For those in retirement, or a few years from retirement, our advice to you is this, “beware of advice.” To be more specific, we are talking about generalized advice (no pun intended). Generalized advice is what you, and thousands of others get from magazines, blogs, cable shows and financial networks. Forget bonds, buy stocks, buy gold, sell commodities, use options, hold cash, own your age in bonds, buy and hold, day trade. Some, or even all of this advice could be found in a one-month magazine issue, or even throughout a one-day financial network broadcast. Generalized advice for investing is much like a waiter recommending the “daily special” to everyone that sits down at a table.
If you are planning to live off your retirement savings for 10, 20, or even 30 years, “winging it” is not the best investment plan. In an era where investors feel the grass is always greener somewhere else, many people tend to venture outside their simple goals and objectives. It seems we get pulled away from what we need, to what we “want” or what we feel we “deserve.” If the market has averaged 7% (after inflation) for 100 years, then this is what we should expect each year going forward, right? Of course not. Stock ownership in 1952 was only 4.2%. In 1980, 13%. In 1989, 32%. In 1998, 52%. So who are all these people that averaged 7% a year after inflation? Don’t be jealous of your neighbors, their grass has just about the same number of brown patches yours does.
So, what “generalized/specific” advice are we giving you?
First, be realistic. Expect, deserve, need, want, all culminate into one type of investment return, which is the one you actually get. If a safe return is 3 percent in short-term investment grade corporate bonds, and you’re trying to achieve 7%, you would have to increase your risk and expect more volatility. Also, if you are trying to obtain higher returns by investing in stocks versus bonds, then don’t be shocked if your principal declines if the stock market declines. As we have heard a million times, no one can predict the market; maybe it’s about time we all start believing it.
Second, plan your cash flow carefully. If you are withdrawing funds from your nest egg, make sure you have a proper allocation to income producing holdings. Consider duration and don’t chase yields. Invest in a way that gives you the best chance to take advantage of future rate cycles to counter inflation, especially in your core bond holdings. If you can support most, if not all of your withdrawal rate with yield, then you won’t feel like you have to take a “pay-cut” if your equity holdings take a hit. Allocate your retirement portfolio to minimize drawdowns, especially once you begin taking withdrawals. Also, having a proper allocation to equities for longer-term growth is prudent. You just don’t want to end up in a nine-foot hole when you can only jump up eight feet.
Third, enjoy your retirement days. Not too many people on their death-bed have made, “should have day-traded more” their last words. Low volatility plus constant cash-flow equates to low stress and a high sleep tolerance.
Lastly, as we come full circle, filter your advice. You have your own individual needs, goals and tolerances. Let your realistic objectives guide the allocation of your investment portfolio and never forget the two most important factors for a successful retirement portfolio; Diversification and Discipline. There will always be a “daily special” offered to the masses. Just don’t let your eyes trick you into taking on more than you can stomach.
(Repost from 06/12)