Playing It Safer: Why Some People Should
If you’re more concerned with protecting the assets you’ve got than adding to them, your options may seem rather grim.
Bonds, often a haven from the turbulent stock market, just finished a losing year as rising market interest rates depressed bond values.
Returns on cash investments--certificates of deposit, money market mutual funds and savings accounts--have inched higher as the Federal Reserve has raised interest rates but are typically in the 5% to 6% range.
Gold, silver and other precious metals, which have been a way to store value since ancient times, have been a bad bet for most of the last 20 years.
Yet most investors should have at least some investments that don’t rise and fall with every stock market twitch, financial planners say. After the market’s record 1999, this is a good time for older investors, in particular, to evaluate their total portfolio and determine what percentage is in lower-risk assets. It may be less than they think.
West Los Angeles financial planner Joel Framson insists that even his most hard-charging clients must have some cash or short-term bonds in their portfolios.
Harold Evensky, a leading planner based in Coral Gables, Fla., makes sure his retired clients have at least two years’ worth of expenses stored in cash and several years’ expenses in bonds.
Both planners want to ensure that their clients have at least some insulation in case stocks go down and don’t come back up again for a prolonged period.
Consider: Even though 1999 was a bad year for bond owners, the average long-term government bond mutual fund’s net loss was a relatively modest 7.4%.
In a horrendous bear market for stocks, by contrast, equity portfolios could plummet 40% or more. And if you lose 40% on an investment, it must then rise 67% just to get back to even.
Another argument for keeping some assets out of stocks: “Once you get up to 80% in stocks, there is only a marginal increase [in potential returns] in going more into the market,” Framson said. “It’s not worth the extra increase [in risk] to do that, even for young clients.”
Should a bear market slam stocks soon, many investors may overreact and sell shares at their lows, compounding the damage to their portfolios, planners say. Seeing that at least some parts of their portfolio are holding up well can alleviate that risk.
Even those who don’t panic may run into financial disaster if they are beginning to tap their funds when the stock market goes down, said Todd Cleary, vice president of financial planning services for T. Rowe Price Associates in Baltimore.
The mutual fund company’s research using historical investment returns and simulations of best- to worst-case scenarios show that a stock market downturn at the beginning of retirement can mean running out of money years earlier than expected, particularly if the retiree fails to cut back sharply on spending.
The higher the proportion of stocks in the portfolio, the quicker the retiree can run aground.
Nonetheless, most investors shouldn’t entirely avoid the stock market because they need the kind of long-term, inflation-beating growth that’s historically been offered only by stocks.
Framson said he urges even his most conservative investors to have at least 20% of their portfolios in stocks, a percentage that asset allocation software shows can produce better overall portfolio returns without an increase in risk.
For many conservative clients, Framson prefers an allocation of 50% stocks for even better returns with only a slight increase in risk. Such a portfolio “really is not terribly risky, even for a conservative investor,” he said.
With all that in mind, people who want to take some of their money out of stocks can consider the following ideas for safer-haven investing:
* You can find unusually high yields right now in tax-free municipal bonds or muni-bond mutual funds. People in the 28% federal marginal tax bracket and above will find that munis, typically an investment for the wealthy, are paying tax-equivalent yields that beat those of comparable Treasury bonds.
As is typical with bonds, the highest rates are on the longest-term bonds--the ones that react most violently to market interest rate changes. Investors who want to reduce risk further should plan either to hold individual bonds until they mature or stick to shorter-term maturities.
Laddering maturities, which means assembling a portfolio of bonds of varying maturities, can lock in today’s yields while ensuring that you’ll have capital coming available for reinvestment in possibly higher yields in the future.
* If you want to shift some savings to traditional bank investments, yields are more rewarding than six months ago. The average yield nationwide on a one-year CD is 5.54%, up from 4.77% six months ago, according to Bankrate.com, a financial data and research firm.
Investors who search can also find rates on one-year CDs that exceed 6%; Providian Bank in Salt Lake City, for example, recently offered a CD that yielded 6.65%.
* Shorter-term Treasury yields now are at their highest levels in more than two years. The annualized yield on a two-year T-note is about 6.24%. A big advantage of Treasury securities over bank CDs: You don’t pay state income tax on Treasury interest.
* If you’re looking to lower risk within a 401(k) retirement account, check the options available either in terms of bond funds or “stable-value” accounts. The latter often are insurance contracts that pay a fixed interest rate, like CDs.
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Liz Pulliam can be reached at liz.pulliam@latimes.com.
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Balancing Risk and Return
Boosting the percentage of stocks in a portfolio generally increases expected returns--as well as risk. The following chart shows the average annual return an investor could expect with each portfolio over five years or longer, as well as the maximum percentage the investor is likely to lose in any given year. The figures are based on historical and economic data from research firm Callan Associates.
Source: Joel Framson and Brian Scott, Glowacki Framson Financial Advisors, Los Angeles
