How About Oldsters and Portfolio Management?

When will you change your investing strategy? Why will you change it?

My audience often asks insightful questions. When I started this current series on target date funds, one reader said the following and asked a pertinent question: “Very interesting evaluation of target date funds, and very pertinent for investors in their beginning and middle years of wealth accumulation. How about us oldsters who have far fewer years to manage our portfolios? Folks in their 80s— what’s your take on investing for most likely the short-term? I’d appreciate your thoughts and suggestions for the very golden years. Thanks in advance, and I genuinely enjoy your postings.”

Life is often short and uncertain. Like the dandelion, we bloom and then we will blow away and (so it would seem) disappear. We are like a mist and our days are like the width of my hand, compared to all of time and eternity. James reminds us not to count on long life. We should not boast about tomorrow.

“Come now, you who say, ‘Today or tomorrow we will go into such and such a town and spend a year there and trade and make a profit’— yet you do not know what tomorrow will bring. What is your life? For you are a mist that appears for a little time and then vanishes.” James 4:13-14

The Psalmist had this to say: “Behold, you have made my days a few handbreadths, and my lifetime is as nothing before you. Surely all mankind stands as a mere breath! Selah” Psalm 39:5

The Golden Years and Retirement Funds

Because I have already said that I think the typical target date funds are a bad idea, the prudent investor has to ask, “What should I do when I reach retirement? What changes should I make in my investment strategy and asset allocation? Should I start to buy bonds for a steady source of income? Should I buy an annuity with guaranteed income from an insurance company?” The answers to these questions depends on your own answers to questions like the following:

1) Did I save and invest wisely before I reached retirement? 2) Does my Social Security and/or pension cover all or most of my costs of living in retirement? 3) Do I have any debt or mortgage loans? 4) Would I like to leave an inheritance for my children and grandchildren or give a portion of my estate to charitable causes and my church? 5) Is it likely that I might live another 10-20 years based on family history?

When Do You Stop Thinking Long-Term?

When do you stop thinking long-term?

If you were thinking long-term when you were in your 20’s, 30’s, 40’s, and 50’s, then I believe you might want to think long-term in your sixties, seventies, and eighties. Assets will, over time, have less buying power due to inflation and the ever-present threat of more taxes and fees. Health care costs are not likely to decline. The costs of food and services will continue to increase over time, if history is any indication of the reality of the future. Long-term investing, therefore, makes cash and bonds a poor long-term strategy.

How Much Did You Save?

Sadly, far too many people reach their retirement age and have less than $250,000 saved in their retirement account. If we assume bond or CD interest of 4%, then the income from those savings will be about $10,000 per year. That isn’t much. Therefore, your strategy going into retirement may have to be different from someone who was able to amass a retirement account of $1,500,000.

The person with $1.5 million can reasonably expect to receive $60,000 per year in interest and dividends. Furthermore, if that investor has invested in dividend growth stocks and ETFs, that income is likely to increase year-after-year at a rate that is better than the Social Security inflation adjustments. One of the reasons I do not own bonds, and I am 72 years old, is that bonds are not going to add any meaningful growth in income. While I might die before I am 80 years old, I am also thinking about my wife, who may live until she is 95 years old. That is a long-term perspective. Furthermore, if I live until 85 years old, then I also have a long-term investment horizon.

The Total Income Picture

My advice, therefore, is a function of total income needed, adjusted for inflation, with a long-term perspective. My wife and I have zero debt, no mortgage, reasonably good health, and considerable income from Social Security. We won’t have to sell any of our stocks during a market downturn to fund the required minimum distributions when we reach age 73, because our dividends can easily cover this withdrawal from our traditional IRA accounts. Furthermore, much of our income is now coming in the form of dividends in our ROTH IRA accounts. That income is tax free. As a result, it makes far more sense, from a long-term perspective, to stick with my current dividend growth strategy.

Volatility Versus Risk

The insurance industry sells annuities based on a certain combination of fear about the long-term and each person’s understanding of their current and likely future income needs. For most individuals, the insurance company is asking you to think more about volatility in the stock market than about true risk. Therefore, I rarely can recommend an annuity for 99% of those entering retirement. The costs are too high and the results are not satisfactory.

Ultimately, each situation will be a bit different. There may be wisdom in having 10-20% of your portfolio in quality corporate bonds and US treasuries with inflation protection. That approach makes far more sense than the irrational switch from stocks to bonds that target date funds use to “protect” you from future calamity.

A Rule of Thumb Summary

One of the most important rules to remember is to “think long-term.” Because we don’t know how long we will live, we should make each day count but remember that God may choose to give us another ten or more years, regardless of our age. Don’t let short-term thinking cause you to make decisions that are bad for the long-term.

At what point will your assets dies before you die? In five years? In ten years? In 25 years? Think long-term when you answer this question.

Want to Learn More?

As always, I welcome your general questions and even specific questions about this or any topic in my blog. Your questions help me provide ideas you can use as you build your own investment goal statement and your long-term investing strategy.