Top 4 Portfolio Management Tips For Retirees

By Marc Davis | September 28, 2011 AAA
Top 4 Portfolio Management Tips For Retirees

Financial advisors may disagree on many things, but most agree that a retirement investment portfolio should try to maximize return with minimum risk. That diversity of holdings is the best way to protect yourself against the meltdown of any one sector.

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Another area of general agreement among financial advisors, although there's some dissenters in this area as well, is on the composition of the ideal investment portfolio for retirees. Principle objectives of a retiree's equities portfolio should be:

Diversity
Investments across a broad range of instruments and asset classes - mainly stocks, bonds and index funds, plus cash or cash equivalents - provides the diversity that protects a portfolio against unexpected market declines. Also, allocating investments across sectors can help protect against certain shocks. A price decline in one market sector is then counter-balanced by other unaffected holdings in the remainder of the portfolio. When investing in equity, many financial advisors recommend that no one stock should be weighted with more than 4% of total portfolio allocation. Index funds, such as one that tracks the S&P 500, invest in Fortune 500 stocks and are also recommended by many financial advisors. They have a low expense rate and have a historic record of growth. Triple-A corporate and government bonds are also recommended for the fixed income portion of a portfolio. (For more on differing opinions, see Why Financial Advisers Disagree.)

Capital Preservation
The nest egg of equities and other investments held by the retiree represents a lifetime of working, investing and saving. The capital value of, and return on, those investments must sustain the retiree with income for the rest of his or her life. So, a principal strategy of whoever manages the portfolio should be the preservation of the capital that the portfolio contains. To achieve that result, the portfolio should hold stocks with little or no volatility. Stocks and other investments vulnerable to downward price pressure, sector weaknesses and big price swings are not suitable holdings for retirees.

Steady, Reliable Dividends
High quality, large-cap, dividend-paying stocks in industries such as health care, energy, pharmaceuticals, leading fast food chains and technology have been recommended by many advisors. A basket made up of well-chosen equities will provide the most dependable returns. A diversified portfolio of dividend-producing stocks in several strong sectors should provide a steady income stream for the retiree.

The stocks themselves and news pertaining to these stocks and their market sectors should be continually monitored. When negative influences occur, it may be time to sell the weakened stock and replace it with a stronger stock. A financial advisor or broker can do both the monitoring of price changes and business news and advise the appropriate portfolio adjustment.

However, because there's no incentive to trade stock for the retiree - no trading commission is paid to the retired person – the retiree should also do the monitoring and market research. This is not always possible, and often the retiree is not sufficiently knowledgeable, so it's critical to have a trusted, experienced financial advisor. (Read how investors find stocks that fit this strategy in Finding Solid Buy-And-Hold Stocks.)

Risk Avoidance
This objective - avoiding risky investments - is related to the above two portfolio objectives. Highly volatile stocks that regularly fluctuate up and down in price 2% or more in a day are not desirable holdings for a retiree's portfolio. Growth stocks that continually trend upward despite occasional price drops due to profit-taking selloffs might feel like a more appropriate choice, but each stock needs to be evaluated against the other investments in the portfolio and the weight. Some financial advisors recommend that a small percentage of a portfolio (usually no more than 4%) contain equities that may provide a bigger return on investment. These stocks, of course, are riskier. If and when there's a move in these stocks to the upside, the retiree reaps the reward of this risk. It could contribute to maintaining buying power of the entire portfolio, or help keep up with inflation.

The Bottom Line
Once retired, it's a good idea to have a diverse portfolio. Preserving capital and avoiding risk are essential components that will allow a retiree to enjoy retirement with peace of mind. It's a good idea to maintain the services of a trusted and knowledgeable financial advisor once you retire, that way he or she can do the market research for you while you think about your retirement. (Your investments should change with your goals and income, check out The Successful Investment Journey.)

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