Preserving your portfolio
Baby boomers nearing retirement need to start shifting their investing gears
Say, though, you were to shift to 50 percent stocks and 50 percent bonds. That would have yielded 9.2 percent on average every year. Barely a difference. But you would have lost money only eight times in that 44-year stretch. One thing is certain: You probably shouldn't give up on stocks altogether. Workers who not only invest through 401(k)'s and IRA s but also have the comfort of a traditional pension have enough security to take more risks, says William Reichenstein, a professor of finance and investment management at Baylor University. He says that "Social Security income and defined benefit payments can be thought of like fixed-income exposure."
Staying invested. In the early years of their retirement, Tom and Sheila Carranza have discovered that they can live primarily off the income generated by their two pension checks and Social Security. Tom, 67, a former machinist and production engineer, recently retired, while Sheila, 62, retired from her job working for a school district about seven years ago. This has allowed the Las Vegas couple to keep a majority of their self-directed assets, held mostly in mutual funds, primarily in equities.
But for those who don't have this luxury--and that is the majority--there are things you can do to reduce risk while still enjoying the potentially higher returns of stocks. Within your equity allocation, you can choose more stable, consistent types of stocks that are likely to help you sleep at night. You can pare your exposure to company stock. The average 60-something has 29 percent of his or her 401(k) assets in company stock. Scarborough recommends having no more than 5 percent of your holdings in your employer's shares.
You can also reduce your exposure to aggressive growth stocks, while emphasizing blue-chip dividend payers. "Dividend-paying stocks give you a bird in the hand," says Colorado Springs, Colo., financial planner Jim Shambo.
Moreover, because of the income they pay out, dividend payers tend to protect portfolios in down years. In 2001, for example, dividend payers in the S&P 500 fell 0.1 percent, versus losses of 5.4 percent for non-dividend-paying stocks.
Meanwhile, since the end of 1979, dividend-paying stocks in the S&P 500 have earned 15 percent on average, vs. 12.4 percent gains for non-dividend payers.
Shambo says his desire for consistent returns--even if they're in the form of income, rather than capital appreciation--would suggest putting a small portion of your money, perhaps 5 to 10 percent, in real estate investment trusts.
A portfolio of 50 percent stocks, 40 percent bonds, and 10 percent cash would have produced average annual returns of 10.9 percent between 1972 and 2003, according to Ibbotson Associates. Had you taken 5 percent of that equity allocation and another 5 percent of the bonds and shifted that into REIT s, your portfolio would have earned slightly more--11.2 percent a year--with less risk.
Westfield, N.J., financial planner Paul Westbrook also suggests older boomers consider lightening up their exposure to small caps while moving more of their equity holdings into large-cap stocks. The reason? "Less volatility," he says. Meanwhile, he says, large-cap stocks can offer more protection in down markets.
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