Chaos theory is simply the science of surprises and how the smallest alteration in a system can have massive consequences.

“Chaos” doesn’t necessarily sound like a good thing when discussing your assets and financial outlook, but some of the tenets of this theory actually help you weather unpredictability during retirement immensely better than just flying on autopilot.

In this volatile and ever-shifting economy, those on the edge of retirement should throw off the old stereotype of a stagnant and change-resistance existence. Taking a laissez-faire approach to your retirement income can have disastrous results. 

Savvy investors want to focus instead on beating the index in negative return years rather than depending on passive strategies. How do you get there? Let’s take a closer look at bucking conventional wisdom, accepting chaos, and developing a more sustainable retirement strategy.

Active Advantages

Many of us have heard for years that passive investing wins out over active investing year in and year out. While this traditional approach once promised steady returns, that’s not the case anymore, not in this economic climate where things change as fast as a butterfly flapping its wings.

As the old school “set it and forget it” way of investing could be detrimental to your vital income streams during retirement, does that mean you have to become a helicopter parent, anxiously logging in every day to check your stats? Not necessarily. 

But taking a more active role in building your nest egg is key to ensuring you’re always generating income, no matter what happens. Plans change, pandemics happen, and belligerent nations create conflict, so it’s important to be able to shift your priorities quickly.

Innovation and Inspiration

Look at some of the great investors of our time and study their game plans. Billionaire Warren Buffet thinks in the long term and doesn’t live or die by the stock market. He focuses on increasing the intrinsic value over time and compensating for uncertainty with a margin of safety. 

Buffet also follows the words of Nathan Rothschild, a 19th-century British financier and one of the founders of the Rothschild banking dynasty, who famously advised that “the time to buy is when there’s blood in the streets.”

“Be fearful when others are greedy, and greedy when others are fearful,” Buffett says, encapsulating the contrarian investment philosophy that’s certainly paid off for him.  

David Swenson was a prominent philanthropist and served as the Chief Investment Officer of Yale University until he passed away in May of 2021. His adept management of institutional assets saw mind-boggling annual returns and led to the development of one of the financial world’s best-known models.

As of October 2022, the university’s endowment fund reached $41.4 billion after gaining 0.8% last year. It’s “the single largest source of revenue for the university’s budget,” stated Yale CFO Stephen Murphy. The school only spends a fraction of it each year.

Swenson moved the school’s fund away from traditional assets to lower risk and raise return. At the time he took over, the endowment was facing spending cuts and reduced purchasing power. He focused on ensuring diversification through alternative investments like private equity, hedge funds, and real estate and reduced dependence on domestic marketable securities.

Swenson’s innovative methods became known as the Yale Model or the Yale Endowment Theory. He worked closely with Dean Takahashi, the former Senior Director of the Yale Investments Office and the current Executive Director of the Yale Carbon Containment Lab, a multidisciplinary laboratory that supports innovative solutions to climate change issues.

But how does all this translate to your personal investment strategy? By eliminating the constraints of following a traditional path, you’ll hopefully end up with a well-diversified and equity-oriented portfolio that encompasses market-insensitive assets, illiquid assets, and domestic listed equities and bonds.

4 Qualities for High Performance

Those who hope to get the biggest bang from their retirement plan should strive to achieve 4 specific goals with their portfolio:

  • It’s able to withstand weirdness and stresses in disruptive markets.
  • There is strong diversification within asset classes.
  • It includes assets that yield cash flows.
  • It’s rigorously reviewed regularly to catch problem areas early.

Hartman Income REIT Management, Inc. published an interesting article explaining the metrics of the Yale Model and how to allocate your funds to most closely approximate its ridiculously successful philosophy. 

The goal of this type of adaptive portfolio management is to optimize portfolio performance and minimize risk by proactively adjusting the asset mix in anticipation of changing market conditions.

Here’s Swenson’s ratio for individual investors:

Adaptive portfolio management strategies typically involve a combination of quantitative analysis, economic forecasting, and human judgment for tactical and dynamic asset allocation, as well as vigilance and consistent evaluation. 

Find What Works for You

While this approach did gangbusters for Yale’s endowment, it does present certain challenges for the average investor. That’s why it’s crucial to partner with an experienced financial advisor who’s able to guide you in the spirit of the Yale model and the principles of chaos theory while avoiding unnecessary risk-taking. 

No investment strategy can guarantee returns or protect against losses, and investors should carefully consider their own financial goals and risk tolerance before committing funds.

Chaos isn’t a bad thing when it comes to retirement planning — embracing it can help you better weather unpredictable events. A trusted advisor can help you stay on top of the storm and come out ahead. Reach out today to explore your options and discover how working with a skilled financial planner can benefit you.