There’s no such thing as an ideal retirement portfolio. But some portfolios meet the requirements of retired investors much better than others.
As they enter retirement, most investors assume with undeniable logic that the absence of work-related expenses will greatly reduce their overall outlays. However, they often overlook the extra costs of filling up all that newfound leisure time—with hobbies, travel and so on.
Then too, you have to consider taxes and inflation. Neither of these is apt to disappear soon, even though the coronavirus has cooled inflation over the past year. Both taxes and inflation will continue to take a toll on your investment income over the longer term.
In short, investors may want to prepare for the possibility of spending as much in retirement as they spent when they were working.
Safety takes on new importance
For the retiree, investment safety assumes new importance. With a little care, however, that extra measure of safety is easy to achieve. You’ll want to adhere to these five simple rules.
First, and most obviously, you should limit your use of margin loans to matters of convenience — to smooth out cash flow, facilitate budgeting, and possibly take advantage of opportunities such as stock-purchase rights. But margin loans should never exceed 15 per cent of your total portfolio value.
Second, you’ll want to increase your emphasis on income or income-appreciation investments. With respect to common stocks, that means you’ll invest mainly in stocks with high current yields, or with the potential for rapid rises in dividends—mature growth stocks, for instance.
Third, you’ll insist on quality in your investments—a record of earnings, dividends and so on. Now more than ever, it’s important to have as little as possible to do with so called ‘concept’ stocks that have a business plan but no business.
Fourth, your overall portfolio stance should shift toward defensive investments and away from the aggressive kind. That means you’ll invest more in finance, utility and consumer goods-and-services holdings, and less in manufacturing and resources.
Fifth, in the interest-bearing part of your portfolio, stick mainly to maturities of five years or less. This limits the harm you’d suffer in a period of rapidly rising inflation and the higher interest rates it would cause. What’s more, stagger your maturities over the next five years, so you have funds coming up regularly for reinvestment.
If interest rates seem high or low
You may of course want to skew your maturities somewhat, in response to high or low levels of interest rates.
If, for instance, you believe interest rates are likely to come down over the next year or two, you may want to invest more heavily than usual in four-year or five-year maturities. You’d want to put less money in one-year or two-year terms, because rates may be lower when these come up for reinvestment.
If, however, you agree with us that interest rates are apt to rise over the next year or two, you should do the opposite. Invest less in longer-term securities and more in shorter-term issues. That way, you should be able to more easily take advantage of the higher rates that are anticipated a year or two from now.
Finally, adhere religiously to portfolio fundamentals. Set investment goals and priorities, and pursue them through a balanced and diversified portfolio. After all, an unbalanced and undiversified portfolio of even the highest-quality investments can lead to disappointment.
This is an edited version of an article that was originally published for subscribers in the May 7, 2021, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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