Jan. 31, 2013, 7:30 a.m. EST
Retirees and stocks: Sell now or hold on?
By Robert Powell, MarketWatch
If you haven’t asked this question, you will. Is it time to take your chips off the table? With the major stock market indexes close to all-time highs, now seems as good a time as any to walk away from the table, especially if you are back to where you were in 2008.
The answer truly depends on your personal circumstances, but also on who you ask. To be fair, it’s not quite like the old joke about asking five economists for an opinion and getting six answers, but it’s pretty darn close. In fact, the experts we spoke with offered up recommendations ranging from sell everything to do nothing. Here’s a recap of their advice.
Sell, sell, sell
Stephen Chen, the founder of NewRetirement.com, thinks now might be the time for retirees to consider selling. “If someone has remained invested through the downturn, then it probably makes sense for them to sell some of their stocks into this rally and rebalance according to their needs, especially someone around retirement age who has less time to ride market ups and downs,” said Chen.
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The caveat, however, is this: Ideally retirees have a good understanding of their minimum retirement income needs and have identified the sources that will guarantee that income (Social Security, pension, annuity, bonds, dividends, drawdown strategy, and the like). “Once retirees have a plan for their core income needs, they can take more risk with their remaining assets,” Chen said. “Investors should be rebalancing their portfolios annually so that if they have a run-up in one portion (equities, for example) they can rebalance to maximize their risk adjusted returns.” Read more at NewRetirement.com.
What the heck are you doing the stock market anyway?
You might not call it the sell-everything approach, but one camp suggests that no matter what the stock market is doing or has done, you shouldn’t be investing in risky assets to fund your retirement, unless of course you’ve already got your future expenses covered with safe, reliable streams of income.
Instead of investing in stocks, this camp suggests that you invest in Treasury Inflation Protected Securities (TIPS), or zero coupon bonds, or income annuities as way to fund your desired standard of living.
To be sure, selling all your stocks all at once to follow this strategy might be a shock to the system. So consider ways to ease into it. Reduce, over time and steadily, the percentage you have in stocks while increasing the percent you have in, best case, inflation-adjusted income-producing assets. Consider, too, reading “Risk Less and Prosper” by Zvi Bodie and Rachelle Taqqu if this approach appeals to you.
See related video: Don’t Risk Your Retirement in the Stock Market.
Try product allocation
Others, meanwhile, say that just because the stock market is at all-time highs doesn’t mean you should take your chips off the table. But they do recommend allocating your assets across products and investments, not just risky assets.
“My fundamental belief is that retirees and pre-retirees should pursue a preset allocation strategy rather than take some chips off the table,” said Garth Bernard of Sharper Financial Group. “Taking chips off the table or changing the asset allocation mix in response to the market situation is de facto ‘market timing’ and it has been demonstrated to be one of the least productive and riskiest approaches to retirement investing.”
Because of the potential length of time spent in retirement and because there is a tendency to drawdown the assets, retirees and near retirees show use a balanced produce allocation with perhaps as much as 40% to 50% in a diversified holding of stocks, said Bernard.
The key to managing assets in or near retirement, according to Bernard, is what he calls the “tossed-salad approach.”
Allocate a portion of the assets to a balanced investment approach, allocate a portion of the assets to an insured-withdrawal approach, and allocate some to insured future guaranteed income such as long dated annuitized payments. “Like a tossed salad with a mix of vegetables of various colors, some that grow above the ground and some that grow below the ground, plus a dash of fruit, such an approach will be good for one’s financial health in retirement,” said Bernard.
Set aside up to three years of living expenses
Others also say the recent gains in the stock market does provide a good excuse for revisiting and rejiggering your investments. But Ross Levin, the founding principal and president Accredited Investors, advocates using what some might call a two-bucket or a best-of-two worlds approach. His recommends setting aside up to three years’ worth of cash in an online saving accounts and then investing the rest in a portfolio where stocks might represent anywhere from 40% to 80% of assets.
This approach, which Levin uses with his clients, “allows us to not be forced to sell during bad markets,” he said.
Levin readily admits that studies have shown that this strategy can be a drag on returns. “But studies don’t consider the client’s emotional responses to selling for cash needs during down markets,” he said.
Not two, but four buckets
Others agree that retirees and pre-retirees ought to consider putting their money into different buckets. In the case of Jason Branning of Branning Wealth Management, it would be four buckets, however.
“Pre-retirees and retirees should be sure they are planning strategically,” he said. “They need to have or create a disciplined retirement plan that carefully divides their goals with solutions that can actually deliver as needed and in expected ways—base expenses matched with base income; discretionary expenses need to be covered by discretionary income sources.”
And retirees should manage various risks in retirement with up to four goal-segmented prioritized funds or buckets, which Branning refers to as “modern retirement theory.”
With that theory, you would have a base fund that covers basic expenses. Social Security, part-time work, an immunized bond portfolio, lifetime annuity stream, and, though least preferred, a reverse mortgage are examples of the sort of income produced from that fund.
You’d also have a contingency fund that would cover potentially catastrophic expenses, a discretionary fund that would cover nonessential expenses, and a legacy fund.
Branning, for the record, is opposed to selling stocks now just because they are up. He noted that the annualized five-year returns for the S&P 500 (SNC:SPX) (4.37%) and the Dow Jones Industrial Average (DJI:DJIA) (5.24%) have not been anything to write home about. But pre-retirees and retirees should write this down for future reference.
“Market directions cannot be controlled, and even the best money managers aren't always correct,” he said. “No one can predict the future; there are simply too many factors outside a retiree’s control. Pre-retirees and retirees should, however, exercise their control through a retirement plan that can navigate the unknowns of market and life.”
For starters, just because the market rises to an all-time high should not automatically signal sell all stocks. “This rise in values does offer retirees the opportunity to rebalance their portfolios and reaffirm or shift their investment policy statements in light of specific income needs but only in the context of their whole retirement plan,” said Branning.
No need to sell
And then there are those who advocate not for two or four buckets or allocating your money across products, but for traditional investment management practices.
“As with many asset allocation decisions, it really depends upon both your ability and willingness to bear risk,” said Bob Johnson, a finance professor at Creighton University. “If you have the ability to bear the risk of equities (that is, if you have a margin of safety in terms of your asset base) and the willingness to bear risk (that is, the mind-set to be able to mentally bear a 20% decline in the market), then given yields in the fixed income market, I wouldn’t significantly change my asset allocation.”
Now when one talks about near retirees, Johnson said people often make the mistake of thinking they have a short time horizon. “But, if someone is 65 years of age, life expectancy for a male is an additional 19 years,” he said. “That is not a short time horizon and moving assets all into a very conservative asset allocation, an investors runs a significant shortfall risk—that they will outlive their assets.”
Johnson is also quick to question whether the stock market has indeed advanced a great deal in the past five years. By some accounts it has, he said. But, a little historical perspective may help.
For instance, the following are the returns on the S&P 500 for the five-, 10-, and 20-year periods ending Dec. 31, 2012:
Five-year compound annual growth rate is 1.63%
10-year compound annual growth rate is 7.06%
20-year compound annual growth rate is 8.22%
“Now, the above returns don’t take into account the near 7% the S&P has advanced this January,” Johnson said. “But, I think the lesson is immediacy. It is a behavioral finance tenet that investors tend to overweight the near term past. They see the past month and believe that the market has advanced a great deal—and, for the month it certainly has. But the returns for the past five years on stocks have been abysmal.”
For Johnson, the bottom is this: “I would not dramatically change my asset allocation due to short term moves in the market. An investor should have a target allocation and that allocation shouldn’t change from the target unless life circumstances change. Trying to outguess the market in the short-run is, I believe, a losing proposition for individual investors. In fact, I think it is a losing proposition for most professional investors.”
Robert Powell is editor of Retirement Weekly, published by MarketWatch. Learn more about Retirement Weekly . Follow his tweets @RJPIII . |
