6 Investing Strategies for Retiree Wannabes
Having shaken off the jitters, many investors have either re-entered the stock market or upped their exposure in recent weeks. But for retirees or folks nearing retirement age, simply exiting safer investments such as bonds and certificates of deposits might not be the best strategy.
Some clearly are seeking to recoup losses suffered during the downturn. According to a recent survey by Charles Schwab & Co., in the first quarter of 2010, 46% of investors were focused on growing their retirement savings, while just 29% aimed for protecting their savings. (There is no comparable earlier study). Further, Schwab reports its advisors have to spend less time reassuring their clients these days. This past January, just 31% of investment advisors reported needing to reassure clients about the stock market, down from 49% a year earlier, according to a separate survey.
Fueling the confidence: the belief that the economy is in the early stages of recovery -- not to mention that share prices are still 20% to 25% below where they were before the downturn hit, says Jeff Layman, the chief investment officer at BKD Wealth Advisors in Springfield, Mo.
The question is whether the market has moved too far, too fast -- and if some investors are overly exuberant. "There is a tremendous amount of uncertainty in the environment still," says Layman. Between the extreme market movements in the last two years and the government's expanding debt load, today's investment mantra should more closely resemble cautious optimism rather than overconfidence, he says.
So what should investors itching to recoup their lost retirement dollars do? Here are six investment suggestions:
Retain Some Stock Exposure
As Layman points out, share-price valuations are still low despite the recent stock market rally. In addition, during the downturn companies across the board trimmed costs and boosted productivity -- putting them in prime earnings expansion territory, says Jim Scheinberg, a managing partner at the Culver City, Calif., investment advisory firm North Pier Fiduciary Management. "For five quarters in a row, Wall Street has beat analysts' expectations 50% of the time," he says. Today, companies are largely positioned for earnings growth as revenues start to increase.
Overweight Big-Cap Stocks
Stephanie Rossi, a wealth advisor at AMTD, suggests favoring large-company stocks over those of smaller firms. While "anything is possible," she says, "large companies will be able to recover quicker than small companies." Upon exiting a recession, other factors like technological innovations and human ingenuity kick in.Â
Plan for Bear Markets
Still, as an investor in the stock market, you have to keep in mind that bear markets are inevitable, says Layman. Although it's tempting to bail out completely -- especially after going through two harsh bear markets in a decade -- you likely need to have some exposure to stocks to both reel in returns and beat inflation. "The key is to reach an asset mix that will allow you to sleep at night -- and weather another bear market," he says. "Even the most conservative investors should have at least 25% to 30% invested in stocks."
Be Sure to Diversify
The rest of your portfolio should amount to a mix of fixed income and international investments, say advisors. In the last year and a half, Layman's firm BKD Wealth Advisors shifted its portfolios further into global investments. Specifically, the company has moved from 25% international exposure to 38% today. "We believe that growth in the margins will come from outside the U.S.," he says. "Thinking more globally is very important to investment diversity."
Balance Out Your Portfolio With Bonds
Another investment vehicle that still has legs: bonds. Since the downturn, investors have largely flocked to corporate debt, which caused prices to rise as bond yields dropped. Bill Walsh, a co-founder of advisory firm Hennion & Walsh in Parsippany, N.J., thinks there's still upside in the fixed-income favorite. Specifically, for investors in higher tax brackets, he suggests municipal bonds, which are generally tax free. Those in lower tax brackets might be better off with taxable bonds that offer higher yields, he says.
Buy Bonds With Short Shelf Lives
Steer clear of long-term bonds, though, says Scheinberg. If inflation escalates, which is a definite possibility considering the size of the federal deficit, you won't want to be stuck in an investment where the market will demand higher yields that your bond is paying, he says. Once inflation hits, it's a no-win scenario for long-term bonds.