Financial Frontlines®

So what should a retired person’s investment portfolio look like?  Since I know nothing of your financial situation or future plans for your money, consult with your financial advisor when considering your options.  That understood here are a few random thoughts.  These ideas can be used in whole or in combinations.

To maintain value. Please realize that maintaining value requires safe, secure and risk-free accounts and this does not make you money. The reason I make this point is because people consistently ask me for safe investments that pay high rates of return.  Not to shop around for the best fixed rates but to grow their accounts.  Safe and growth are not compatible financial objectives.

• The potential for high returns is the result of taking risks.  Institutions don’t pay high rates for people to protect principal.  If safe paid, everyone would be safe and investing would be dirt simple.  You may remember times when safe accounts paid outstanding rates.  Keep in mind the the inflation rate at those times.  Safe accounts probably won’t keep up with taxes and inflation.

To structure your account for safety, options include checking and savings accounts, money markets, CDs, individual bonds held until maturity, and fixed-rate annuities (note fees and holding periods).

To generate income. Imagine you own rental homes and your source of retirement income is the rent income you receive from your tenants.  As long as you receive the rent income, the value of the homes is not a primary concern.  We are not selling the houses.  This example provides a good frame of mind for investing to generate income.  You’ll own dividend producing investments.  The value of the investment will go up and down but your eye is on the target, the dividend per share.  Don’t expect growth or capital appreciation from an income portfolio.  If growth happens, it’s gravy on the taters.  If the dividend tax rate doesn’t change, you may lower your tax burden.  Options for generating income include dividend paying stocks, closed-end funds, bonds, dividend-income mutual funds, fixed annuities, real estate investment trusts (REITs), and preferred stocks.

To grow your portfolio. You have to assume some risk.  This is the portfolio for folks wanting/needing to stay ahead of taxes and inflation or to create wealth.  Growth typically means ownership in the economic engines of the world; corporations.  It helps to take the long view and understand that historically the stock market is up/positive the majority of the time.  You invest based on the long-term positive returns of the stock market and can withstand the short-term down times.  Even in a flat market, growth can be achieved but it is tricky.  When the market is heading up, you can afford to be a cork on the ocean and just follow it up—stock index fund for example.  However, when the market is flat, stock selection is crucial.  You better have a good fund manager at the helm making wise stock picks.  The market may be flat but individual companies within the market are prospering.  To stay ahead of inflation and taxes, your portfolio must be around 50% stocks at a minimum.  Investments options include stocks both individual and in mutual funds, variable annuities, or long-term bonds in a decreasing interest rate environment.

Let’s mix it up a bit.  A portfolio recipe might:

o       Include safe investments to maintain principal for immediate use funds, some income producers and some growth holdings.

o       What if you used income producers to dollar cost average into some growth holdings?

o       You could hold 50% safe—50% growth and re-balance as the portfolio gets out of whack.  If the growth is up, you’ll be selling high, taking profits, and locking them in safe holdings.  If the growth is down, you’ll be buying low and averaging down your share costs.

o       Maybe invest in an all income portfolio to increase your income.

Do you have ideas to share?  What’s worked for you?

My last post, Before You Pull the Trigger…, was meant for working people in the accumulation phase of their lives.  As you can imagine, I’ve been frequently asked to provide investment ideas for retired people.  What can you do to repair the damage caused to your investments by this down market?  I wish there was a magic answer but there isn’t.

I’m going to start with three assumptions.  First, tax breaks from selling losses are not your priority.  Second, your accounts are already way down in value.  Third, you are concerned about running out of money.  You want to get back to Oct 2007 account values ASAP.

This is obviously a huge challenge since there is no option that allows you to reestablish your value in a short period of time; at least not in a realistic way.

If these assumptions are the case, what investment or savings vehicle offers you the greatest opportunity to recapture your past values?

Stocks, mutual funds, bonds, money market accounts, CDs, real estate, preferred stocks, convertible stocks or bonds, commodities, closed-end funds, insurance products, gambling, rich relative, your mattress? 

There are pros, cons and risks with all of these.  I vote for stock mutual funds.  I know some of you will think I’m nuts.  People have told me stocks will take too long to come back and some have said they never will.  Well what other option do you have?  I can only go by the research and history and that points to stocks.  From now on when I mention stocks, I mean stock mutual funds.  I’m not suggesting you start managing your own stock portfolio.

But you want to play it safe.  You don’t want to be burned again.  Fine.  You can put your money in a money market, CDs, a passbook savings account, interest earning checking account, or bonds.  Historically, these will not offer enough return to rebuild your accounts.  You’ll feel better with your stable values and you’ll be stressed as your account balance remains stagnant.  When the stock market rebounds, you’ll be left without a dance partner sitting in the corner.

The rebound of the stock market is a key moment when you are trying to rebuild your accounts.  Consider this…

From 1987 through 2006 (240 months), one dollar in the stock market (S&P 500) grew to $9.31.  Think about what events occurred in that period.  Black Friday in October 1987.  The first Gulf War.  There was a recession in the early 1990s.  The dot-com bubble burst in March 2000.  The World Trade Center came down September 2001.  The global war on terrorism.  Iraq, Iran, Afghanistan.  Yet, the stock market averaged 11.8% over that time.

Now, over the same time frame, if you missed the 17 best months of the S&P 500, your dollar would have been worth $2.32.  Treasury Bills did better returning $2.42.  This is the cost of not being in the market when the rebound occurs.  If you think you can sit on the sideline and time when to jump in, you’re just gambling.  You won’t know it’s happening ‘til it’s already happened (kinda sounds like Yogi Berra).  Historically, the stock market rebounds months before the economy shows signs of recovery and the masses figure it out.  As I write this blog, the Fed lowered interest rates to the lowest level on record and the DOW Industrial index is up 225.  Is this the rebound?  I don’t know but if it is, I hope you are already on board.

Of course, I must say past performance is no guarantee of future results.  And this is not indicative of any particular investment but is an illustration of a period of time for the S&P 500 index.  It comes to us from 2007 Morningstar, Inc.©, all rights reserved. 3/1/2007

Do some homework and pick a quality managed stock mutual.  Or, find an index fund you like.  Will you grow your money overnight? No.  Will you rebuild faster than the alternatives, probably.  Until then, continue to find ways to decrease your standard of living or, if possible, consider part-time work.  When the day comes that your account values are back up to speed, be sure to reallocate your portfolio to withstand the next stock market downturn.