Retirement accounts typically feature target-date funds and low-cost broad stock market funds. They may or may not include other, more niche mutual funds in their offering. They do not typically disclose that a static investment in these funds–whether they are target-date or stock-based–have gone through periods where they have lost 40-60%. Yes, even target-date funds have experienced periods of significant losses.
Sprout Capital Management, LLC (Sprout Capital) makes use of active strategies to avoid such sharp drawdowns. Sprout Capital aims to achieve high returns relative to the risk taken in retirement accounts through tactical investment management of your 401(k).
- Robust and Intuitive
- Uses time-tested tactical investment research
- Avoids stock-market funds during severe recessions
- Adapts to current market conditions
- Systematic
- Rules-based allocation
- Backtestable results
- Customized
- Adapts research to your specific plan’s investments and rules
- Adapts to your risk profile
Risk management in retirement accounts is usually accomplished with target-date funds. Target-date funds are really just a set mix of stocks and bond funds, with that mix (or “glide path”) changing over time. As time goes by, the glide path tends to weight stocks less, and bonds more. This is the bare-minimum of risk management, and many employer plans place employee contributions into target-date funds by default.
A set-it-and-forget-it (passive) approach, whether investing in target-date funds or a basket of other mutual funds, historically has led to investor regret, as these funds have gone through significant drawdowns.
Alternatively, Sprout Capital employs an active approach to manage risk. This typically involves regularly and systematically investing in the top-performing stock fund available to a retirement plan.
When the economy enters a recession, the stock market generally experiences steeper-than-normal declines. Instead of staying the course, Sprout Capital will switch retirement funds into top-performing bond funds (or stable-value funds). This tries to keep client losses from becoming too severe.
This “switch” between stock funds and bond funds is based on long-term economic and stock market indicators. The indicators that comprise the signal track different aspects of the economy that tend to lead, or are coincident with, stock market declines. Such indicators include excessive financial leverage, rising unemployment and slowing demand for housing. When the economy does show signs of a recession, the stock market must also be trending downward for the switching signal to indicate a “risk-off” stance. This confirmatory approach makes the strategy less likely to react to false signals.
If you need help deciding how to manage your employer retirement plan or your IRAs and taxable accounts, please contact us to start a discussion!