Diversified
Retirement Portfolios
Weather Storms Best
By Andrew Leckey
The
stock market, as wrenching as its 2002 plunge has been, could
have taken an even bigger bite out of the retirement hopes and
dreams of average Americans.
What if a chunk of
their Social Security money had also been stashed in the market?
The partial privatization
of Social Security, by which workers could invest a portion of
payroll taxes in stocks, has been shoved to the back burner by
this year's events. Recommended by a presidential commission
for study this year, the idea now won't come up again until the
market stages a comeback and fears about risk are temporarily
forgotten.
Don't forget these
grim days when that proposal does resurface.
The euphoria of a rising
market often makes it a deceptively simple answer for every need.
Overlooked are its cyclical nature, its often-inexplicable psychology
and its tendency to fall quickly on the perception of bad news.
Next time someone plots your retirement strategy based on a 10
percent annual stock market return, tell him to get a grip on
reality.
A portion of your retirement
money, and probably all of your Social Security funds, should
be in investments that don't go down. Many 401(k) and individual
retirement accounts are loaded with stocks, with little fixed-income
or cash to form a solid foundation.
No one should believe
that retirement is impossible and that Americans will have to
work until they drop, as some scary magazine covers are proclaiming.
Sensible investing will get you where you want to go, although
retirement strategy must notch up in sophistication and avoid
overblown market expectations.
Those with diversified
retirement portfolios have weathered recent storms best.
"In the first
six months of this year, our model retirement portfolio was up
0.2 percent, and July won't bring it down much," said Sheldon
Jacobs, editor of the No-Load Fund Investor newsletter
(www.sheldonjacobs.com), Irvington-On-Hudson, NY. "We went
conservative at the beginning of 2000 because we felt the market
was overvalued and haven't made hardly any changes since then."
Using mutual funds,
Jacobs' model retirement portfolio is 50 percent bonds, 30 percent
stocks and 20 percent cash.
Within the portfolio
are the Meridian Value (MVALX) and Oakmark Equity &
Income (OAKBX) that include both stocks and bonds; the stock
index fund Schwab 1000 (SNXFX); and the conservative foreign
stock fund Longleaf Partners International (LLINX). On
the bond side are Harbor Bond (HABDX), TIAA-CREF Bond
Plus (TIPBX) and Vanguard Short-Term Corporate (VFSTX).
The portfolio also holds money-market funds.
Even if there's a new
bull market in the next 12 months, people in or near retirement
must accept that the glory days of the 1980s and 1990s are gone,
Jacobs warns. It still makes sense to hold some equities for
growth, but portfolios with an "extreme" amount of
equities won't be best for a retiree for a long time, he believes.
Pre-set your asset allocation with some basic parameters for those asset classes, Paulsen advised. Since the Asian economic crisis of 1997, stock and bond returns have become negatively correlated. With stock prices up when bonds are down, and vice versa, you should adjust your weightings with changes in trends.
"Once a year, check whether stocks or bonds went down the most and then put 5 percent more into whichever is down and take the money from the other asset class," he advised. "Another step you should take is to increase your stock weighting toward international stocks because the U.S. dollar is going to continue to weaken and they'll benefit from that."
Financial planners have been hearing from many concerned older investors in these turbulent days.
"Clients in retirement are asking us if they need to change their lifestyle, while those ready to retire want to know if they'll have to wait," said Ray Ferrara, a certified financial planner and chief executive of ProVise Management Group LLC in Clearwater, FL. "In the past 10 weeks, the dial has basically been turned back to March 2000."
Don't try to make back all your losses by buying battered stocks. Ferrara cautioned, since that won't protect your portfolio for the future. Retirees must also monitor their withdrawals to be sure they're not taking out too much. Be prepared to scale back your lifestyle for a couple of years if it turns out it's going to be necessary.
"The biggest problem in retirement investing that we're seeing are clients who are overly concentrated in a single stock position, especially if they're in big companies that make their stock readily available," said Martin Nissenbaum, national director of personal income tax planning for Ernst & Young in New York. "This is dangerous for your portfolio."
This is a time to "hunker down," Nissenbaum concluded, preserving what you have and building up slowly again. If you're close to retirement, you have a shorter time horizon to recover from a drop in the value of your assets and must therefore make every decision count.
Editor's Note: Andrew Leckey's column, Successful Investing, appears regularly in the print version of The Bull & Bear Financial Report.
