BlackRock (NYESE:BLK) managing director Quintin Price believes retirees need to put more into equities due to rising life expectancies. Years ago, I remember George Russell of Russell Indexes saying the same thing. Is this a matter of self-interest, or is there something in what they say?
Financial planners used to espouse the asset allocation mantra “100 less your age.” They were talking about the percentage of your portfolio that should be invested in stocks. So, if you’re 48, you should put 52% in stocks and the rest in bonds and other fixed-income investments.
However, that guideline was developed years ago when our life expectancy wasn’t nearly as long. As a result, many professionals have ratcheted that up to “120 less your age” to account for the changes. The same 48-year-old would now put 72% in stocks and 28% in fixed income based on the revised mantra, an allocation that seems better, if not perfect.
Why isn’t it perfect?
Because it’s a one-size-fits-all approach that doesn’t take a person’s particular situation into account. Suppose this 48-year-old has been working since 18 in a unionized position that already provides a reasonable pension? If he’s healthy, he could live well past 80. It seems pointless for that person to completely avoid risk by investing in guaranteed investments.
Americans on the whole tend to underestimate how long they’ll live, which can affect their decisions regarding asset allocation. The Society of Actuaries asked 1,600 adults aged 45 to 60 (half were retirees) how long they would live, and 40% underestimated their life expectancy by five or more years. Unless you’re incredibly wealthy, that miscalculation could have serious consequences on your standard of living in those final years.
BlackRock’s Price uses the example of German two-year government bonds to illustrate how ridiculous it is to be so heavily weighted in fixed-income investments. In early July, the yield on those bonds fell below zero, meaning investors were paying to lend money to Germany, the strongest economy in the European Union.
Would you give your wealthy neighbor some cash and then turn around and lend him or her money? I doubt it, yet investors have become so risk-averse they’re willing to pay to park their money. It’s sheer lunacy. And that’s why Price advised his 80-year-old mother-in-law to put more into stocks.
My dad is in his 81st year, and his philosophy is to invest all his funds in stocks except what he needs for the next 12 to 18 months. Occasionally this approach will bite you in the posterior, as it did in early 2009, but for the most part it’s worked out well because he’s achieved real returns that are superior to bonds.
When it comes to the financial services industry, I’m as cynical as they come. I believe the mutual fund business was created by investment managers solely to provide an additional distribution channel and revenue stream. The consumer barely entered into the equation. The same can be said for ETFs, although with much lower fees, the argument here is more tenuous.
However, that doesn’t mean Price’s comments warning investors to increase their stock allocations using high-yielding equities is self-serving in any way. He’s merely stating the obvious: If interest rates continue to remain at record lows and inflation runs between 1% and 3%, your retirement fund is heading in reverse.
To prove Price’s point, let’s compare how some investments have fared since the stock market lows of March 9, 2009, through Sept. 10:
|Vanguard REIT Index||254.7%|
|Consumer Discretionary Select Sector SPDR||205.9%|
|SPDR S&P 500
|Vanguard Total Bond Market
|iShares Barclays 1-3 Year Treasury Bond
Retirees or those near retirement who put $10,000 in the iShares Barclays 1-3 Year Treasury Bond (NYSE:SHY) on March 9, 2009, would be sitting on $9,792. If they’d put it in the Vanguard Total Bond Market (NYSE:BND) they’d have $11,78. And if they went hog wild and bought the SPDR S&P 500 (NYSE:SPY), they’d have $21,412. These are all taking into account inflation. Only the SPY provided any real protection against inflation.
By investing in high-yielding equities, especially those with a record of increasing dividends every year, you’re ensuring you have more funds for enjoying your retirement. If you need some cash for an unexpected expense, the SPY provides the best opportunity to do so without eating away at your principal.
In Canada, where housing prices haven’t taking a beating like they have in the U.S, I hear the same thing time and again from homeowners: “There’s nothing safer than real estate. Stocks, on the other hand, can go to zero.”
For most Americans, the opposite is true. The value of most people’s retirement accounts have almost completely recovered since March 2009, while their home values have barely budged. Over time, equities provide the best combination of growth, liquidity and almost zero maintenance. You can’t say the same about your home or your typical bond fund.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.