Try Defying Conventional Wisdom When Investing
During Retirement
The bottom line is that there are ways to invest that
can allow you to meet your needs
By Jeffrey D. Voudrie, CFP
Sept.
3, 2008 - Relying on conventional financial services advice may result
in working years longer or living with less during retirement. They say
that you should only take 4% a year off of your investments. They also
say you should increase the amount you have in ‘safe’ investments like
bonds. But I believe they are wrong.
In my earlier article, “Retirement
Investing: Forget 4%”, I said I would reveal strategies and
techniques that break with conventional wisdom, but that may allow you
to live a more comfortable retirement. Here are those strategies and
techniques.
I answer readers’ financial questions free of
charge. George recently emailed me explaining that he lost 30% of his
wealth between the years June 2007 and June 2008. When factoring in
inflation, he needs to earn at least 6% per year. To provide a cushion
he wants to earn 7-8% a year. But he doesn’t want a repeat of the losses
he sustained in the past. What should he do?
Many of you reading this article may be in the same
situation. Here’s an edited version of how I responded:
“George, as you realize, you won't be able to earn
6-8% while keeping your money ultra-conservative. So there are two ways
to approach your need:
1) Follow the financial services industry
conventional wisdom. They will allocate a large portion of your
investments to CD's and/or other ultra-safe government and corporate
bonds. They then allocate a smaller percentage to inflation-fighting
investments such as equities. Keep in mind that the 10-year government
bond is currently paying a 3.7% return.
The problem with this standard approach is that it
actually increases your risk. If you have 60% of your portfolio earning
4.5% and you need to earn 8% overall, you will have to earn around
14.75% on the inflation-fighting part of the portfolio. The chances of
consistently earning that much on equities are very small and involve a
high level of risk.
That doesn't make any sense to me!
2) Turn conventional wisdom on its head by
following the strategies and techniques that I use for my clients.
First, the allocation of the portfolio shouldn’t be
based on the fact that bonds appear safer than equities. Instead,
allocation should be based on opportunity. What type of portfolio will
give you the greatest probability of achieving the return you need with
the least amount of risk - based on current market conditions?
In today’s environment, I rely on a combination of
private fixed investments that don’t fluctuate based on the market
combined with a globally diversified and actively managed portfolio.
Since dividends have historically made up a large part of the overall
market return, I use high-dividend paying investments pretty
extensively.
High dividend paying stocks can increase their
dividends over time—you don’t get that with a traditional bond. That
means that the yield you receive on your original investment can go up.
For example, I purchased a stock for my client’s accounts that was
paying just over 8% back in August of 2005.
Since then the dividend yield has more than
doubled. Now, based on what was originally invested, their yield is
around 17.5%. There’s a different stock I purchased around the same
time. It was yielding 4.6% when I purchased it, but since the dividend
has increased it now yields 8.3% based on the price we purchased it at.
The downside of these types of investments is that
the underlying price of the stock fluctuates. There can (and will) be
periods of time when the value of the stock dips below the purchase
price. There will be other times it may be substantially higher. But the
purpose for owning it is the long-term increasing dividends it can
generate.
Second, the portfolio must be diversified by
strategy. Buy and hold is just one strategy, but shouldn’t be the only
strategy used. I employ a combination of short-, medium- and long-term
strategies. That way only a portion of the portfolio is exposed to the
strategy-risk (all strategies have risk).
The first two steps will dramatically decrease your
risk. To minimize risk even further, the third step is to closely
monitor each investment and take action when necessary to harvest a
profit before it disappears or to protect your principal. I establish
pre-defined limits and use proprietary systems to alert me when those
tolerances are breached.”
I’m sure George found my financial advice atypical
from that of most advisors.
But can you see how applying this approach actually
reduces your overall risk while greatly increasing the probability you
will earn 7-8%? It does so because it reduces the return you have to
earn on equities. The probability of averaging 8% on equities is much,
much higher than the probability of averaging 14.75%--especially when
the portfolio is generating a high level of dividends.
As a professional money manager who has spent years
developing and perfecting proprietary systems and strategies, it’s
easier for me (than you) to put these principles into place. But you can
significantly reduce your risk while dramatically increasing your chance
of success by following similar ones.
The bottom line is that there are ways to invest
that can allow you to meet your needs. You can retire sooner or have a
higher standard of living during retirement. But, unless you have a huge
nest egg, it will involve thinking outside the traditional financial
services box.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
Keep up with the latest news for senior citizens, baby
boomers
Sept.
3, 2008 - Relying on conventional financial services advice may result
in working years longer or living with less during retirement. They say
that you should only take 4% a year off of your investments. They also
say you should increase the amount you have in ‘safe’ investments like
bonds. But I believe they are wrong.