide.

For more information on this approach, read the white paper.

1 PEW Research:Baby Boomers Approach Age 65 — Glumly

RFS 14113-d

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