Rethinking Investments After a Flight to Security

Shaken by what seemed to be an earthquake in the world’s financial markets two years ago, millions of retirees fled to safety, shifting their holdings into savings accounts, Treasury bills, money market funds or certificates of deposit. Now they are suffering the aftershocks: with short-term interest rates well below 1 percent, their assets are not producing enough income for daily living expenses.


What should they do? There is no quick answer to that question, but four leading financial advisers offered a variety of ideas for investing with significantly better yields while limiting risk.

Diversifying portfolios is a main theme, and it is important to analyze one’s cash flow and to assess financial priorities, distinguishing between needs like money for food and utilities and favorite outlays like family gifts that may no longer be practical.

Some people may discover that although portfolio values have fallen in the last two years, their assets are still sufficient for their long-term needs. Others may have to rethink their financial plans and tailor their portfolios accordingly. What follows are the advisers’ suggestions:

JASON T. THOMAS, chief investment officer of Aspiriant, a fee-only wealth management firm with offices in San Francisco and Los Angeles, emphasized the need for a diverse portfolio with a strong equity stake meant to provide solid cash flow. In trying to avoid risk, many people have incurred “purchasing power risk,” he said, because the return is lower than the level of inflation.

“Think globally,” he said, adding that some American companies, notably Nike and Caterpillar, were investing in emerging markets with strong growth prospects. That makes them a good way for investors to take a global position while holding dollar-denominated investments in companies subject to American law and accounting standards. For a single global equity holding, he suggested the ACWI, or All Country World Index, fund from iShares Trust.

Dr. Thomas also favors real estate investment trusts because they are “an opportunity to buy into a depressed market,” and many pay dividends of 5 percent and higher. The iShares Trust based on the Dow Jones U.S. Real Estate Index has had an annualized return of 4.76 percent.

Commodities are “an unloved asset class,” he said, but holding them or an exchange-traded fund that holds them is a way to hedge against rising prices of raw materials in the future.

Turning to credit markets, he recommended the Nuveen High Yield Municipal Bond Fund, which is yielding 7 percent. When buying high yield, he prefers a fund because of its professional management and diversified holdings. He said he would avoid most Treasury and corporate bonds for now because interest rates are so low. As rates rise, bond prices fall, so holders may have to keep the bonds until maturity to get their principal back.

In repositioning a portfolio, Dr. Thomas said, “don’t do it all at once; do it in steps.”

MARK L. POLLARD, a wealth management adviser and senior vice president for investments of Merrill Lynch in Princeton, N.J., warned, “In desperate times, people do desperate things. Don’t. If you blow your capital, it’s gone. It may be necessary to temper your expectations.”

Still, Mr. Pollard said, a prudent investor can do much better than staying in cash or Treasury bills. A portfolio of high-quality stocks can yield dividends of 3 to 4 percent over all and offer a potential for long-term capital appreciation.

Among the stocks he likes are AT&T, Verizon, Johnson & Johnson, Exxon Mobil, Chevron, Procter & Gamble, Pfizer, General Electric and Merck.

Enhanced returns are available through certain structured investments, Mr. Pollard said, describing a Merrill Lynch product called STEP Income Securities. They are senior unsecured debt securities issued by Merrill’s parent, Bank of America, for terms of six months to two years. Their payouts are linked to the performance of an underlying stock, including Ford, JPMorgan, Apple, Google and Schlumberger.

Each one is a bit different. Some offer yields of 7 to 10 percent, with limited downside protection if the stock declines. Last month, a note linked to Pfizer was offered with a potential yield of 14 percent but no downside protection.

Retirees who have enough income for basic living expenses from other holdings, pensions or Social Security and are bullish on the underlying stock might find the notes attractive for generating income, provided they are comfortable with the downside risk.

JAMIE KALAMARIDES, senior vice president for retirement strategies and solutions at Prudential Retirement in Hartford, pointed out that retirees in their late 60s may live for 20 or 30 more years. Many fear they may outlive their money. Yet, as investors, they tend to be risk averse.

He recommended slowly shifting to a diversified portfolio from money market funds and C.D.’s. Traditionally, he said, that would include preferred stocks and bonds, and perhaps a fixed annuity for guaranteed income. Today, he said, Prudential and others are offering a new generation of annuities with a guaranteed minimum-withdrawal benefit.

The product is intended to overcome misgivings about traditional annuities while providing lifetime income, appreciation if the market rises, flexibility in withdrawing money and some money for the estates of holders who die within 20 years. At present, the annual income is 4.5 to 5.5 percent a year, depending on the purchaser’s age, he said.

ELIZABETH SCHLUETER, national practice leader for the private wealth management group of JPMorgan Chase in Indianapolis, advised retirees to look at the total return of their portfolios, not just at interest and dividends. “We believe as a firm that it is important to stay invested,” she said, with diversified holdings of equities, bonds, mutual funds and alternative investments like hedge funds, commodities and currency, but changes in a portfolio should be made over time, not suddenly.

For living expenses, “spending rate is as important as asset allocation,” Ms. Schlueter said. “Look at asset basis. What percentage can I pull out of that asset basis?” In other words, recognize some capital gains, rather than relying only on portfolio income. “At some point, inflation will creep back,” she added, and that is why a diversified portfolio with some appreciating assets is important.