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In 1943, naval engineer Richard James created a tension spring to stabilize ship equipment. Accidentally knocking it off his workbench, James observed the spring "walking" and “slinking” downward in a graceful, wavy motion. This unexpected behavior transformed a mundane tension spring into the iconic Slinky toy.
Originally designed for naval purposes, the spring found a new role, delighting generations of children and, if we are honest, plenty of adults. This invention demonstrates how one creation can fulfill diverse and important functions.
Is Retirement Planning in Need of Its Own Slinky Moment?
Financial advisors seek innovative solutions for multiple purposes in retirement planning, such as Richard James's discovery of unexpected versatility in the spring. The goal is to find adaptive strategies that maintain core strength amid various challenges.
Retirement planning has transformed, presenting unprecedented complexities. Today's retirees face issues their predecessors rarely encountered.
Dunham coined the term “Retirement Investment Paradox" to describe these new realities. This concept highlights intricate, often conflicting factors modern retirees must navigate.
Advisors must recognize that past strategies may not suffice. The evolving landscape demands a sophisticated approach that directly addresses emerging challenges.
Retirement Investment Paradox
Three key factors define the Retirement Investment Paradox:
- inflation
- increased longevity
- sequence risk
As financial advisors, managing these interconnected risks is crucial for any well-constructed plan. The paradox lies in how these factors influence retirement planning and what helps one factor can potentially devastate even the most carefully planned plan.
Think of retirement planning as sailing a ship from San Diego to Hawaii.
The goal is to reach Hawaii (a comfortable retirement) with enough supplies (money) to last the journey.
- Inflation: Think of inflation as a constant headwind. It steadily pushes against the ship, making progress harder and requiring more supplies (money) than initially anticipated.
- Increased Longevity: Imagine discovering mid-voyage that Hawaii is farther away than you originally planned. This means you now need to ensure your supplies last for a longer journey.
- Sequence risk: Picture unpredictable storms during your voyage. If a major storm hits (poor sequence of returns, especially in the first few years of retirement), it can damage the ship and deplete supplies, making the rest of the journey precarious.
Therefore, the "Retirement Investment Paradox" highlights retirees' conflicting challenges as they battle inflation, increased longevity, and sequence risk.
Inflation
Equities have historically demonstrated a capacity to outpace inflation.
Over the last three decades, ending 3/13/2024, inflation eroded the purchasing power of a dollar by more than 50%. This erosion can significantly impact a retiree's financial stability. However, despite enduring four major bear markets during this period, the S&P 500 index achieved a remarkable after-inflation gain of 840.5% total return.
Increased Longevity
A 65-year-old retiree may live another 40 years or longer, necessitating growth in their retirement portfolio. Over the last 40 years ending 6/30/2024, the S&P 500, including dividends, has grown by an annual rate of return of 11.84%, which implies strong growth for living longer. (3)
Sequence Risk
This is where the Retirement Investment Paradox comes into play.
The very asset class that can protect retirees from inflation and provide necessary long-term growth for increased longevity is also the one that could potentially deplete their savings prematurely due to the sequence of returns.
Common Strategies for Past Retirees
Addressing the Retirement Investment Paradox requires balancing multiple risks. However, traditional approaches often fall short when tackling all three factors: inflation, increased longevity, and sequence risk. Here's a look at some common strategies:
Bond Ladders
Historically, bond ladders provided adequate retirement income. Today, despite higher rates, the likelihood of future rate decreases poses challenges. Bond ladders struggle to generate sufficient yield for longer retirements and lack growth potential to address longevity.
Additionally, fixed payments lose purchasing power over time, leaving retirees vulnerable to inflation. Modern retirement strategies require a growth component, often involving equities, to combat extended retirement periods and inflationary pressures.
Bucket Strategies
Bucket strategies mitigate sequence risk by allocating funds across multiple time-horizon portfolios—these range from highly liquid short-term buckets to longer-term investments. While effective against sequence risk and does provide a degree of growth, this approach may fall short for modern retirees.
The conservative nature of 12 to 18 months of income in a money market plus the short-term buckets might not generate adequate growth for extended retirements or maintain purchasing power during high inflation. Consequently, though helpful with sequence risk, bucket strategies may inadequately address the dual challenges of longevity and inflation many contemporary retirees face.
Annuities
Annuities provide steady income, addressing sequence risk regardless of market conditions. However, they often fall short of longevity and inflation risks. Traditional annuities offer fixed lifetime payments but typically do not adjust for inflation, eroding purchasing power over time.
While inflation-protected options exist, they often come with higher costs or lower initial payouts. The extended retirement period amplifies inflation's impact, potentially leaving retirees vulnerable due to annuities' limited growth potential.
Is DunhamDC the Slinky Moment for Your Clients
Since November 2022, DunhamDC has historically accomplished this by owning fewer equities at market peaks and more equities as market cycles bottom and start their ascent.
At its core, DunhamDC is not just another investment strategy. It is a philosophy that draws inspiration from the timeless wisdom of Warren Buffett's advice: "Be fearful when others are greedy and greedy when others are fearful."
DunhamDC does not chase trends but instead sculpts them. Its unemotional, algorithmic approach is the only strategy we are aware of specifically designed to own fewer stocks when the market cycle hits a new high, and more stocks when it hits bottom and begins its way back up.
It accomplishes this by adjusting its equity exposure, increasing it during market declines when stock prices are lower, and subsequently selling portions of its equity holdings during market upswings and price increases.
In our view, this is the complete opposite of what most investment strategies do. Most own the most stocks when the market cycle hits its high, and fewer or no stocks when the cycle hits bottom and starts its journey to a new high. It is truly designed to buy low and sell high.
It uses an algorithm that is unemotionally based on math and time. It eliminates complicated strategies and human emotions.
Like James' tension spring serving dual purposes, DunhamDC addresses multiple retirement challenges. It aims to mitigate sequence risk while providing growth potential, uniquely positioning itself to handle the Retirement Investment Paradox. DunhamDC offers a comprehensive approach tailored to the complex needs of modern retirees, balancing risk management with growth opportunities.
Remember, our goal is not to eliminate risk entirely but to manage it to align with each client's unique circumstances and objectives. DunhamDC does not replace annuities or bucket strategies but works with them to better prepare your clients for the potential devastation of the Retirement Investment Paradox.
For more detailed information about DunhamDC, do not hesitate to contact our Business Development Team. They can provide performance data, historical equity position movements, and important disclosures.
Our Business Development Team can assist you Monday through Friday from 9:00 am to 8:00 pm Eastern time at (858) 964-0500.
Sources:
- The History of Slinky, by James Springs and Wire Company, n/d, https://www.jamesspring.com/news/the-history-of-the-slinky/
- Chart of the Day: Inflation vs. Stocks, by Samuel A. Kiburz, April 11, 2024, https://www.crews.bank/blog/charts/inflation-vs-stocks
- Dunham and Bloomberg
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.
Index Definitions:
The S&P 500 - The S&P 500 is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 Index components and their weightings are determined by S&P Dow Jones Indices. It differs from other U.S. stock market indices, such as the Dow Jones Industrial Average or the Nasdaq Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy. You cannot invest directly in an index.
Past performance may not be indicative of future results. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There may be economic times where all investments are unfavorable and depreciate in value.
DunhamDC (“DunhamDC”) is a proprietary algorithm of Dunham & Associates Investment Counsel, Inc. (“Dunham”) that seeks to mitigate sequence risk, which poses a threat to an investor's returns due to the timing of withdrawals. The algorithm employs what Dunham considers to be a pragmatic strategy, generally making incremental increases to the equity allocation when global stock market prices decrease and decreasing it when global stock prices increase. This approach is objective, unemotional, and systematic. Rebalancing is initiated based on the investment criteria set forth in the investors application and is further influenced by the DunhamDC algorithm.
Due to the large deviation in equity to fixed income ratio at any given time, investor participating in DunhamDC understands that a large deviation in equity to fixed income ratio can have significant implications for the risk and return profile of the account. Accordingly, during periods of strong market growth the account may underperform accounts that do not have the DunhamDC feature. Conversely, during periods of strong market declines, the account may also be underperforming, as the account continues to decline, due to the higher exposure in equities. Similarly, if the fixed income investments underperform the equity investments, it is possible that the accounts using the DunhamDC feature may underperform accounts that do not have the DunhamDC feature, even though they may have adjusted the exposure to equity investment before a decline. Therefore, the investor must be willing to accept the highest risk tolerance and investment objective the account can range for the selected strategy. Please see the Account Application for the various ranges.
DunhamDC uses an unemotional, objective, systematic approach. The algorithm does not use complex formulas and is designed to create a consistent process with limited assumptions based on historical data.
DunhamDC may make frequent purchases and redemptions at times which may result in a taxable event in the account and may cause undesired tax-related consequences.
Trade signals for DunhamDC are received at the end of each trading day with the implementation of the trades not occurring until the next business day, which means that there is a one-day lag that may result in adverse prices.
DunhamDC operates within predefined parameters and rules, some or all of which may not be available to review. While this approach can reduce emotional biases and enhance consistency, it may limit adaptability to changing market conditions, economic considerations, or unforeseen events. Extreme conditions may require deviations from the program’s prescribed approach, and such adaptability may be challenging to incorporate. The DunhamDC algorithm is programmed based on specific criteria and rules, it may not capture certain qualitative or contextual factors that can impact investment decisions or movement in the markets. Beyond the initial assumptions used to develop the algorithm, it lacks other inputs or considerations that human judgement and discretion may be necessary to evaluate. DunhamDC may utilize historical data, statistical analysis, and predefined rules. It does not make any predictions and may add to certain investments before they perform poorly or may divest from other investments before they perform well. Dunham makes no predictions, representations, or warranties as to the future performance of any account.
Accounts invested in DunhamDC are subject to a quarterly rebalance to its target allocation at the time based on DunhamDC in addition to the signals provided by DunhamDC at any given time.
Dunham makes no representation that the program will meet its intended objective. Market conditions and factors that influence investment outcomes are subject to change, and no program can fully account for all variables and events. The program requires making investment decisions based on factors and conditions that are beyond the Account Owner’s and Dunham’s control.
DunhamDC is NOT A GUARANTEE against market loss or declines in the value of the account or a timing strategy. Investor may lose money.
Asset allocation models are subject to general market risk and risks related to economic conditions.
DunhamDC has a limited track record, with an inception date of November 30, 2022.
**The investment strategy of DunhamDC is powered by the DC algorithm, focusing on the principles of price and time. Utilizing multiple “zones” or trigger points, the algorithm systematically identifies market sentiment,
selling into strength during periods of euphoria and greed, while capitalizing on opportunities duringtimes of pessimism and fear. This allows DunhamDC to adapt dynamically to changing market conditions.
DunhamDC is NOT A GUARANTEE against market loss or declines in the value of the account or a timing strategy. Investor may lose money. Asset allocation models are subject to general market risk and risks related to economic conditions. The chart represents the trade signals when the equity allocation increased (green arrows) or decreased (red arrows) over the period shown. See reverse for Important Disclosures.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.