12/19/2013 2:15 AM ET|
Don't stop investing after retirement
If you've made it this far, chances are you'll live longer than average, and an overly conservative portfolio won't cut it. Here are three ways to keep your money growing through retirement, but diversified against risk.
Too many investors think they should switch to overly conservative investing after they retire. Some mistakenly move too large of a portion of their money into fixed-income investments and cash.
It is surprising that so often, people think they will live to the average age of the population, or until around 77 to 80 years. What they don't realize is a key concept called "given or conditional probability." Given that you are already over 60, the reality is that you have a new average life expectancy.
After all, you survived all those wild years of your youth. Hence, if you and your spouse already in your 60s, thinner than me, don't smoke and have no major illness, guess what? At least one of you is more than likely to fly by 90 years old. That means your money has to last for 30 more years!
You need your money to keep growing after you retire. And remember, you don't want to run out of money six months before you pass. You have to make sure your money lasts longer than you.
What's the remedy? It used to be that if you just left your money in the bank and bought some bonds, you could be assured of growing your money at 4 or 5 percent a year. However, those days are long gone, especially when inflation is factored in.
Naturally, you may say to yourself, "I don't want to risk losing my money. After all, I can't make it over again." What can you do to grow your money at an average of 4 to 5 percent a year while keeping your risks low? The secret lies in getting the right asset classes in your portfolio and then leaving it alone.
There is no such thing as a no-risk investment. But a broadly diversified portfolio left alone to grow for decades can allow your money to grow, yet as a whole, be just as safe as money left in the bank. But how do you make sure you get the mixture right?
Here are three components to diversifying your portfolio for long-term safety.
Get a very broad mixture of assets
Make sure to have small portions of many different asset classes and management styles in your overall portfolio to smooth out the volatility over time. Although much attention is given to trying to pick the best-performing mutual funds, it turns out that better long-term growth at reduced risk comes more from good diversification rather than fund selection.
This mixture of assets should include all levels of equities, large-cap, small-cap, various industries, different styles, both active and passive funds, plus a variety of corporate and government bonds, mixing short and long-term duration. Make sure to include other asset classes like real estate investment trusts and even a dose of a variety of commodities, from timber to gold to oil and gas.
As you age, you will very slowly reduce portions of the higher-volatility asset classes; for instance, larger blue chip stocks with higher dividend yields will replace the small-cap, more volatile growth stocks. Still, the secret is not making too big of a bet on any one asset class or style.
Broaden your horizon of countries
Despite the massive economic improvements of many countries around the world, the news still scares many away from investing overseas. Yet one of the most important ways to decrease your portfolio volatility while increasing your return is to make sure to have a significant minority of your assets invested in highly rated overseas securities.
The reality is that growth in the U.S., Europe and Japan is slowing as our populations age. But the good news is that there is a select group of about 20 countries, including Chile, Poland and Thailand, that have already emerged and will continue to grow at a rate much higher than the "old countries," and yet, as a basket, will be diversified enough to keep your volatility relatively low.
In your retirement years, it is best to stay out of the more "frontier countries" as they remain too volatile. However, the safer portion of the "growth countries," as a whole, could actually turn out to be safer than just investing in the U.S. It's fine to have the majority of your money in the U.S. in the 21st century, but it is no longer wise to have your entire core portion invested in only one country.
Let time work its magic
Of all the diversification techniques you can employ, time, by far, is the most powerful. Indeed, we have seen again how much patience matters. In the crash of 2008, if you only took out enough money that you would need to live on, for instance, one-thirtieth of all your money, then you would have only suffered a loss on that small portion. And after only five years, the various markets have recovered. Thus, only taking each year what you need to live on is critical.
Of course, you may slowly reduce first from the more growth-oriented volatile asset classes as you age, but remember, at least a significant portion of your money needs to keep growing even into your 80s.
What should your non-cash portfolio look like when you're 72?
Naturally, every person is different. Needing to spend money sooner for your own unique reasons alone can alter these percentages dramatically. Thus, a range of suggested portfolio weightings is much more helpful. The portfolio below is stated in wide ranges because as you age, you will want to move to the lower percentages of investment in these classes and more into cash and short-term funds. Just remember to do it slowly -- only a little movement each year.
Sample recommendation for a 72-year-old person:
- U.S. equities: 15 to 30 percent
- International equities (including growth countries): 5 to 10 percent
- Fixed income, U.S. government and corporate bonds: 40 to 55 percent
- Fixed income, international bonds: 5 to 15 percent
- Real estate investment trust funds (REITs): 3 to 8 percent
- A mixture of commodities: 2 to 4 percent
Understandably, people will have their personal prejudices against certain investments. However, it is critical not to totally ignore any category. Having zero money invested overseas, for instance, actually adds risk to your portfolio.
For many people, their home is one of their most important assets. But remember, you have high concentration and liquidity risk in your house investment, so it is best to make sure you have a solid investment portfolio in financial assets as well.
The above portfolio structure will help ensure that no matter how long you live, you won't be a financial burden on your family.
More from U.S. News & World Report:
VIDEO ON MSN MONEY
So folks hit that Magic Number and Retire, say this year for Instance. You see that the Stock Markets have set Record Highs and if you held Strong, you more than likely recovered the losses of the Great Recession. You hear the DOW20K crowd and the DOW30K crowd and how nobody knows and why this is the only game in town. What you don't hear anymore, you can literally LOSE your entire investments in Stocks. Folks want you to believe that we are in a new Normal, forever. That's total BS.
I am NOT stating that folks regardless of AGE shouldn't or can't invest, I just strongly suggest that it's not nearly the SURE things some are saying. I am also strongly suggesting that these Articles are done by Folks that NEED you to invest in order for them to have income. Without YOU, they don't exist. Many posters feel the same way, they need as many folks in to keep the GAME alive. And yes, it's a GAME. The Proof, $4Trillion in QE in America Alone with Aunt Yellen planning to do much much more. The FEDS will run this Economy into the Ground and then Claim nobody say it coming when in fact everyone saw it coming, Again.
Corporate America has over $4Trillion in Debt coming due over the Next Four Years. The FEDS funny math will end sooner than later because the Rules are Changing on how they deal with Banks. Furthermore, there will have a huge Burden on what the FED pays Banks as opposed to what the FED pays back to the Treasury. Aka the urgency to Taper sooner than later.
The Last GDP report indicated a higher number but also far higher inventories, not a good sign. Real inflation is far higher than reported and as fewer folks not retired aren't any longer making a living wage, the Profits at the Corporations folks are trying to sell you will slowly but surely dry up. Somebody has to have money to buy products, the FEDS can't just print to infinity. Folks will come to this board to protect their own interest. They don't give a darn about what happens to you. Welcome to the Old, New America.
It`s laughable that these people who always complain about the stock market.It`s simple,
JUST STAY AWAY AND DON`T WORRY ABOUT IT.The market is where I make a ton of money
because I`ve learned how to read a balance sheet and do fundamental stock management.
If you hate the market put your money in CD`S and be thrilled with 1%.WOW !
What is 100% missing in this article is the Nuts and Bolts behind the Recovery and the FACT that what caused the Great Recession in the First Place, Scam Derivatives was never fixed. Our FED alone has amassed about $4Trillion in bloated assets. That Derivative Market you never hear about any more, it still has anywhere from $500-700Trillion in Bad Assets floating around. That's why Europe is in intense discussion of how to handle Bad Banks, mostly all of them and that's why our FED printed around $4Trillion here at home.
C-n-bc has guest and hosts I can't stand simply because many are pushing a Political Agenda. Specifically Rick Santelli whom is an editor for that Business News network. However that hardly means I can't respect the knowledge he is imparting. He and I have similar beliefs about what the FEDS are doing and why. It was also stated that 60% of earning since 2011are due to Massive Stock Buybacks, not real earnings. So when you take into account Real Inflation, lack of a living Wage, the Great Wealth Divide, Money Printing to Infinity, Soaring Global Debt, and the major Decline in Corporate Revenue Growth, some folks want you to think it's little Green Men and Tin Foil hats and not the Cold Hard Reality we currently face.
Some folks want you to dive HEAD first into a Bull Market that is due to the most Corrupt Financial Engineering Scam in World History. Well it's only fitting seeing we had a even bigger Financial Scam that caused the Great Recession. So sure go right ahead, dive in with your hard earned Retirement Dollars that most were lucky to recover after the last financial debacle. Behave like nothing of the sort ever happened. Sooner than later, not only will Social Security and Medicare be stolen from us, retirement dollars will be as well.
In the meantime , Hanukah and Menorah lighting's are mentioned over and over ?
I know I live in a leftist paradise but it's REALLY pissing me off !
The hypocrisy and double standards of these creeps on the left is disgusting
December 20, 2013 2:37 AM ET"
"Risky derivatives make return for returns' sake
By Francesco CanepaPublished May 30, 2013
"Antibiotic Use on Farm Animals to Be Phased Out in U.SBy Alex Wayne Dec 11, 2013 11:01 PM CT"
"Japan Sales Tax to Increase Next Year, Abe Says
There are literally countless articles that are discussing the REALITIES of today without the silliness of putting little Green Men and Tin Foil hats in the Discussion. Folks are always protecting their own interest so be wary. For instance, Buffet once stated that Derivatives were WMD of mass Destruction. However shortly after, Buffet has engaged in those WMDs for profit and we haven't heard a peep about Derivatives from him since.
You can find valuable information on the Cleveland Fed site along with the Federal reserve sites. Google GMOs and find out those realities. Google China and pollution, it's no secret. Europe still has 12% unemployment. We just signed a 2 year Budgets deal that does not address our Debt issues. Sure, nobody knows when the Markets will fall so by default nobody knows when they will rise either. I won't refund your money for being Wrong, neither will anyone else.
OUR GOVERNMENT - - - GARBAGE IN = GARBAGE OUT!!!
OUR POPULATION - - - GARBAGE IN = GARBAGE OUT!!!
OBAMACARE = GARBAGE IN = GARBAGE OUT!!!!!
OUR FUTURE?? - - YOU FIGURE IT OUT!!!!!
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[BRIEFING.COM] Recent action saw the S&P 500 (-0.3%) regain about eight points from its session low thanks, in part, to the relative strength of the three top weighted sectors. Financials (-0.2%), health care (+0.1%), and technology (-0.1%) trade ahead of the broader market and their relative strength is noteworthy considering the trio accounts for more than 46.0% of the entire market.
Meanwhile, consumer discretionary (-0.5%), industrials (-0.7%), and materials (-0.6%) continue ... More
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