Managing a nest egg seldom has been more complicated.
Although returns on safer assets have been paltry for some
time, they plunged to new lows this year as the Federal Reserve aggressively
loosened its monetary policy to underpin the economy.
The result? In this year of huge uncertainty about the
economy and markets, older investors have been driven into riskier and riskier
“The challenge facing anyone in retirement is just being
able to generate stable, safe income,” says Andrew Mies, chief investment
officer at Wichita-based advisory firm 6 Meridian.
Market professionals believe the picture will improve once
the nation gets Covid-19 under control. The economy continues to regain
strength, and the Fed is expected at some point to allow rates to trend higher.
But all of that could take several years. Meanwhile, older investors will have
to stretch further and be savvier about deploying their savings, professionals
For now, it may make sense to hold less in bonds and rely
more on appreciation in stocks and dividend income to get the returns an
investor needs. Here are some other takeaways on how the investment landscape
has shifted and suggestions on how to navigate it:
Keep cash to a minimum
Everyone needs cash. But high-yielding bank accounts now pay
less than the 1.2% annualized U.S. inflation rate. And bank rates won’t rise
soon, because Fed policies are crimping bank margins, says Bill Lanzon, chief
investment officer at First American Bank, near Chicago. “You park money for
safety, not to actually earn interest,” Mr. Lanzon says.
Anthony Saglimbene, global market strategist at Ameriprise
Financial Services, suggests some retirees use a three-bucket strategy.
The first bucket should contain enough cash and short-term
bonds to cover projected spending needs for the next one to three years. With
returns on such investments so low, some advisers say this allocation ideally
should represent no more than 15% of the overall portfolio—although the exact
proportion must be tailored to an investor’s circumstances.
Bucket No. 2 is primarily for assets that produce income.
The interest and dividend payments can be funneled into the first bucket to
help maintain the level of funds there. An investor with a moderate risk
appetite might keep around half of the assets in this bucket in bonds and the
remainder in a mix of stocks, alternatives and cash, says Mr. Saglimbene.
The third bucket comprises mostly equities, which are important
to own, even for people in their 60s and 70s. While the exact equities
allocation would depend on an investor’s risk preferences, Mr. Saglimbene
recommends about 60% stocks for a moderate approach. To raise additional cash
for spending needs and keep the bucket in balance, an investor might
periodically trim any stockholdings that have appreciated a lot more than
Watch dividends closely
As the economy tanked this year, dozens of companies slashed
dividends to preserve capital—and that eroded payouts from dividend-focused
funds. The payouts eventually may be restored, but meanwhile, retirees need to
be strategic about stocks or funds they own for dividends, says Mr. Mies of 6
Be wary of dividends with high-single-digit yields, he
cautions. Dividend yields move inversely to stock prices, and a lofty one may
suggest investors expect the payout to be trimmed.
Before buying a stock, eyeball the financial reports.
“Generally, there are signs in financial statements when a company is
struggling to pay dividends,” Mr. Mies says. The dividend-payout ratio—the
percentage of its earnings a company pays out in dividends—is one key metric.
Above 50% could be a sign of trouble.
Use stock appreciation to supplement income
When investors think about getting income from stocks,
dividends usually come to mind first. But another strategy advisers use is
“total return,” which involves tapping the appreciation in some of the
securities an investor owns to supplement income from other sources.
To implement a total-return strategy, calculate how much of
anticipated spending needs already are being met by other regular income
sources, which could include Social Security. An investor then would sell some
securities from time to time, using the proceeds to make up any shortfall.
Raising cash through such sales should go hand-in-hand with
rebalancing a portfolio, says Kathy Carey, head of research at Baird Private
Wealth Management. Investors often are reluctant to sell their best-performing
holdings, particularly if there is a large tax liability. But periodic pruning
of stocks that have ballooned in value can reduce the likelihood that an
investor’s equity allocation gets out of balance, she adds.
Keep bonds short-term
Bond income can provide a way to buffer a portfolio from
equity risk. But for now, bonds pose a dilemma, notes Ed Perks, a senior
manager at Franklin Templeton Investments. Although yields have risen a little
recently, they remain near historic lows. And if the economy rebounds
significantly in a year or two—as Mr. Perks believes is possible—yields could
In such a scenario, bond prices, which move in the opposite
direction to yields, would drop, causing bonds to lose principal value, at
least on paper. Mr. Perks urges investors to be careful of stretching too far
out on the maturity spectrum, because he believes current yields aren’t high
enough there to compensate bondholders for the potential risk of principal
losses. Mr. Perks says bond managers at Franklin currently are “much more
comfortable” with maturities of two to six years than with longer maturities.
James DiChiaro, a senior fund manager at the Insight
Investment unit of BNY Mellon Investment Management, says broadly diversified,
intermediate-maturity bond funds offer the best risk-return mix. Among such
funds rated highly by Morningstar Inc. is Fidelity Total Bond Fund (FTBFX),
with an expense ratio of 0.45%. Meantime, iShares Core Total USD Bond Market
(IUSB) owns thousands of individual securities and charges only 0.06% in
Higher-quality bond funds now yield only around 2% or less. But
they may offer some potential for principal appreciation, particularly if they
hold bonds that have gotten battered in this year’s market turmoil, Mr.
“Uncertainty is far higher this year than in almost any
other year, so I can’t overemphasize the importance of having a portfolio
that’s not exposed just to one part of this market,” he adds.
Mr. Pollock is a writer in Pennsylvania. He can be reached
here for the original article.