If you’re already retired or nearing retirement, your investment mission is a bit more complex than those in the younger crowd. Instead of building wealth, your need is income – without running out of assets before your or your survivor’s death.
Your plan requires balance among your stocks, bonds, and cash so that you manage the downside portfolio risk during bad economies. Manage with a focus on the risk you can accept. However, you must have growth in the portfolio to stay ahead of taxes and inflation and ensure a lifetime of income.
The only way to stay ahead of taxes and inflation and not run out of assets is with stocks. That old story about moving out of stocks and into CDs or bonds in retirement is a myth unless you have so much wealth, you can’t run out of money in retirement.
Your allocation must hold enough stocks for necessary long-term growth, enough bonds to offset stock market downturns, and enough cash to get you through the tough periods. Here are some figures to remember:
- You probably need a 1.5 to 2 years of cash for living expenses. This will prevent you from having to sell stocks as their share prices drop in a bad market; in other words, it buys you time until market recovery, along with giving you peace of mind.
- Figure around 30% to 50% in stocks (cash is not included in these percentages). This will keep you in front of taxes and inflation, plus provide a bit extra growth to help ensure a lifetime portfolio.
- Put the remaining 50% to 70% in bonds. Bonds provide a safety net to cushion the drop when stocks go through a bad spell.
Instead of playing the market, you’re actually taking advantage of active portfolio managers trying to time their buying and selling. In good times, people are moving into stocks and pushing up your values. In bad times, people are fleeing to bonds, driving up those values.
Proof? During a 48% market downturn in 2007-09, a portfolio of 40% stocks and 60% bonds lost only 18% of value. With 1.5 to 2 years of cash on the sidelines, you can sustain and rebound from that loss. Given your stock allocation, once the stock market returns, your portfolio will bounce right back. If you were able to increase your stock ownership during the downturn, you’ll rebound even faster.
The Bottom Line
Carry these points forward as you continue a successful investment journey:
- Managing a portfolio does not require extensive knowledge. It doesn’t mean you must master buy and sell techniques or pick the perfect stock.
- The markets aren’t rigged. No wealthy person is hindering you from having wealth.
- Wealth is not a zero-sum game. It expands to encompass all who know how to create and cultivate it. Your investments provide the capital for innovators and builders of wealth to expand the wealth pool. Your investments participate in the expanding wealth.