By Dave Lucca, CFP^TM

There is no one protecting most of the money invested in mutual funds today. An unusually long bull market has erased the memory of the importance of protecting your nest egg and put the focus on investment strategies that only work in bull markets.

Mutual fund managers don't have the responsibility (by prospectus) of guarding you from severe declines or bear markets – only for investing the money into stocks and/or bonds according to the investment philosophy of the fund.

Index funds have NO ONE making any investment decisions because there IS NO active manager. The stocks are picked merely by size and because of their inclusion in a broad index. During the past five years, as more money has been channeled into index funds, the price of the largest stocks in these index funds has been driven artificially high. This has increased the amount of risk associated with these funds. In a bear market you will be 100% invested in declining stocks.

Most financial planners have bought into a buy-and-hold philosophy that doesn't believe "protecting the money" is their job – just placing the money into good investments.

The majority of money managers are following the Efficient Frontier / Market Hypothesis / Portfolio Optimization methods of optimizing asset allocations over great periods of time with no plan for protecting the money. Their plan for dealing with volatility and bear markets is to be invested over long periods of time.

Without a plan to protect your money, you may deplete your investments in retirement before a long enough period of time has passed for your "efficient portfolio" to recover. For example, in the 1970’s protracted bear market, if you had owned Fidelity Magellan, you would have lost over 70% of your investment over two years. If you were also withdrawing money for living expenses, you would have depleted your portfolio before it ever recovered.