Last week a friend lamented the current investment climate. He is near retirement, he is turned off to stocks, and he sees near zero interest rates on safe savings. What, he asks, should he do? Here’s the answer I gave him:
Stocks. Stocks should be included in any investment portfolio despite what happened to them during the “now-ended” recession. Why? Because stocks provide a valuable guard against inflation over the long term (10-20 years). Here are some things to do which will reduce the risk of stock ownership:
Keep the percentage of stocks in your portfolio between 20% and 50%. Buy low beta stocks (a beta of 1.0 will match stock market performance; a beta of 1.5 will go up or down 50% more than the overall market). Buy stocks which provide good dividends (currently, I consider any stock paying over 3% as an “income” stock).
Diversify your stock holdings by purchasing them through a no load (no commission) stock mutual fund or a stock Exchange Traded Fund (ETF). Buy direct from a no load mutual fund company for mutual funds and use a discount broker for ETFs.
Consider anything related to stock market performance as a “stock.” Note, before the recession I had separate categories for income (Real Estate Investment Trusts) and “alternative investments.” Now, all this stuff is considered part of my stock percentage.
Rebalance. Reassess your portfolio at least yearly. We just had a big September in the stock market; might be a good time to rebalance.
Bonds. Keep a reasonable percentage in bonds, but don’t overdo it. Too many bonds in this near zero inflation environment is not a good long-term investment. Bond values will go down when interest rates go up. Keep in mind that individual bonds will pay you face value when they mature (that is, if the company or government is still solvent). But a 30-year bond at 3.5% won’t be a good idea once inflation kicks back in.
I-Bonds. These are inflation protected government savings bonds. They currently (October 2010) pay 1.74% with a fixed rate of 0.2%. Rates change every six months but the fixed rate remains with the bond. If inflation goes to 15%, your I-Bond will pay 15.2%.
Mortgage. If you are going to stay in your house after retirement and your mortgage has less than 5-10 years to go, you might put your extra cash into paying down the mortgage. That way you save paying interest on borrowed money (how much depends on several factors), and you can eliminate a large expense (your home payment) just as you retire. Be careful not to pay for any program that helps you pay extra mortgage principal; do it yourself for free.
It is a tough time to figure out where to put your money so you will have enough for an enjoyable retirement. Think it through!