Empathy, Strategy and Retirement Savers' Downside Risk

Bringing actual data to the present, as of the end of March 2020, 401(k) assets made up nearly $5.6 trillion in assets,19% of the $28.7 trillion in U.S. retirement assets. Stunningly, by the second quarter of 2020, knowing what we know about pandemic job losses during that period, these figures actually went up by 11%, with 401(k) assets totaling close to $6.3 trillion. How is this possible? A rollercoaster market, that's how. And we all know that built into the steep climbs rollercoasters make, there's usually a terrifying plunge on the other side of that peak.

As investment advisers, we've been conditioned to accept the inevitability of down markets and, in response, have learned how to counsel our clients to ride out the lows until things turn around. Likewise, unless you sell, these dips are mere "paper losses." There's also the sentiment that that wading into the stock market in the first place takes a certain level of "adulting" — and this applies not only to our clients, but also to us, the institutional investors and financial advisers managing our own customers, those everyday workers trying to plan for their retirement.

The reheated myth we've all been fed over and over again is that the stock market is brutal and big losses occur… but there's no reason to panic. But what do you suppose the average American worker thinks — or feels — when we counsel them, "hang in there, don't panic — it's just paper losses…"? We all feel empathy for them. But we can go a step further.

Is it possible that we could channel our creativity, technology, and that empathy we all feel for clients who have experienced those losses, whether paper or real, to help the American worker achieve a more complete, more dignified retirement? And what about the 64.6 million freelance workers — up from 56.7 million just two years ago, now representing 35% of the U.S. workforce — who haven't had a format or matching funds to build a retirement fund? When asked, "When do you plan to retire?", many of these workers simply laugh. Finding empathy any way you can — maybe your son or daughter (or someone else's) is stuck in a self- or under-employment cycle and can't see their way to a financial future — is the first step to helping overcome this problem.

If we haven't learned anything in 2020, hopefully we've learned the lesson that it's foolhardy to suspect that life is always going to continue the way it is. Life can pivot very quickly. Suddenly, timing risk does matter. We'll have losing events, like 2008, and no one likes losing money. You'd expect investment professionals to have better risk-adjusted performance, long term — especially in those maximum drawdown events. But by thinking about portfolio construction and how to build in downside protection, while using a process-driven, algorithmic approach to capture the potential upside, there might be a way to enjoy a steadier and healthier investment experience.

Empathizing with clients who are trying to achieve a meaningful retirement could involve offering them a more predictable range of investment outcomes, a smoother ride on the economic rollercoaster. We believe this is achievable by rethinking the Efficient Frontier model, perhaps even turning it on its head, to create portfolios that lead to the same or better outcome over time, but with a lower risk threshold. That way, if individual investors find they need to alight from the ride for a while, say in the case of job loss or furlough — the proverbial rainy day — there actually are available funds to tap into. For the American worker, a better experience will eventually lead to increased trust in their financial advisers and, more importantly, an opportunity to realize the retirement they've worked so hard to achieve.

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John Ruth is co-founder and chief executive officer of Build Asset Management, a registered investment adviser in Jefferson City, Missouri.