Market Pulse: Investing in retirement
These are challenging times for investors. First the pandemic caused the market to drop 34% in one month only to rebound 45% over three months. There were protests and demonstrations calling for major changes after the death of George Floyd. Then a surge in new cases rattled the market. What is an investor to do?
For a lot of investors, the answer was to sell. According to LPL, nearly 18% of investors sold all their stocks between February and May. The percentage of people who sold greatly increases with age.
A third of investors over the age of 65 hit the panic button. While some of those may have since bought stocks, I’m sure the majority now face the difficult question: What now?
A common mistake for those new to retirement is to get too conservative with their investments. They avoid, or worse yet, sell growth investments and buy low-yielding bonds (or worse, cash) so that their portfolios don’t go down. That is a mistake. Instead, investors should look at their life expectancy and invest for that time horizon.
A person that is 65 or 70 might think they need to get very conservative, but they might live another 25 years. They need to invest with the expectation that their investments will last that long. If you are only making 2% annually on a very conservative portfolio then you are losing money each year to inflation, especially when healthcare costs are factored in.
A popular strategy that I dislike is “rebalancing.” Most advisers rebalance client portfolios on a systematic basis so that the percentages in equity, bond, and other holdings remain the same.
Here’s the problem. Interest rates have fallen since the 1980s so bonds are in a 40-year bull market. With rates near zero, surely bond funds won’t continue to appreciate. Do you really want to buy more bond funds each year as they underperform equities? That’s moving good money to bad.
The best-case-scenario in retirement is to live off the interest and dividends of a portfolio and not have to withdraw from the principal. Some of the dividends will come from equities so there is a growth component to the portfolio. Unfortunately, the majority of people don’t have the funds to generate enough income. That’s understandable.
If you are young, invest in a low-fee equity fund and let the power of compounding work for you. By the time you retire, your investments will serve as your paycheck. It works.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Consult your financial advisor before purchasing any security.
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