The more I read other people complaining about the situations they are in and the more I think about it, the more I come to believe that most people are just allocating their assets in a way that is too risky for them to be comfortable with.
Almost everybody who I hear is seriously considering abandoning the strategy that got them to that point is more than 50% invested in stocks. Stocks go up and they go down. You have to expect them to be able to go down 50% just like you expect them to go up 50%. The long term nature of them has always been to go up, but it’s always been a bumpy ride.
People just really do not like that bumpiness. This affects people of all ages: 25, 35, 45, 55, or 65 it doesn’t matter. None of them want to see their entire portfolio go down by 20% or more in a short period of time.
If you can’t stand to see your total value go down by 20%, you should try to keep less than 40% in stocks. The remainder should probably be in bonds, even during your investing years.
If you contribute an extra 1% or 2% of your income to an investment account, you can easily end up with similar ending amounts at retirement even if you move heavily in the direction of bonds. Moving in that direction definitely helps people feel better about their accounts as well, since there isn’t as many or as drastic decreases in the total account value.
If it helps you avoid the portfolio killer of selling all your stocks when they are low, it’s worth it.
I very rarely sing the praises of keeping assets in cash, but if having money in cash lets you continue with your investment plan without making fear driven changes, then it’s worth it.
It’s perfectly possible to have a really good retirement focusing very heavily on conservative portfolio assets, as with a 25% – 40% stock and the rest conservative assets portfolio.
There are plenty of assets that qualify for the conservative assets side of the equation other than just bonds as well.
Blue chip dividend paying stocks probably shouldn’t be looked at as too much of a conservative asset, because blue chip stock prices tend to go down at the same time other stocks go down, just to a lesser extent. If you want to go 50% or more in stocks, though, you might consider having a large portion of those be high dividend payers, like the VYM index fund. They will help your account value stability while still giving you some exposure to upside stock price appreciation.
Bonds work perfectly good as well. Particularly, you may want to consider a fund that is highly diversified in higher yielding corporate bonds. They are quite a bit more risky than government bonds, but they tend to pay out more as well.
You might also consider using a well designed whole life policy as one of your conservative assets as well. The cash value on these never goes down year to year if you design the policy correctly and it can go up quite considerably as well, with yields comparable to bond yields and a death benefit besides. It only takes a few years until your cash value starts going up more than the amount you are paying on the policy.
You might consider something like this (yield as of 2/10/16):
25% VFINX – Vanguard S&P 500 Index Fund, pays about 2%
25% VYM – Vanguard Dividend High Yield, pays about 3.4%
25% VWEHX – Vanguard High Yield Corporate Bonds, pays about 5.89%
25% Blended Whole Life – Probably yielding about 5% from a good company
If you were to build a portfolio like that, you could expect to have a pretty steady account value, even in times of stock market turmoil.
Sure you might earn a lower percent on your investments over the long term, but if you avoid even one major error then you are probably ahead of the people who invested in a riskier way.
You also have the added benefit of knowing pretty well what to expect in terms of results. The focus on current yield helps you know what to expect and to see constant value coming in, even if markets are going sideways for long periods.
My favorite part of all this is the whole life portion. If you die the day after putting this policy in place, you end up with a really large set of gains on your portfolio assets over the holding period. Most of the death benefit will come in as low cost term insurance as well, especially early on.
I like the idea that after I am gone, people will be a lot better off. Not that I want people to be happy that I am dead, but I would at least like to give them a minimum of 500,000 reasons not to spend so much time grieving. It’s not hard to get that started with a few thousand in year 1.
One thing that it is important to note, though, with a heavy focus on conservative assets is that you will want to invest more towards your retirement. The expected gains will be lower, so it helps a lot to have a larger base of assets you are making gains with.
Even just 2% more of your pay going into building assets will go a long way towards ensuring you have not just a smooth ride to the end, but a pretty good quality of life when you get there.