THE WEEK ON WALL STREET
US and Israeli strikes on Iran intensified over the weekend following the collapse of diplomatic talks, with widespread targets hit in Tehran and retaliation against US bases and regional infrastructure. Markets reacted quickly, with stock futures moving lower, while oil prices surged sharply higher as investors assessed the risk of broader regional conflict. The S&P 500 Index lost 0.42 percent, while the Nasdaq Composite Index fell 0.94 percent. The Dow Jones Industrial Average declined 1.28 percent. The MSCI EAFE Index, which tracks developed overseas stock markets, advanced 2.82 percent.
FACT OF THE WEEK
On March 30, 1858, Philadelphia inventor Hyman Lipman gets a patent for the first pencil with an attached eraser. Years later, the US Supreme Court erases the patent, ruling that combining two existing devices made Lipman’s invention unworthy of a patent.
MARKET MINUTE
Challenging Week
Stocks opened higher to start the week as fresh optimism for a resolution to the Middle East conflict permeated market sentiment, and no further news on Iraq’s force majeure declaration appeared to help momentum. Both the Dow Industrials and S&P 500 booked their best day since early February as the White House reported "very good and productive conversations" to end hostilities.
Markets were under pressure on Tuesday but staged a recovery rally midweek amid reports that Pakistan was mediating ceasefire talks. All three major averages posted solid gains, though it appeared that retail investors remained on the sidelines.
Markets were under steady pressure Thursday despite news after the close of trading that the White House was extending the previous pause on military strikes on Iranian energy infrastructure by an additional 10 days. The selling picked up on Friday. The Nasdaq and Dow Industrials fell into correction territory, while the S&P suffered its longest weekly losing streak in almost four years.
Energy markets are particularly focused on potential disruptions in the Strait of Hormuz, a critical artery for global oil flows, amid escalating tanker traffic and security concerns. While markets have often brushed aside geopolitical flare-ups in recent years, this episode comes at a more sensitive time, given ongoing inflation concerns and the market's exposure to globally linked sectors.
FINANCIAL STRATEGY OF THE WEEK
Retirement Income and the Traditional Portfolio
Taking withdrawals from a traditional portfolio exposes fixed-income investors to “sequence of returns” danger. In other words, experiencing negative returns early in retirement can deplete your portfolio more quickly than expected and potentially undermine the sustainability of your assets. So you may want to consider a couple of strategies to help manage this concern.
Liquid Assets
The first is to have a pool of very liquid assets to fund two to three years of retirement spending; this may keep you from selling longer-term assets at an inopportune time. Through time, and depending upon market conditions, you may have the opportunity to replenish this cash reserve using gains from your retirement portfolio.
Annuities
Another complementary strategy is to integrate annuities. This can help shift the risk of market volatility off your shoulders and onto the issuing insurance company.
The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).
Until retirement, portfolio optimization largely focuses on the blending of different asset classes in the appropriate measure to create optimal portfolios. But in retirement, investors must integrate different retirement investment vehicles to enhance income and manage risk.
One of the industry’s leading thinkers, Ibbotson Associates, has done a great deal of research around this very idea.
In a landmark study, “Retirement Portfolio and Variable Annuity with Guaranteed Minimum Withdrawal Benefit,” Ibbotson’s research came to several key conclusions that hold important ramifications for meeting the retirement-income challenge.
One of the study’s conclusions was that the addition of a variable annuity with a guaranteed minimum withdrawal benefits retirement portfolios—replacing cash or fixed-income allocations. It increases total income while it decreases risk.
A successful retirement is so much more than undertaking sound investment strategies. It also requires understanding the "sequence of returns" danger and taking measures to mitigate the risk.