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What invest mix would you recommend for a soon to be 52 year old investing for retirement? Currently I have a mix of 70% stocks and 30% bonds (mostly high yield).....

Jun 16, 2013 by Dave from Rootstown, OH in  |  Flag
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Dushyant Pandit Level 17

In general, you will find that there are two commonly used approaches to determine what the correct asset allocation for you is.

One method is to use a ‘risk profiling’ questionnaire which will help you to determine how much risk you can tolerate and then craft an asset allocation to fit your risk profile. This is a rate-of-return maximization approach. Generally, this approach will guide you towards a mix of assets whose return is as high as possible consistent with the risk you feel you can take. Many of the Monte Carlo techniques also seem to fall into this category. The draw-back to this approach is that most investors are simply unable to articulate the amount of risk they can deal with. (Behavioral finance has lots to say about this reality).

The other method, one that I prefer, takes the contrarian approach. It basically figures out the amount of return you need from your portfolio to achieve your financial goals, and then figures out what the most conservative (least risky) portfolio needs to be to achieve this desired rate of return. Thus, in contrast to the method above, it’s a risk minimization approach. I find that investors, especially the more financially fortunate ones, often find this method more comfortable.

There are many resources, Advisors or software tools, which you can work with to come up with the specific answer, once you decide which approach to take. They will take your specific situation into account before determining the appropriate answer for you.

1 Comment   |  Flag   |  Jun 18, 2013 from Summit, NJ
Don Chamberlin III, CFP®, AWMA®

Nice breakdown. I actually use both methods in a sense. I do believe in risk profiling, but from the standpoint that a client's risk profile ultimately indicates the most risk the client should be taking. Ideally though, I work towards insuring my clients will be taking the lowest amount of risk possible to achieve their goals. Maximizing risk-adjusted returns so that the client doesn't need to take on more risk than is necessary is truly the best way to go for any client in my opinion.

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Flag |  Jun 18, 2013 near St. Louis, MO

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Thank you for your question Dave. Of course the answer depends quite a bit on your tolerance for the variability of your portfolio, as well as your time horizon for retirement.

Do you plan to retire at 60? 65? 70? How much do you currently have saved? What other sources of income can you expect? Do you have a pension from a prior life? What can you expect from social security?

In general however, as you age, you want to reduce your exposure to certain types of market risk so that when you do retire, there is more of a retirement to take distributions from.

Comment   |  Flag   |  Jun 16, 2013 from Apex, NC

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Alex Bentley Level 18

I wrote a article for Yahoo on this subject that you might find helpful.

Check it out at http://voices.yahoo.com/how-find-asset-allocation-why-matters-12102703.html?cat=3

Comment   |  Flag   |  Jun 16, 2013 from Pacific Palisades, CA

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Peter C. Karp Level 20

Dave,

Congratulations on planning ahead for retirement. Given your age there are some standard allocations however we would need to look at your entire financial picture to determine which investment would be most suitable. Additionally, you could invest in target date investments that are based on your current age and anticipated age at retirement. These are professional managed portfolios that continually rebalance as you get closer to retirement to be more conservative in nature. You could also construct an asset allocation model based on your risk tolerance, investment goals and other investments you may have. We would need additional information to determine where you are today versus your financial goals for retirement. Given the market environment and your timeline for retirement you need to understand where to invest in comparison to where we are in the investment cycle in order to obtain risk adjusted returns.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  Jul 01, 2013 from San Francisco, CA

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2 votes
Rich Winer Level 20

Dave, the ancient rule of thumb was to subtract your age from 100 and that's how much you should have in stocks. However, that approach is overly simplistic. Michael provided you some good things to consider in determining an appropriate and effective mix of asset classes and investments. I would like to add my belief that a good investment portfolio should contain more that just stocks and bonds. At times, it should also contain various commodities and "alternative" investment strategies such multi-asset or long/short strategies. Most people think of stocks and commodities such as gold as the risky part of an investment portfolio and bonds as the conservative part. However, in a rising interest rate environment, there's risk in owning bonds, especially longer term bonds. Also, there are times when stocks and bonds decline at the same time while gold and other commodities may be rallying. These various economic scenarios are the reason why you want to be diversified. They are also why I believe (in opposition to proponents of static, passive investing) that you must be tactical in your approach to investing (and my results validate my beliefs). In the first part of this year, stocks rallied while bonds were essentially flat. Many bond funds actually produced negative returns. As interest rates have back up over fears of the Fed tapering or ending its bond-buying program, stocks, bonds and commodities have declined in lock-step. So, how do you protect your portfolio in such an environment? Perhaps by selling some of your stock position and your longer-term bonds and putting money in bank loan funds or alternative strategies. If you do not feel confident to make these kinds of decisions yourself, you might want to consider hiring a financial advisor to allocate and manage your portfolio for you. A good advisor can not only help manage your portfolio more effectively, he or she can also help you determine which investments and investment strategies should be held in tax-deferred accounts and which should be in taxable accounts. Your advisor can also help incorporate your investment portfolio into your retirement and estate planning. A good advisor can also help you determine whether you could benefit from incorporating life insurance into your retirement and estate planning as part of your investment portfolio. For certain high income, high net worth, highly-taxed individuals, variable, whole or universal life can be an extremely effective tax-free investment and wealth-transfer vehicle. That's a fact you will rarely hear promoted in financial books, magazines or on CNBC. But it can be extremely effective. Retirement distribution planning experts like Ed Slott often recommend life insurance as a tax-free investment and income vehicle for retirement and wealth transfer. The question you asked in this forum deals with the question of asset class diversification. In my practice, I put equal emphasis on tax diversification. You can read the financial guide I wrote on this subject under my Brightscope profile for more information on "how to tax-diversify your retirement savings." Another element to consider is strategy diversification. In a mutual fund portfolio, you might want to diversify among managers who invest in the same asset class but employ very different strategies including growth and value, passive or active, or other unique investment selection and management strategies. In my practice, I diversify my larger clients using my own stock, mutual fund and ETF strategies. Finally, I should also add that many of the advisors on this website (including myself) work with clients throughout the country and can assist you, should you decide to work with a financial advisor. I hope this helps. Feel free to ask additional questions.

Comment   |  Flag   |  Jun 16, 2013 from Woodland Hills, CA

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2 votes

As others have mentioned in their responses there are a few things to consider before giving a true response to this question:

  1. When are you planning on retiring? --> this is important because it makes a difference if it's in 5 years, 10 years, or greater than 10 year

  2. Do you have any expensive goals in retirement? --> this is important because if you are going to be purchasing a vacation property in the near future that is a big capital expenditure that has to be a part of your retirement plan and will ultimately effect your asset allocation

  3. Do you have a sufficient source of income in retirement that will cover a chunk of your annual expenses such as a pension or social security? --> this is important because it will determine how much of your retirement income will need to be supplemented by your investment portfolio

  4. What is your tolerance for risk? --> this is important because your tolerance for risk combined with the other 2 items above will help to determine how much exposure to equities you should have in your investment portfolio

Comment   |  Flag   |  Jun 17, 2013 from St. Louis, MO

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2 votes

Everyone else has answered your question quite well regarding risk and return. I want to add a point on high yield bonds. High yield bonds have historically had a high correlation with stocks, which means they don't provide much of a diversification benefit to your portfolio. Correlations can change over time, but I don't expect the relationship between stock and high yield bonds to change much. For diversification, you'd be better off with a low-cost, bond index fund. You'll get less yield from your bond investment, but your portfolio should be less risky.

1 Comment   |  Flag   |  Jun 18, 2013 from Denver, CO
Dushyant Pandit

Steve, you make a very astute point. Indeed, my analysis bears that out as well.

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Flag |  Jun 18, 2013 near Summit, NJ

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1 vote

Dave, I would start by going to the online portal of your plan provider. Typically there are a myriad of retirement planning tools. To answer your specific question, I would recommend you start with a 'Risk Assessment Questionaire'. There are a series of questions that are designed to determine what level of risk you can take on so that, basically, you can sleep at night.

There are no right or wrong answers. Based on these results you have a guideline to create your own investment style. You may find the results to risky or too conservative for your investment style. At that point you can make a decision. Currently you are allocated into a growth portfolio, that in general, seems appropriate. But after taking a Risk Assessment, you can have perhaps more clarity as to how it applies to you specifically..

Comment   |  Flag   |  Jun 17, 2013 from Delray Beach, FL

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