In my profession as a portfolio manager, it is not uncommon to have some clients preparing for retirement, and one of the most important aspect of retirement planning is how investments are allocated to stocks, bonds, and cash. You may have heard various “rules of thumb” regarding this topic, but they, in my opinion, have only minimal value when it comes to each individual’s unique planning needs. I recently ran across this column by Christine Benz of Morningstar that concisely explains the process we use and why one retiree’s allocation will vary from another. What is presented here is an excerpt from a September commentary.
“Off-the-shelf asset allocation guidance doesn't vary significantly for people who are still accumulating assets for retirement. . . stock-heavy at the outset and well into middle age, transitioning to more bonds and cash as retirement approaches.
Closing in on retirement, however, one-size-fits-all recommendations won't cut it. Some retirees should have 50% (or even less) of their portfolios in stocks, while others should hold portfolios that are much more aggressive.
Why such large variations? The key one is that different retirees will make different cash-flow demands on their portfolios. A retiree who's lucky enough to have a pension that supplies most of her living expenses can reasonably park a hefty share of her portfolio in stocks, holding just enough in liquid assets to cover unanticipated expenses or periodic splurges.
A retiree with a shorter time horizon who is forecasting spending his portfolio during his lifetime, meanwhile, will need to maintain more in liquid assets and less-volatile asset classes like bonds. By venturing too far out on the risk spectrum, he runs the risk of needing to pull his money out at a time when stocks or other riskier asset classes are in a trough.
Guided by this concept, retirees can use their anticipated cash-flow needs to develop a customized asset allocation framework. Money they expect to need within the next few years should go into the only asset class with a guarantee of safety over such a short time horizon: cash. Assets for the middle years of retirement can go into high-quality bonds, which offer higher return potential than cash over a two- to 10-year time horizon with some--but not extreme--fluctuations. Finally, assets that won't be tapped for another decade can go into stocks, which are unreliable over time horizons of fewer than 10 years but typically land in positive territory if you're able to hang onto them for at least a decade.”
By Christine Benz | 09-19-16 | 06:00 AM |
Note: This article is part of Morningstar's September 2016 Retirement Matters Week special report.
This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Camelot Portfolios LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein. Some information in this presentation is gleaned from third party sources, and while believed to be reliable, is not independently verified. A317