DiMeo Schneider and Associates

Is Your Retirement Plan Diversified for a Crisis?
By: Bob DiMeo, Chief Executive Officer
If you oversee a pension, cash balance or even a 401(k) plan, my bet is that until around mid-March you felt investment returns, while positive, were somewhat disappointing. While you acted as a good fiduciary – constructing a prudently diversified portfolio or plan menu – stocks rose in nearly unabated fashion from 2009 until the pandemic took root in the U.S., resulting in the swiftest move to bear market territory in history. Moreover, March was the most volatile month ever for stocks!

Beyond genuine health and economic concerns, investment committee members confess they were incredibly concerned and shocked by rapid market losses, even more so if retirement plan portfolios lacked diversification. Then almost as suddenly as markets plunged, they staged an implausible comeback. Large cap stocks, small cap stocks, high yield bonds… seems like every risk-on asset participated in the rally (as of this writing the S&P 500 is up more than 35 percent from its recent low).

Either sustain or add prudent diversification in your portfolio

Stocks were hammered in the first quarter but there were places to hide, or at least buffer losses. 

However, with the S&P 500, the Dow Jones Industrial Average and The NASDAQ Composite all rallying greatly from their March 23 lows, fiduciaries might become complacent, and that could prove costly.

Tips for diversified investors – First off kudos, during the crushing downturn your retirement portfolio likely outperformed on a relative basis. Your conviction in thoughtful diversification is bolstered (after a 10+ year test following the financial crisis). Our advice to you: maintain your discipline of prudent diversification and be smart in rebalancing your portfolio.

A second chance for retirement plans lacking diversification – In a way your retirement plan committee dodged a portfolio bullet. Sure your plan suffered losses, but not nearly as great as just a short time ago. It could be more important than ever to embrace these three tenets of diversification:

1. Except for the most aggressive investors, most of us seek to minimize our maximum regrets, especially with vast uncertainty on many fronts. This means foregoing an attempt to stretch for the absolute highest possible returns and instead adopting an investment allocation that provides your organization and your participants a fighting chance of achieving important financial goals, ideally with a smoother ride.

2. The Low Volatility Dividend – Contrary to popular opinion, great sums are often accumulated not by gaining more in bull markets, but by losing less in downturns. My colleagues produced exceptional analysis on this topic some years ago with the essence being: if a portfolio drops 50 percent, it must gain 100 percent simply to break even. A portfolio that protects against steep declines can outperform over time, even if that very portfolio may not shine in roaring up markets. The Low Volatility Dividend can help investment committees capitalize on the fact that most retirement plans have a long term time-horizon.

3. Own a portfolio you can stick with (and encourage participants to do the same) – This one is simple. If your portfolio lacks diversification and the recent plunge made investment committee members nervous wrecks, do not allow the rebound to blur your memory. Humans are hardwired to fear loss more than we appreciate gains… and we tend to bail on an investment strategy at just the wrong time. Acknowledge that it is a loser’s game to own an aggressive, non-diversified portfolio if you are simply going to dump investments at their lows.

To me, the charts below illuminate the need for portfolio diversification. The U.S. just experienced a record period of job losses, yet stocks rallied as though the all-clear was signaled. Which chart should investors believe? Your guess is as good as mine and only time will tell… that’s why diversification matters.

No one knows when a solve for COVID-19 will surface, or for that matter when the next crisis will occur. Is remarkable recent equity performance warranted, or simply a bear market bounce? If your retirement plan portfolio is thoughtfully diversified, continue acting as good fiduciaries and maintain your discipline. If your portfolio lacks diversification, the recent rally affords your committee a second chance. You might not receive a third.

In response to the crisis, we are offering complimentary portfolio stress tests and other analytics to prospective retirement plan clients. For details, contact any of the professionals at DiMeo Schneider.

1 U.S. Large Cap: S&P 500 Total Return Index - U.S. Small Cap : Russell 2000 Total Return Index - U.S. Small Cap : Russell 2000 Total Return Index - Hedge Funds: Hedge Fund Research HFRI Fund of Funds Composite Index
2 Wall Street Journal -  performance through May 8

This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources which are believed though not guaranteed to be accurate. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Past performance does not indicate future performance. This paper does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.

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