Published in Bradenton Herald: June 18, 2013
By GARDNER SHERRILL |Investor’s Column
June 18, 2013
Sound the Alarm - Bondholders Beware
What is an appropriate portfolio for someone nearing or in retirement? Unfortunately the simple answers in money management often gloss over important information. One of the rules of thumb that continues to circulate is to subtract your age from 100 and to put that amount into stocks and the residual into bonds. So if you were 60 years old, you would put 40% into stocks and 60% into bonds.
There are several issues with this formula:
- As life expectancy continues to rise, running out of money becomes a greater risk.
- As you age, you break the 1st rule of investing – you start to put the preponderance of your eggs in one basket.
- It oversimplifies that we only have two choices to invest in and that of the two bonds are safe and stocks are risky.
Looking back it has been very easy and successful for a retirement portfolio to overweight into bonds. For the last 30 years bonds have enjoyed a fixed income plus appreciation spawned by a consistent decrease in interest rates. As interest rates drop, bonds increase in value (the opposite also holds true). In 1982 the 10 year treasury topped out at 14.59%1 and since that point they have continued to drop. It’s important that we understand that this trend is not likely to continue in the coming years.
- Robert Ketchum – The CEO of the Financial Regulatory Authority, FINRA, said: “it’s clear that interest rates have more room to go up than down and that the strategies that were appropriate for many investors a few years ago may no longer be appropriate today.”
- Bill Gross - The manager of the world’s largest bond fund stated: “the three-decade bull run in bonds ended 04/29/2013 when the treasury yield hit 1.67%.
- Brokerage firms led by UBS are talking about re-classifying all-bond account holders from “Conservative” to “Aggressive” Investors.
Despite these warnings Reuters posted that investors allocated $301 billion into U.S.-registered bond funds in 2012 and have added another $121 billion through April of 20132. As rates have gotten so low many investors have sought to increase yields by taking on greater credit risk. In April of this year, investors oversubscribed to buy Rwandan bonds at an annual yield of 6.875%. This followed similar purchases from countries such as Bolivia, Zambia, and Mongolia3.
The continued focus on fixed income is not shocking given investors lost $30 trillion in equity market value during 2008. Those that did not have a process to stay in for the rebound are rightfully twice shy from repeating the experience. Nobody can predict the future, but there are sensible proactive risk management strategies that investors can implement to help limit their exposure to the potential swings of market pullbacks. The Heath Brothers new book, Decisive, states that in making good decisions, “process mattered more than analysis by a factor of six”. Having a good process can keep you balanced during times of duress and protect you from overweighting your portfolio towards one risk in an attempt to avoid another.
So what is an appropriate portfolio for someone near or in retirement? The answer of course is – it depends on your circumstances. This is where having a conversation with a CERTIFIED FINANCIAL PLANNER™ can benefit you because a CFP® is skilled in pairing your goals with your ability to fund them. A CFP® can offer suggestions on how to restructure a portfolio so it has an opportunity to pursue your goals and minimize unnecessary risk.
My firm has identified seven economic scenarios that we believe have some chance of occurring over the next few years. Based on these scenarios and your circumstances, we “stress test” your portfolio to help determine where it may be vulnerable. Based on this analysis, restructure your portfolio so it has an opportunity to profit or at least minimize loss regardless of whether the market goes up or down.
About the Author:
Gardner Sherrill CFP® helps professionals and entrepreneurs plan for a successful retirement without unnecessary risk or sacrifice. To learn more about the Stress Test, visit http://sherrillwealth.com. Securities offered through LPL Financial, Member FINRA/SIPC