How conservative should my portfolio be as I approach retirement?

I am 66 years old and I am still working. However, I will be retiring within the next year or two. I also have a simple IRA. Do I take less risk or high risk in my portfolio? Do I look for high returns?

Retirement, Retirement Plans
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September 2017
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Without knowing your details, I couldn't begin to give you solid advice.  Anyone who tells you they can are wrong in my opinion.  So without knowing your net worth, investment knowledge, spending plans, genetics/likely longevity, and whether you have a sell discipline etc... I cannot say.  That said, "conventional wisdom" says the older you are the more conservative you should become because you don't have the time to recoup a major downturn. 

I don't necessarily prescribe to conventional wisdom so will give you a different perspective.  The problem with the above view is that when you have a major correction, 80% of all stocks go down whether stable large cap or growth.  The S&P 500 declined approx 40% in 2008 with the NASDAQ growth even worse.  So it is really about how much risk is in the overall market, not the "style."  And there will be times to get defensive.  Now we are currently fully invested but that could change if the environment changes.

If you are a multi-millionaire and could withstand a 2000 or 2008 like event with a buy-and-hold strategy (not recommending), then you wouldn't have to be more conservative.  This brings me to bonds.  An old rule of thumb is the older you are the more you should have in bonds.  Never mind that we are at or near the end of the dropping interest rate supercycle in bonds that began around 1981.  So bonds have become more risky than even just a year ago and are probably as fully as stocks.  Did you know that treasury bonds lost -32% of their value in just 16 months between 77-79?  Inflation is like kryptonite to bonds, even worse than rising rates.  Thus far, inflation according to the Fed has been tame and so there isn't too much concern yet.

I am not trying to scare you, rather, to think outside the box.  You need to measure the broader trends and make adjustments accordingly.  So your allocation should change fairly often, a couple of times per year.  You would adjust the percentage of bonds, stocks, and even commodities up and down depending upon the economic data & inflation numbers.

So while you should have some bonds, you should currently be looking for "stable" dividend paying stocks in lieu of a portion of your bond portfolio.  I believe these may actually be less risky than many bond sectors in this current environment.  And you should have a sell discipline for both of these and everything in your portfolio.

Now in full disclosure, I am an active manager and do not prescribe to the buy-and-hold "pie chart" mentality especially in this later stage bull market - both stocks and bonds.  But since the Central Bankers have engineered interest rates to artificially low levels, there is no "safe" investment, like a CD, that will keep up with your inflation (medical costs etc..). Therefore the low paying, fixed interest safe investments will almost guarantee you a loss in terms of purchasing power.  And indexed annuities will only pay you between 3% to 4% no matter what the insurance agent tells you.

This will continue until rates normalize and the Central Bankers actually raise rates to even near normal levels. What I am telling you is that the conventional risk versus returns is not nearly as important as the market risks.  So while we have an ETF Porfolio customized for the individual, we also have sell metrics for every "slice" of the pie chart within the portfolio.  So any sector could default to cash, and if things begin to get really ugly, a huge portion of the portfolio could be in cash.  You adjust risks in the portfolio by dialing up & down your cash levels.  You also manage risks by position sizing.

You have always been told that to make more you have to take more risks.  But you can make a solid return without taking more risks.  If you miss a decent portion of the downturn by being heavy in cash and then be more fully invested during solid uptrends, you should be fine.  This is what I call risk-adjusted returns.  Dialing up and down risks by taking more risk (more fully invested) when things are stable, and taking less risk when the markets are choppy or in a downtrend. Thus participating in the markets when they are good and not trying to outperform, but getting out of much of the way when they are bad.  This is contrary to a static pie chart. 

But if you are going to do a buy-and-hold strategy, then yes, you need to dial down your risks.  You need to have a decent portion in bonds and most of your equities should large cap stocks.  You should also have a small portion in precious metals as a hedge against inflation and your bond portfolio.

Again, all of this was meant to stimulate your thought processes and to give you a different perspective to research.

Hope this helps and best of luck, Dan Stewart CFA®


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