What are some suggestions for allocation and diversification of my portfolio?
I am self-employed with approximately $1.2 MM in various IRAs, 401(k)s, and a couple annuities. I also have another $250,000 in liquid savings. I will probably never fully retire, but I fear taking a major hit on my portfolio. I am turning 68 years old and my wife will turn 65 years old this year. What are some suggestions for allocation and diversification of my portfolio?
I agree with Dan’s response that it is impossible to answer what kind of diversified portfolio would be right for you, given that we do not know any specifics about you.
However, in general, a modern-day investment portfolio in 2019 for an accredited investor such as yourself should be diversified beyond traditional equities/bonds, and also include Alternative Investments. University Endowment Plans and Family Offices have been incorporating Alternative Investments for over 30 years in their asset allocation models and accredited investors should take advantage of them as well.
I believe that traditional investment models of 70/30 60/40 50/50 etc., of stock/bonds are considered only partially diversified and are inadequate in today’s investment markets. They leave out an important asset class that are available to modern-day investors, which means that you miss out on valuable investment opportunities, that can better grow and protect your investment portfolio at the same time. For today’s standards a fully diversified portfolio should be closer to a 30/30/30 mix of equities/bonds/alternative investments. This “Full Spectrum” diversification model would achieve the following:
- Less stock and bond market dependence
- Lower portfolio volatility
- More predictability
- More tax advantages that traditional equities and bonds cannot offer
- A more un-emotional way to invest
- Better downside protection during market downturns
I hope this gives you a start to better protect, diversify and grow your assets as a modern-day investor.
The time horizon recommended for asset allocation mostly depends on when you think you will use the money. You are of normal retirement age, but plan to keep working. Also, your $250,000 cash cushion should be more than you need to support expenses through the average recession (which lasts 12-15 months historically).
Generally, I'd say start with 60% stocks/40% bonds, but if it helps you sleep better at night, go 50%/50% in your 401(k).
The Asset Allocation & Diversification Myth - where to start?! As far as your investment allocation, I have no idea what you’re invested in now - individual stocks, types of mutual funds, etc... My question to you is what is your strategy to buy & sell? The type of accounts - retirement, 401k, IRAs, SEPs, taxable brokerage - are simply receptacles to hold the investment, not a strategy. Now you can incorporate the type of accounts - taxable or tax-deferred - into your strategy by placing the proper investment into the proper account based upon its attributes. But the primary strategy(s) are your investment rules. What would make you buy and what would make you sell? Or are you simply employing a diversified "pie-chart" buy-and-hold strategy (which we do not subscribe to for a number or reasons)?
The dirty little secret about diversification is that it goes up at different rates & correlations, but when it sells off, the various asset classes become highly correlated and all go down together. So just when you need "diversification," it isn't there to protect you. Cash IS an asset class and can and should be used to dial up or down risk in a portfolio. You can also use inverse ETFs to hedge the portfolios even in IRAs.
Therefore, you must first define your strategy(s). Then many of the other factors will fall into place. Modern Portfolio Theory (MPT) has a lot of holes in it, so if your advisor is using MPT with a pie-chart buy-and-hold strategy, you should be concerned at your age. That is exactly what you are feeling; I am just clarifying it for you.
Make sure your advisor is free from any conflict of interest. Ask if they act as Your Fiduciary? Ask them if they make the investment decisions in-house or whether they outsource to funds or sub-advisors. I am assuming you use an advisor because you have annuities. I am not a fan of annuities either and do not provide them to my clients. With your asset base, you need strategy(s) not products.
I know I have given you a lot to think about, but it isn't just about how much you are saved or in what account. It is about overall strategy first and foremost, then the rest will fall into place by default. And you need a strategy to protect your nest-egg without doing an "indexed" annuity where you will make very little upside. If you have any questions, you are certainly welcome to reach out to me & pick my brain. But I have more questions for you first than answers. You should too.
Hope this helps and best of luck, Dan Stewart CFA®
The financial markets are going to continue to be uncertain and volatility is likely to increase in the years to come. But the equity markets are still your best choice for appreciating your money over time. If you want to invest yourself, you should only invest in the index funds that mimic the S&P 500, Dow, and the Nasdaq. You can put 20% of your money (other than the $250K in cash) into bonds; the rest 80% can be divided into the 3 indexes I mentioned. The breakdown will depend on when you go into the market. I am not a fan of variable annuities. Fixed annuities are fine when you are ready to take distributions from your assets. You can also find a good money manager and financial advisor who manages money actively with a meaningful diversification in mind and she can invest some of your money that is meant for mimicing the indexes into an actively managed portfolio. You can check out my profile and decide if I can help you.
Your liquid savings is a great sign. Being defensive generally will keep you from being in an agressive allocation.
1.Are you diversified? Are you protected against taxes, inflation, and market fluctuation?
2.Are you willing to stay away from locking up anymore of your money for long periods of time?
3. What is your timeframe in years before making a withdrawal?
4. Would you agree that defense is more important than offense at this moment?
5. Do you currently have a strategy and a fiduciary fee-based relationship with an advisory firm?
I hope this encourages you, thank you.