Rewriting the Golden Rules of Retirement Investing

Secure, steady and safe.


Those three words once associated with retirement investing no longer hold true, as many retirees have been forced to assume more risk to make up for the deterioration in their portfolios in recent years.

What's more, experts say using one’s age to determine the optimal asset allocation mix — the golden rule of retirement investing — has become a thing of the past.

For one, ultra-low interest ratesfor instruments like certificate of deposits, money-market and savings accounts have been generating lackluster, if not marginal, fixed incomereturns for years.

“The old model has flipped flopped,” says William Fisher, a financial advisor with Summit Advisors based in the San Francisco area.

With CD rates and government bond rates in the tank, retirees are left with fewer re-investment options as those instruments mature, notes Fisher.

Wealth managers agree that retiring in today’s investment environment is about as bad as it could be — much like the long bear market of the 1960s and 1970s — with individuals living longer and purchasing power shrinking.

Many financial advisors are now questioning the relevance of traditional investing strategies that follow the 60/40 stocks-to-bonds mix and long-term, buy-and-hold approaches, a nationwide study by Natixis Global Asset Management showed.

Among the 163 advisors surveyed, 80 percent say their clients are torn between increasing returns and keeping their investments safe.

The wild swings in the stock marketgenerally have scared away many retail investors. For instance, more than $260 billion has been pulled from U.S. equity mutual funds since the end of 2008, while $800 billion has gone into bond funds, based on Investment Company Institute data.

But retirees in urgent need of recovering the colossal losses in their portfolios are left with little choice but to return to equities, especially with the Federal Reserve’s stated intention of keeping rates near zero'till 2013.

“For people to maintain any form of retirement, they have to assume higher risk profiles,” says Alan Harter, managing director of Pactolus Private Wealth Management, who advises high net- worthfamilies with at least $25 million to invest.

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“Realistically, yields are very, very low,” adds Harter. “The only place for them is to have a large portion of their money in high-quality equities.”

Chasing High-Dividend Yields

So what does that leave?

“Go for multinational equities, paying a dividend,” says Harter.

Even amid the volatility and downward price pressure from worries about the EU debt crisis or a potential hard-landing for China's economy, wealth managers point out that dividends provide income even if the stocks are depreciating.

Payouts this year are set to hit a record. The net increase in dividends reached $24.2 billion in the first quarter of 2012, a 27.6-percent jump from a year ago, according to Standard & Poor's, while dividend payouts by S&P 500 companies alone are expected to hit some $280 billion in 2012 — another record.

“We expect to see double-digit growth in actual dividend payments for the remainder of 2012, which would equate to a 16-percent gain over 2011,” Howard Silverblatt, a senior index analyst at S&P, noted in a recent report. “Given underlying fundamentals, low payouts and cash reserves, 2012 should set a record high for cash dividend payments.”

“Dividends can contribute up to 40 percent of a stocks’ total return,” adds Fisher, the money manager.

The dividend yield on some blue-chips is currently at 3 percent or more. Whirlpool is at 3.3 percent; Pfizer's is just under 4 percent; and Verizon's 4.8 percent.

By contrast, the 10-year Treasuryis yield around 1.8 percent.

In a weak economy, high-dividend stocks tend to outperform most other assets, according to a recent Blackrock report. In fact, they have tended to do better than other shares in both bull and bear markets.

Many investors view high-dividend stocks as a means to get downside protection, as the time to recover their initial investment turns out a lot shorter than waiting for capital growth, the report adds.

Dividend growth is a crucial factor in selecting the right stocks as those with high-dividend yield coupled with low-dividend growth have underperformed the broader market, highlighting the importance of strong dividend payout ratios.

“This is why it is worth focusing on companies with strong free-cash flow,” according to the Blackrock report.

Extra Insurance

While many retirees have recovered much of their portfolio losses during the financial crisis-recession period, those who were burnt the most from the sudden decline in the stock market are taking extra precautions.

Many are holding more cash as they’re scared, observes Fisher of Summit Advisors, adding that such individuals tend to gravitate towards safer bets like insurance products with guarantees or principal-protected investments.

“That’s been growing like wild fire in the last 10 years. You have principal protection plus potential growth,” he says. “You don’t get killed on the downside.”

For Pactolus Private Wealth Management, a typical client portfolio has 30-50 percent in assets that provide short-term liquidity.

Pactolus' Harter says the firm's strategy also includes looking at multiple global currencies as a means of attaining secondary liquidity.

The firm also invests in other asset classes, such as direct multi-family real estate investment trusts, REITs.

Revenue growth in that sector is expected to hit 4-6 percent this year, according to a report in , citing research by SNL Financial, with funds from operations projected to grow at least 9 percent during the period.

Approximately 3 million households have “doubled-up” since 2008, and many of them will be looking for their own place to live as the job market improves, another report stated, suggesting further upside potential for the multi-family REIT sector.

As a secondary inflation hedge, Pactolus has been buying up farmland, primarily in northwest Missouri, which has appreciated 8 percent in recent years, says Harter.


“This the ultimate inflation hedge — better than gold and silver,” he says. “Gold and silver will, in the shorter term, be traded like other risk assets.”

Retiring Is Risky Business

For those looking to add alternative asset classes and/or shift a higher percentage of funds into equities, wealth managers say it's more important than ever to understand one’s appetite for risk.

The roller-coaster patternof the stock market since the spring of 2011 is ample cause.

“People tend to put investment policy before risk,” Harter says. “Start with risk. Start with the end in mind and the minimum amount you need.”