Securing your golden years: A case study on balancing stability & growth in retirement portfolios
Introduction
Market volatility can be quite distressing for those people who are nearing or have already reached retirement. The years of careful saving and investment often shift the frequent focus from expansion to preservation. A balance between protecting and growing the wealth accumulated is not easy to strike, and it becomes all the more vital when market volatility is high.
Recent events highlight the risks of not securing portfolios. During the week ending December 18, 2024, U.S. equities markets saw the biggest outflow since September 2009, totaling $50.2 billion. The Volatility Index, or VIX, on the same day increased 74% in what was its second largest-ever jump, surpassing some highly recognized events that happened in February 2007 and June 2020. Such volatility brings into focus the need for strategies that limit the risk of loss while allowing for further growth.
Daily Chart of VIX Index
A smarter way to navigate volatility
Confluent’s Principal Protection Strategy
This case study examines how adding Confluent’s Principal Protection Strategy to a traditional 60/40 portfolio can provide stability, reduce drawdowns, and enhance long-term wealth accumulation. By comparing three portfolio configurations, we illustrate how this innovative solution balances protection and growth.
Defining the portfolios
Portfolio A
Traditional 60/40 portfolio:
a. 60% allocated to the S&P 500 Index ETF (SPY).
b. 40% allocated to the Bloomberg Aggregate Bond Index ETF (AGG).
Portfolio B
Incorporating 100% Principal Protection:
a. 50% allocated to SPY.
b. 30% allocated to AGG.
c. 20% allocated to Confluent Principal Protection Strategy with 100% principal protection using SPY as the underlying asset.
Portfolio C
Incorporating 90% Principal Protection:
a. 50% allocated to SPY.
b. 30% allocated to AGG.
c. 20% allocated to Confluent Principal Protection Strategy with 90% principal protection using SPY as the underlying asset.
The Confluent Principal Protection Strategy is rebalanced annually, with protection levels reset each year. It carries an annual fee of 1%, netted from performance metrics.
Comparative analysis: Key metrics (2005–2024)
Portfolio A | Portfolio B | Portfolio C | |
|---|---|---|---|
Annualized Returns |
7.7% |
7.4% |
8.1% |
Annualized Risk |
10.7% |
9.5% |
10.2% |
Risk-to-Reward |
71.7% |
78.2% |
80.2% |
Max Drawdown |
-18.9% |
-16.0% |
-16.0% |
Statistics for Hypothetical Portfolios: 2005 – 2014
Context and perspective
Why portfolio adjustments matter
Investors close to or in retirement often find traditional 60/40 portfolios insufficient to address their evolving needs. The challenge lies in balancing:
Capital Preservation: Protecting years of accumulated wealth from sharp market downturns.
Growth Potential: Ensuring the portfolio continues to generate returns that outpace inflation.
Growth of $100 invested in each of the strategy
Portfolios B and C introduce the Confluent Principal Protection Strategy, which provides a safety net during market declines while enabling participation in market recoveries. This dual focus helps investors maintain confidence in their long-term financial plans.
Benefits of adding principal protection
1. Reducing Anxiety by Lowering Volatility
Portfolios B and C showed reduced annualized risk compared to Portfolio A (9.5% and 10.2% vs. 10.7%). This reduction means fewer extreme swings in portfolio value, offering peace of mind.
Example: During the 2008 financial crisis, Portfolio A’s drawdown of -18.9% turned a $1 million portfolio into $811,000. In contrast, Portfolios B and C’s drawdowns of -16.0% preserved an additional $29,000, a meaningful cushion for retirees.
Portfolios annualized volatility
2. Preserving gains during market stress
The Confluent Principal Protection Strategy’s safeguards shine during periods of high volatility, such as the December 2024 turmoil. Investors avoided the steepest losses, preserving gains for future needs.
Hypothetical scenario: Suppose an investor accumulated $2 million by 2024. Allocating 20% to Portfolio C would ensure 90% protection of the principal invested in this segment. Even during a market crash, this allocation secures $360,000, providing stability and confidence.
Ending values as of December 2024 for hypothetical portfolios invested $100 in each portfolio
3. Enhancing long-term growth
Portfolio C achieved the highest annualized returns (8.1%) and risk-to-reward ratio (80.2%). This superior efficiency supports steady growth over time.
Example: A $500,000 investment in 2005 would have grown to $2,452,000 in Portfolio C by 2024, compared to $2,256,000 in Portfolio A. This additional $196,000 underscores the power of combining protection with growth.
Portfolio Annualized Returns: 01/2004 – 12/2024
Real-world application
Jane and Michael, a couple in their early 60s, had saved $1.5 million for retirement. Concerned about protecting their wealth from market downturns, they allocated 20% of their portfolio to Confluent’s 90% Principal Protection Strategy within Portfolio C. Over the next decade, this strategy safeguarded their principal during market declines and allowed them to benefit from recoveries, growing their portfolio to over $2.7 million.
More importantly, the strategy gave them peace of mind. They no longer worry about market volatility derailing their retirement plans. Instead, they focused on enjoying their golden years with confidence, knowing their financial future was secure, no matter what the markets did.
Conclusion
Confluent’s Principal Protection Strategy offers a strong option for investors who are either risk-averse or near retirement to manage market volatility. This strategy allows the investor financial peace of mind through reduced volatility, profit protection, and enhanced returns.
Take control of your future financial situation. To learn more about how our Principal Protection Strategy can help protect and grow your money, contact Confluent Asset Management. Schedule a complimentary consultation today.
Disclaimer
Confluent Asset Management is a Registered Investment Adviser that offers institutional and individual investors systematic wealth and asset management services and investment solutions.
This hypothetical portfolio analysis is based on back tested data from January 2005 through December 2024. The Principal Protection Strategy carries an annual fee of 1%, and all returns presented are net of fees. Actual performance may vary. The cap rate on the Principal Protection Strategy changes daily and depends on factors such as market risk, interest rates, volatility, and liquidity. The strategy is evaluated only at the end of the one-year contract term. Options utilized in the strategy are European-style options.
Risk Disclosure: Options and derivatives involve significant risks and are not suitable for all investors. The use of options can lead to substantial losses, up to and including the entire principal amount invested. Please consult a qualified financial advisor to assess whether such strategies are appropriate for your financial situation.
Past Performance Disclosure: Past performance is not indicative of future results. Any references to historical returns should not be relied upon as a guarantee of future outcomes.
This material is for informational purposes only and does not constitute investment advice. For personalized recommendations, please consult with a licensed financial professional. Neither the author nor Confluent Asset Management assumes any liability for investment decisions made based on this material.
