Preparing for Retirement in an Era of Market Concentration

Interviewer: 
Joining us today to talk about retirement planning and diversification strategies and more is Raymond James Senior Portfolio Manager Kim Inglis. Well, first, Kim, are investors too concentrated in US tech right now?

Kim Inglis:
Yeah, I think interestingly, I think a lot of investors don't really realize how over-concentrated they are, actually. I mean, if you think about it, if you look at the S&P 500, the top 10 holdings represent somewhere around 36% or so of the index, which is up from 23%, which is the long-term average. So it's a pretty big increase. You know, and obviously lately it's been dominated more by IT and consumer discretionary, which has been dominating returns, but also risk. And, you know, while these might be great companies, that over-concentration risk is an issue because ultimately, you know, market leadership does change over time. You know, and if you're in a really over-concentrated portfolio, particularly in tech right now, in the areas that are really over-concentrated, when that changes, that can be an issue.

Interviewer:
Now, Kim, what can investors do to avoid the over-concentration?

Kim Inglis:
Yeah. So, you know, I like to say that diversification feels unnecessary pretty much right before it's needed.  You know, and the reason for that is ultimately when, when market volatility pops up it can, it can happen pretty quickly, and if you're really over-concentrated, that can obviously be really painful. So a good way to try and prevent that or protect yourself a little bit, would be to apply a bit more of an equal weights approach to your portfolio. So instead of, you know, investing directly you know, into an S&P 500 ETF you might consider for instance, an equal weight S&P 500 ETF where those 500 names are then in there on an equal percentage weighting. So that's obviously going to help improve risk-adjusted returns and, and guard against some of that volatility. And ultimately, when volatility does come around typically an equal weight approach tends to be a lot more resilient as well.

Interviewer:
Are there unique ways of introducing equal weight strategies into portfolios? I know you mentioned the ETF wrapper, for example.

Kim Inglis:
Yeah. So, I mean, you know, a couple of different things come to mind. So if, for instance, you have, you know, a big individual stock portfolio you know, and you're a bit concentrated in that regard, what you might wanna do is add in an equal weight ETF. So that could act as a bit more of a diversification anchor, so to speak within there. And so that will also, you know, help, help diversify, help lower that single stock risk by adding that, that sleeve in there. You know, if instead, say, you're building a portfolio from scratch, maybe what you wanna consider is you know, building your core using equal weight ETFs and then adding in some sector tilts so that if you wanna be more tactical with things and express your market views, you can then add in some sector ETFs to then, you know, overweight whatever is your area of interest at the time. So a couple different ways of doing that.

Interviewer:
Switching gears a bit here, Kim, what's changed the most about retirement planning today? Because this is another topic that comes up quite a bit.

Kim Inglis:
Yeah, definitely. I would say you know, the biggest issue per se would be that people are living a lot longer. You know, when I'm doing financial plans for clients, I'm running numbers out to age 95 you know, sometimes depending on family history, even out to age 100. so it's a significant length of time obviously. You know, and the beauty of modern medicine, of course, is that we get to live a lot longer. But of course that poses some problems with retirement planning because it's no longer just retirement income planning, but you need to guard against things like longevity and inflation risk and that sort of thing. And so, you know, one thing I always like to say is that just because you retire, it doesn't mean that inflation retires, so investors really need to be careful and add in a growth element into their retirement portfolios that helps protect them against that inflation risk in particular.

Interviewer: 
Building off of that, Kim, how do you help clients manage market volatility in retirement?

Kim Inglis:
Yeah. So in retirement in particular, what I try to do is I look at assets and I segment them into the time horizons and liquidity needs for the clients. And I like to encourage them to think in buckets. So as an example, you might wanna have a short-term bucket where you have maybe a year or a year and a half's worth of income in that bucket, and it's just strictly in money market. So there's no market risk there. It doesn't matter what the markets are doing over that time period because you've eliminated that risk from your portfolio and your near-term needs are taken care of. Then of course you wanna have a medium-term bucket which is maybe a little bit more growth and income focused, and then you can use that income to then top up that short-term bucket. And then as I mentioned, retirement is tending to last a lot longer than historically. So you do need to have that, that more growth element in the portfolio. So you wanna have a long-term bucket where the assets are more growth focused, geared towards protecting against inflation.

Interviewer:
Well, Kim, great to have you with us. Thank you so much for joining us, and thank you to everyone out there watching. Once again, that was Raymond James Senior Portfolio Manager Kim Inglis, and I'm your host, Jenna Dagenhart, with Asset TV.