Category Archives: Investment Planning

Retirement: Get Help or Not?

My Comments: Some people have an innate ability to look after money. Others, not so much.

This is especially critical as you transition from working FOR money to when money is working FOR YOU. We call this retirement.

It’s further complicated because the financial advice industry is now undergoing a massive shift in how you receive that “advice” and how much you pay for it. How do you you choose that person or company and are they worth the effort? Are the fees they charge justified?

The article that follows is an attempt to help you work through this question. Know that the conclusions reached by the author may no longer be valid.

By Nick Thornton October 26, 2015

New analysis of investment returns from managed accounts shows participants who are using the option (to get help) often have a substantial advantage over those who don’t, according to a study published by Empower Retirement.

In “The Haves and the Have-Nots: What is the Potential Value of Managed Accounts,” the industry’s second largest record keeper examined the account performance of more than 315,000 participants in almost 1,800 plans, from 2010 to 2015.

The average annualized return from managed accounts was 9.77 percent, net of fees, compared to 7.85 percent for participants who don’t use a managed account option.

Moreover, participant accounts without managed options experienced a wide discrepancy in rates of returns.

The data shows a spread of nearly 11.5% between the best- and worst-performing non-managed accounts.

But managed accounts experienced substantially less volatility in their performance — only about a 4 percent spread between the best and worst performing accounts.

Empower’s study, which was conducted with its subsidiary RIA, Advised Assets Group, suggests the difference in both the extra returns seen in managed accounts, and the wide variance in returns with non-managed accounts, is largely explained by behavioral finance.

Ed Murphy, president of Empower, says managed accounts can neutralize participants’ natural instinct for loss aversion, which can influence the stasis so often experienced in non-managed accounts.

That fear can keep savers in a poorly balanced strategy.

“Managed accounts can take the emotion out of investing,” said Murphy in an interview. “More and more, participants are showing they want help designing and managing a strategy. A managed approach can give participants the confidence they need that investments in their plan are properly allocated.”

Murphy said Empower is seeing growth in terms of the number of plans adopting a managed option and the number of participants actually enrolling in them. Because of their relative novelty in the market, previous comparisons have been hampered by limited data.

But this year’s study incorporated data from 64 percent more plans and 159 percent more participants than last year’s study, as more savers have been enrolled in managed accounts long enough to be eligible for review.

That suggests a more accurate accounting of how well managed accounts are faring, said Murphy.

“The results are convincing,” he added. “Look at the compounding effect of an annual difference in 200 basis points. Over a participant’s lifetime, it can mean an astronomical increase in retirement savings.”

Fees are important, underscored Murphy, because he thinks an excessive preoccupation with cost can have the adverse affect of participants overlooking the need to understand their risk profile. That can result in volatile, and often lack-luster, returns.

Earlier this year, Cogent Reports, the financial services research arm of Market Strategies International, released research showing one-fifth of plans with at least $500 million in assets are defaulting participants into managed accounts.

That’s a notable increase from just last year, when only 5 percent of such plans were doing so.

As adoption has grown, and as more record keepers and advisors create managed products for the market, some have suggested they are poised to replace target-date funds as the next evolution in plan design.

Murphy is skeptical of that theory, and says both options will have their place for the foreseeable future, as different investors will be attracted to different strategies.

But he does say the conventional target-date strategy is “outmoded.”

“Take two 40-year-old participants. One has saved, the other hasn’t. One has a history of cancer, the other is healthy. Both are put in the same TDF with the same glide path. There’s not enough personalization,” said Murphy.

“And there is a substantial difference in the risk different funds with the same glide path take on. I think people purchase them without a full appreciation of the risk involved,” he said.

That said, he doesn’t see target-date funds going away. He does, however, see them evolving.

Anecdotally, Murphy says interest in managed accounts is growing with all types of sponsors, but that their popularity is particularly notable among sponsors of public plans, such as state and local governments.

Still, challenges remain. Education on managed accounts, and their value proposition, remains essential.

“We believe this new paper presents a strong empirical case for considering managed accounts as part of a plan sponsor’s offering to its plan participants. We will be sharing it with both advisors and clients as a way to drive the discussion further,” he said.

Bull Market Complacency Calls for Caution—and Action

My Comments: Today is Monday, when I post something about investments. Scott Minerd is not only a global figure in this environment, he has the ability to reduce complex ideas to where even I can understand them. His message, as I understand it, is continue to ride the bull, but be prepared to panic at any time.

  June 09, 2017 | By Scott Minerd, Global CIO

By many measures, the stock and bond markets have rarely been more expensive and more stable, and that has me worried. High-yield bonds and mortgage-backed securities are both trading near their narrowest-ever spreads relative to Treasurys, and they have been hovering around these levels for months. At the same time, U.S. stock market indexes are continuing to make new highs while the Chicago Board Options Exchange Volatility Index (VIX), which measures option-implied S&P 500 volatility, is near its lowest level since 1993. The amount of complacency built into the markets argues for caution.

Plenty of events clustered around this summer and fall could potentially spell disappointment for the markets. In Europe, Emmanuel Macron may have handily won the presidential election in France, but there remains the French parliamentary elections next week. These elections may result in what the French call “cohabitation,” a term that describes when the president and the majority of the members of the French parliament represent two different parties, which has not happened in France since the 1997 election. Meanwhile, the U.K. election results have hobbled Theresa May’s mandate and created a cloud of uncertainty over the timing and direction of Brexit negotiations. German federal elections, due to take place in September, will test Angela Merkel’s conservative bloc.

In Washington, the focus is on the Senate version of the healthcare bill, which is unlikely to be finalized before the August recess. This delay could push back the timeline for enacting tax reform to 2018. This says nothing of the political uncertainty in Russia, North Korea, or in the Middle East.

As this realization settles in, I think some of the hope underpinning the markets will slowly erode this summer. History suggests that there is a high likelihood we will get some sort of shock in the second half of the year, which would lead to tightening financial conditions and widening credit spreads. I have seen it happen a number of times in my career: The stock market crash of 1987 and the Asian crisis in 1998 were both unexpected events late in a lengthy economic expansion that led to a brief but violent repricing of risk assets. Both events, however, were followed by at least two more years of an expanding economy.

Today we are on pace to set a record for the longest expansion in U.S. history, thanks in large part to the slow post-crisis recovery and accommodative monetary policy. The current upward slope of the yield curve offers no indication that it will end soon, but eventually it will, given the Federal Reserve’s indications that further tightening is needed. I believe we will see two more rate hikes in 2017, the next one occurring later this month, and at least three increases in 2018. I also expect that the Fed will announce in September a change to its balance sheet strategy that will involve a gradual tapering of reinvestments in 2018. This should put upward pressure on yields at the short end and the belly of the curve, where most of the new Treasury issuance is likely to come.
Even as conditions call for a healthy dose of caution, there is no need to panic longer term. There is still significant ongoing stimulus coming from the European Central Bank and the Bank of Japan.

The combination of these conditions argues for taking certain near-term portfolio actions. Investors should consider upgrading credit quality whenever possible while reducing exposure to high-yield bonds and stocks. Holding some dry powder* for opportunities that should arise amid a pickup in volatility later this year would be a wise move. With spreads near record tights, fixed-income investors simply are not being compensated for the risk they incur in the hunt for yield. Investors should remain disciplined and not chase returns now. It may not be the most exciting message, but no one ever took a loss by booking a gain.

As I see more life left in this economic expansion, I believe there will be opportunities later in the year to make up for any near-term underperformance. The coming correction might not happen tomorrow, but current conditions bring to mind the legendary response of Baron Rothschild, who, when asked the secret of his great wealth, said he made his fortune by selling early. It might be wise to follow Baron Rothschild’s example and take some chips off the table.

How Not To Screw Up Your Investments

My Comments:
Basic stuff for some of us; gibberish for others. So if you have difficulty with this, ask your financial advisor for help.

Dana Anspach on April 6, 2017

Smart investors follow an asset allocation plan.

An asset allocation plan tells you how much of your total investments should be in stocks versus bonds and then gets into additional detail, such as how much should be in large company U.S. stocks (or index funds) vs. international vs. small cap.

You maintain investment ratios by rebalancing on a predetermined basis, such as once a year. In a 401(k) plan, rebalancing is often accomplished automatically by checking a box that says something like “rebalance every x months to this allocation.”

In general, while you are saving, rebalancing can be easy. If you should have 10% of your investments in small cap, and you only have 5%, when you fund your IRA, you put it in a small cap fund.

This process gets more complex as you accumulate different types of accounts. You may have a 401(k), an IRA, a Roth IRA, or a 403(b). If a married, your spouse may also have multiple types of accounts. Maybe you also have a deferred comp plan or stock options. Now rebalancing must encompass which types of investments should be in which accounts. While working, as you add money to accounts you can make progress on maintaining the right balance by putting new deposits into the investment type that is most needed.

When you retire, if you have multiple types of accounts, it gets more complex. Should you withdraw from the S&P 500 Index SPX, +0.11% fund in your brokerage account first, or sell a portion of the stable value fund in the 401(k)? Some 401(k) funds won’t allow you to choose which fund to sell. You may have to take withdrawals proportionately from each investment type, which isn’t necessarily a bad thing, but it limits flexibility in how you manage your investments.

If you have enough wealth, rebalancing won’t matter. I have one client who has about $2 million with my firm and manages the bulk of his investments, another $6 million, at Vanguard. I recently asked him how he manages cash flow in retirement. He said when his checking account gets too low he sells something at Vanguard. Pretty easy for him. The amount he is selling is small compared with his portfolio size, so his decision will have an insignificant impact on his portfolio allocation.

Most retirees don’t have $8 million in financial assets. If you are a consistent saver, you may have $500,000 to $1.5 million; if you have a great job or inherited wealth, perhaps a bit more. You have enough to be comfortable, but the decisions on how you withdraw it will have a significant impact on your total wealth and available cash flow in retirement.

There are two primary approaches to rebalancing in the withdrawal phase: systematic withdrawals and time segmentation.

With systematic withdrawals, you withdraw proportionately from each investment type. For example, if you were withdrawing $30,000 from a $500,000 account which was allocated 60% to stocks and 40% to bonds, you would sell $18,000 of your stock holdings and $12,000 of your bond holdings, thus maintaining your 60/40 allocation. Systematic withdrawals are easy to manage if the bulk of your investments are in one account.

If you have multiple account types, systematic withdrawals are more difficult. For tax reasons, it often makes sense to withdraw from one type of account first, and that account may be allocated differently than other accounts. And, if you’re married, your spouse may invest conservatively, while you invest more aggressively, or vice versa. Investing this way may not be optimal, but if you haven’t coordinated your plan as a household, this is often the reality. Multiple accounts with varying tax consequences and an uncoordinated allocation make maintaining an appropriately balanced portfolio while withdrawing more challenging.

With time segmentation, first, you develop a plan that tells you which accounts to withdraw from in which years. Next, you match up the investments in those accounts with the point in time where you plan to take the withdrawals. If you know you are going to withdraw $30,000 a year for the first five years from the IRA, you will have $150,000 of the IRA in safe, stable investments, like CDs or bonds with maturities matched to the year of the withdrawal, or low duration bond funds.

As with all investment strategies, there are pros and cons to any approach. The biggest problem is many people don’t have a plan at all. Having a well-tested retirement income plan brings peace of mind. A plan allows you to relax and enjoy your retirement years. If you are nearing retirement age and don’t have a defined rebalancing strategy in place that shows you when and how you will take money out, it’s time to get one.

Why Reducing Investment Losses Is So Important

My Comments: There are times to be cautious and there are times to throw caution to the winds. As you get older, caution is increasingly common.

One way to solve your dilemma is to focus efforts on limiting what we call downside risk. That’s the opposite of upside risk for those of you just figuring this out. Most people have no problem with the upside. I’ve never had a client pissed at me for helping them make a lot of money.

However, for the past two plus years, it’s been elusive. There is a remedy but first, let’s set the stage for controlling downside risk. This idea become increasingly critical in retirement when you start using your retirement savings to pay bills.

Raul Elizalde  |  April 6, 2017

Investing in stocks can be brutal. According to research, the S&P 500 lost at least 10% from a previous high every two-and-a-half years on average, and at least 20% every six. A 30% loss happened every 13. It has fallen 50% from a peak three times since 1954. Remarkably, losses of this magnitude contradict the models we use to describe market behavior.

For example, the largest S&P 500 one-day loss was 20.5% in October 1987. According to a widely used model of stock market returns (which assumes they form a bell curve around an average), the likelihood of the 1987 loss is roughly equivalent to picking the right card in a deck with as many cards as atoms in the known universe. In other words, that loss could not have happened.

Limit Your Losses When the Market Drops

Clearly the problem is not that impossible events happen; it is rather that our models are inadequate, and a lot of analysts have tried to come up with better ones. So far, this quest has proven fruitless. We still can’t predict markets with any meaningful accuracy. This is why markets are not so much like the weather, but rather like earthquakes, which scientists now admit are unpredictable.

But here is the good news: we cannot predict earthquakes, but we know how to build earthquake-resistant structures. Likewise, we cannot predict markets, but we have techniques that can help us limit losses when markets tank. There are some very basic reasons why limiting losses is more important than producing strong returns.

A well-known example goes like this: If you lose 50% of $100 you need a 100% return on the remaining $50 to break even. This means that a large percentage loss requires a very large percentage gain for full recovery.

But a far more important example is this: If you only lose 20% of $100, you will need just 25% to bring the remaining $80 back to $100. So a small loss requires much less effort to come out from it.
Limiting Losses Even More Important in Retirement

This is even more important for retirees who use savings to pay for living expenses.

For example, taking $10 after a portfolio falls from $100 to $50 leaves the saver with only $40. A subsequent 100% return only takes the portfolio back to $80. That means that the $10 withdrawal turned into $20 because of its bad timing.

But when $100 only falls to $80 and $10 are taken, a subsequent 25% recovery on the remaining $70 brings the value up to $87.50. This means that the $10 withdrawal turned into $12.50—a much smaller penalty for taking money out at the worst possible time.

The moral is clear: limiting losses is an essential element in portfolio management.

How to Limit Losses

Limiting losses requires some basic processes in place. The best known is diversification, or investing in a mix of assets that tend to move in different directions. But a mix that looks diversified today may not be diversified tomorrow, especially when markets take a turn for the worse. This is because in down markets investors sell everything and correlations go up sharply. Therefore, a mix that does not take into account how the market cycle changes is prone to go through periods where diversification goes away just when investors need it most. Adapting portfolios to market conditions requires dedication, patience, and a well-designed set of rules.

This is, or should be, the professional portfolio manager’s job. Some investors insist that the portfolio manager’s job is simply to beat the market by picking a high proportion of winning assets. Accordingly, they are willing to pay a premium for those managers who seem to have the hot hands. This is a bad approach, commonly known as “chasing past returns.”
Many studies show that virtually no active fund can consistently beat its benchmark, and not because of fees. According to Standard & Poor, which publishes a regular analysis of fund performance, most funds underperform their benchmarks both before and after fees.

The simple explanation is that poorly diversified funds can only outperform their benchmarks through superior forecasting. But, just like for earthquakes, forecasting the market accurately is impossible. As one academic put it:

Going back to basics, the idea “to invest successfully in the stock market, you need to know whether the market is going to go up or go down” is just wrong. (Professor David Aldous, UC Berkeley – The Kelly criterion for favorable games, Lecture 2)

While limiting downside exposure is crucial in portfolio management, having this protection in place at all times can be frustrating. If the market keeps on rallying, the “insurance” against declines may appear to be an unnecessary drag on returns, just as going through the expense of building a house that is earthquake-resistant may seem like a waste as long as there are no earthquakes.

We have all complained about paying for insurance that we don’t seem to need. This is understandable as long as disaster does not strike. But the temptation to cancel insurance can be dangerous. If you are not yet convinced this is so, please reread the first paragraph to see why having a systematic process to protect investments from losses is a good idea.

How Timing Impacts Your Retirement Portfolio Longevity

My Comments: Many a client has asked “How long will my money last?” and the only rational, unsatisfactory answer is “It depends”.

Unfortunately, luck plays a major role in our lives. If you’re alive and well today, chances are you’ve had at least some good luck. In answering the above question, much depends on timing, which is typically something over which we have NO control. Little more than deciding the date of your birth.

Follow these thoughts by Kevin Michels to get some additional insights.

Kevin Michels, CFP® February 20, 2017

How long will your retirement nest egg last? This is an intricate question to answer and many factors come into play such as rate of return, the value of your savings, annual withdrawals, inflation, etc.

However, one factor that is very important and is largely not spoken of is the timing of when you retire. In fact, the timing of when you retire is so important it can make the difference between running out of money in retirement or leaving a multi-million dollar inheritance to your children and grandchildren.

A Retirement Example

Let me explain by example. Let’s take 10 imaginary couples and pretend they have each saved $1 million for retirement. Each couple invests the full $1 million in the S&P 500 for the duration of their retirement, which we’ll assume lasts for a period of 30 years. Each couple also plans on withdrawing $100,000 per year from their portfolio and will increase that amount by 3% per year to account for inflation. The only difference between each couple is the timing of their retirement. The first couple retires in 1977, the second couple in 1978, the third couple in 1979, and so on and so forth.

All else being equal, aside from the timing of each couple’s retirement, how will they each fare over a 30-year period? The disparity between the longevity and value of each couple’s retirement portfolio is staggering.

Three out of the 10 couples actually ran out of money before the 30-year period ends, simply because they chose to retire one year too early or one year too late, while the other seven couples end the 30-year period with balances ranging from $500,000 to $3.2 million.

The three couples that ended up running out of money (1977, 1981, 1986) all had something in common. The first five to 10 years of their investment returns were subpar. The perfect storm for a short-lived retirement portfolio is created when you pair investment losses with withdrawals in the first five to 10 years of retirement. You get so far behind, that it becomes impossible to catch up. This is known as “sequence of returns risk.”

To put this into perspective, take a look at the table below regarding the most successful couple, who retired in 1979 and ended with $3.2 million, compared to the least successful couple who retired in 1977 and ran out of money in 20 years.

Couple

Longevity of Retirement Nest Egg

Average Annual Return of S&P 500 for 30-Year Period

Average Annual Return of S&P 500 for First 5 Years of Retirement

1977 – 2006

$0 after 20 years

12.48%

8.13%

1979 – 2008

$3.2 million after 30 years

11.00%

17.36%

Although over the long term the S&P returned 1.48% more per year in 1977 to 2006 than 1979 to 2008, the couple that retired in 1979 will leave a multi-million dollar estate largely because in the first five years of retirement they have superior investment returns than the couple who retired in 1977.

Safeguards to Protect Retirement Investments

Fortunately, we can put safeguards into action to mitigate the sequence of returns risk.

1. Don’t invest your entire portfolio in the S&P 500 or any other one asset class.

For the most part, it is good for retirees to be invested in stocks. This protects against inflation risk and low yields in the bond market as we’re seeing now. But volatility comes with stocks so it’s also important to include some bonds or bond funds in your portfolio as well, to smooth out returns.

2. Always keep at least the next two years of expected withdrawals in cash or short-term bonds.

In our example, each couple planned on withdrawing $100,000 per year and increasing that amount by 3% a year for inflation. So in their first two years of retirement, they could have liquidated $203,000 ($100,000 for year one and $103,000 for year two) and kept it in cash to safeguard against short-term volatility. This would have saved the couples who retired in 1977 and 1981. Both of those couples started their retirement with negative returns.

3. Rebalance your portfolio annually.

Rebalancing is simply the practice of selling high and buying low. If your portfolio is invested in 70% stocks and 30% bonds and the stock market underperforms the bond market for a year or so, naturally the stock portion of your portfolio will decrease while the bond portion will increase. If at the end of the year your portfolio is now made up of 65% stocks and 35% bonds, you can sell the 5% of bonds to reinvest in low-priced stocks or to keep in cash for future withdrawals.

4. Aim for a lower withdrawal rate in the first five years of retirement.

Your withdrawal rate is calculated by dividing your total withdrawals for the year by your total portfolio value at the beginning of the year. In our example, the withdrawal rate for our retirees starts at 10% ($100,000/$1 million), which is high for the first five years of retirement. As previously stated, the longevity of your retirement portfolio is greatly affected by your returns and withdrawals in the first five years of retirement. If each one of these couples would have started with a lower withdrawal rate, even 9%, they all would have had money left over at the end of the 30-year period. Try to start with a lower withdrawal rate and then increase it as your portfolio grows.

In the end, the decision of when to retire isn’t as important as the plan you have in place to ensure your retirement capital lasts the duration of your life. Before you begin living the golden years, make sure you work with your spouse and potentially a financial planner to have a plan in place that will provide peace of mind during those years of market turmoil.

3 Secrets to a Comfortable Retirement

My Comments: These lists are usually somewhat pathetic. Why just 3 secrets; why not 5? And these are not really secrets. But I needed something to try and catch your attention today so here are 3 Secrets!

I think it’s very possible that the next 30 years are going to be far less ‘profitable’ than were the last 30 years. So if you are in your 40’s and have enough presence of mind to know that there’s a high chance you’ll live into your 90’s, what follows makes a lot of sense. But I can tell you that when I was in my 40’s, having enough money to enjoy retirement never crossed my mind.

Walter Updegrave  |  January 17, 2017

The main goal of retirement planning is to be able to maintain roughly the same standard of living after your career as during it. But achieving that goal can a challenge. For example, the latest Transamerica Retirement Survey of Workers found that 40% of baby boomers expect their standard of living to fall during retirement, 83% of Generation Xers believe they’ll have a harder time achieving financial security than their parents, and only 18% of millennials say they’re very confident about their retirement prospects.
So how can you avoid having to ratchet down your lifestyle after calling it a career? Here are three ways:

1. Live below your means during your working years. This simple concept is something that many people have difficulty pulling off. Indeed, a 2016 Guardian Life survey on financial confidence found that nearly two-thirds of Americans say they’re not good at living within their means, let alone below them. But this is critical for two reasons: By saving consistently, a portion of your earnings today will be available for future spending when the paychecks stop. And the lifestyle you will be trying to continue in retirement won’t be as costly as what it might have been without the saving.

Granted, some people face such difficult financial circumstances that they have little choice but to spend all they earn. The issue for most of us, however, is finding a way to turn the resolve to save into actual dollars in a retirement account. The best way to tilt the odds in your favor is to make saving automatic, such as by enrolling in a 401(k) or other workplace retirement plan that moves money from your paycheck before you can even get your hands on it.

Generally, you want to set aside 15% or so of pay each year (including any money your employer kicks in), although you may need to step it up a bit if you’re getting a late start. If you can’t hit your target right away, you can work up to it gradually by boosting your savings rate a percentage point or so each year you receive a raise. If a 401(k) or similar plan isn’t an option where you work, you can sign up for an automatic investing plan and have money transferred each month from your checking account into an IRA at a mutual fund company.

Putting your savings regimen on autopilot allows you to bypass the chief obstacle to saving—you, or more accurately, your natural impulse to spend. It makes it more likely that the money you intend to save actually ends up getting saved. Further, if, say, 10% to 15% of your paycheck is going into your 401(k), then you pretty much have to arrange your life so that you’re able to live on the remaining 85% to 90%. In other words, you’re effectively forced to live below your means.

This approach isn’t foolproof. You can always sabotage yourself by running up lots of credit-card or other debt in order to overspend. But if you avoid piling on debt, save consistently and track your progress periodically—which you can do with a good retirement calculator like this free version from T. Rowe Price—you’ll reduce the chance that you’ll have to live a more meager lifestyle than you’d envisioned in retirement.

2. Learn to take pleasure in small things. Preparing for a secure and comfortable retirement is certainly important, but you don’t want to focus on saving and controlling spending so much that you don’t enjoy life. Fortunately, you don’t have to live large to be happy. On the contrary. Research shows that the pleasure you receive from spending even on major expenditures and big luxuries quickly fades. So indulging in more small, less-expensive purchases may actually lead to greater happiness than splurging on high-price items.

For example, in a paper titled “If Money Doesn’t Make You Happy, Then You Probably Aren’t Spending It Right,” researchers exploring the relationship between spending and happiness note that “if we inevitably adapt to the greatest delights that money can buy, then it may be better to indulge in a variety of frequent, small pleasures—double lattes, uptown pedicures, and high-thread-count socks—rather than pouring money into large purchases, such as sports cars, dream vacations, and front-row concert tickets.”

Clearly, you’re not going to eliminate all big-ticket expenditures during your life. But to the extent that you can find less costly yet still effective ways to treat yourself, you’ll free up more money to save for retirement and be better able to manage your spending after you retire without forcing yourself to live like an ascetic.

3. Get a bigger investment bang for your savings buck. Saving regularly by living below your means is the surest way to avoid seeing your standard of living fall in retirement. But another form of saving—reducing the amount you shell out in investment costs and fees—can also help. How? Simple. Morningstar research shows that lower costs tend to boost returns, which allows you to build a larger nest egg during your career and can lower your risk of depleting your savings prematurely after you retire.

The easiest way to reap the benefits of lower investing costs is to invest your savings as much as possible in a broadly diversified portfolio of index funds or ETFs, many of which you can find with annual expenses of 0.20% or less, vs. 1% to 1.5% for many actively managed funds. Low-cost index funds and ETFs can also bestow an advantage beyond their cost savings—namely, the more you stick to a straightforward mix of stock and bond index funds, the less likely you are to fall for gimmicky or exotic investments that can make it more difficult to manage your retirement portfolio and possibly drag down long-term returns.

I can’t guarantee, of course, that following these three guidelines will allow you to maintain your pre-retirement standard of living throughout your post-career life. But I can say that doing so should definitely tilt the odds in your favor.

Walter Updegrave is the editor of RealDealRetirement.com.

Investment Strategies for Your Retirement Accounts

InvestMy Comments: A phrase I’m known to use from time to time is that ‘life in this country is better with more money than it is with less money.” While this might seem too obvious for you, there are many people whose efforts to have more money have fallen flat. Here’s a few ideas that might help you.

Michelle Mabry, CFP®, AIF® January 26, 2017

With interest rates coming off a 36-year low and expected to rise, most investors expect to see bond prices fall and consequently deliver a negative return in what is considered a low-risk asset. We have seen a rebound in equities, and with the S&P 500 and Dow at all-time highs, some say the stock market is richly valued. As a retiree seeking income from your investments and looking to preserve your principal, where can you turn? What are ways retirees can invest for income and still minimize risk?

You have always heard you need a diversified portfolio and that has not changed, but what has changed is how you diversify it. Retirees need to determine the proper asset allocation of stocks, bonds, cash and alternatives based on income needs, time frame, and tolerance for risk.

How to Diversify Investments in Retirement

Let’s look at bonds first. If you invest in a traditional bond portfolio you are exposing yourself to interest-rate risk as rates rise and bond prices fall. You need to understand the average duration of the bond investments you hold. For example, a typical intermediate-term bond fund will have a duration of 5-10 years. If the average duration is eight years, then a 1% increase in rates will result in an 8% decrease in the net asset value (NAV). This would wipe out all the interest gains and then some. The shorter the duration, the less the potential loss.

So it is important to look for other assets that have low-risk characteristics or standard deviation similar to bonds but produce absolute returns, that is, a positive return regardless of which way rates are moving. Floating rate income, TIPs and some market neutral funds can be a good way to diversify your fixed-income portfolio. You may also want to look at structured notes as a way to produce yield and protect your downside.

Dividends as Equity

For the equity portion of your retirement portfolio, consider blue chip dividend-paying stocks or dividend growth strategies. Many large-cap funds pay dividends in excess of 2.5%, plus you have the upside appreciation potential over time to keep pace with inflation during your retirement years. Remember to keep focused on the longer term and not be too concerned with short-term volatility. Dividend-paying stocks have outperformed most other asset classes over time. Small-cap stocks have been one of the best-performing asset classes, so it would make sense to find dividend-paying small- and mid-cap equities as well.

When searching the universe of mutual funds and ETFs, there are not many of these, but a couple that have attracted our attention are WisdomTree Midcap Dividend Fund and WisdomTree Small Cap Dividend Fund with yields of 2.63% and 3.03% respectively as of December 30, 2016. Of close to 2,000 ETFs available in the U.S., a search revealed only four that are exclusively dividend-driven and which also hold just domestic small- or mid-cap stocks. Two of the portfolios feature issues that have exhibited dividend growth while the other two ETFs (the WisdomTree funds) include all dividend payers in their capitalization range.

Include Alternative Assets for Diversification

Also important in developing a portfolio for retirement is a focus on absolute return strategies, and many of these fall into the alternative asset class. Alternatives are anything that is not a stock, bond or cash. Alternatives have no correlation or negative correlation to other asset classes so they are great diversifiers. Our retired clients typically have one-third of their portfolio in alternatives. Examples include managed futures and long/short strategies as well as volatility strategies using options. An example is LJM Preservation and Growth which has shown a positive return every year since its inception 10 years ago with the exception of one year, 2013, when the stock market went straight up and there really was no volatility. The fund was up in 2008 when stocks and bonds were not, and therein lies the importance of a diversified portfolio to manage risk.

By rebalancing your investments quarterly or semi-annually back to the original investment allocations you can create the cash needed to sustain your monthly withdrawals in retirement until the next rebalance. We do not recommend a withdrawal rate in excess of 4% in light of current market and economic conditions.