There is just a ton of information and advice out there about how investors reaching toward retirement should weight their portfolios among competing — and hopefully coordinating — assets.
InvestorPlace Editor Jeff Reeves provides an amusing but instructive view on the topic, suggesting that a nice approximation is the (100-Age) value of a stock-and-bond mix. It is definitely worth a look and a quick back-of-the-envelope calculation, so enjoy and get to work:
But what is just as important as a formula is understanding both your existing portfolio and your “investment horizon.”
In other words, how much do you have, how much is what you have providing in pure income, and how long until you might start to live on that income along with whatever is provided by an employer (pensions), employee benefits (retirement plan) and the government (Social Security — you know, that redistributed money).
If you are in and around my age, and you’ve had the good fortune to invest over time in the market, you’ve seen some very good times (1989-1998 returns averaged a compounded 19% per year!) and some less-than-stellar events — including the 1987 market crash (508 points — 23% of value), a bear market in 2000-02 that cost the market 49% of value, and the meltdown of 2007-09 with its 57% drop.
What’s amazing about that is the net of all that time is an annualized gain of around 11%. So with any luck, persistence and patience have hopefully paid off, and you’ve built a bit of an income-producing nest egg.
Now comes the investment horizon factor: How much longer do you want to be invested, and how much longer can you be invested and take the portfolio risk you know comes with time?
Investors loaded up with outstanding dividend-paying portfolios that include the likes of Chevron (NYSE:CVX), Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG), Wal-Mart (NYSE:WMT) and IBM (NYSE:IBM) — as well as other income producers like master limited partnerships (MLPs) and real estate investment trusts (REITs) — should be able to enjoy the benefit of consistent income that can cushion the body blows from down days (or even months).
Similarly, investments in mutual funds, ETFs, closed-end funds and other vehicles that offer monthly payouts — for instance, the popular SPDR Barclays Capital High Yield Bond ETF (NYSE:JNK) — buttress the time between quarterly payouts from those mentioned above. And of course, bonds themselves fill in generally on a semi-annual basis.
So if you’ve managed to build a laddered portfolio, income can be timed monthly.
The point: Your investment horizon can be expanded — even as you get closer to retirement — with enough income to support what you want out of your lifestyle or employment status if you’ve played your cards right during your investing lifetime.
And by expanding the investment horizon, you give yourself the opportunity to let time do what it historically does to the marketplace: increase stock prices on good, solid investments. If you don’t have to sell into a downturn because of your cushion, you won’t, and will wait it out until the inevitable turn.
Does that mean you should shun or ignore moves into alternative investments like bonds? Absolutely not! The best news about a bond — specifically, a U.S. government-issued bond, — is that no matter what happens to its price while you hold it, you will get back 100% of what you put in when it matures. So safety is assured regardless of the investment horizon.
Indeed, Money Magazine writer Walter Updegrave makes such a case in an interesting Q&A session here.
Keep looking at your portfolio to make sound short- and long-term decisions, and while snickering at Reeves’ video again, take a minute to think through your own investment horizon.