Nearing retirement? How to invest and allocate, according to the pros
It’s a difficult time for people approaching retirement: Markets remain volatile and inflation is eating away at cash. Despite the uncertainty, money managers and analysts say it’s important to stay invested when approaching or already retired. So how should one allocate funds given unsettled markets, a shorter investment horizon and the need for retirees to have some liquidity? CNBC Pro is asking the experts for their opinions. Look Beyond a Traditional Stock/Bond Split The traditional 60/40 portfolio – composed of 60% stocks and 40% bonds – has not performed well this year, with high inflation typically being bad news for bonds. “It might be wise to look beyond a traditional stock/bond split,” said Veronica Willis, an investment strategy analyst at the Wells Fargo Investment Institute. “We recommend including diversifiers like commodities as they don’t move in the same direction as stocks or bonds, which can help mitigate losses and reduce volatility.” Historically, when stocks lost ground, bonds gained. but that was not the case this year. However, the recent rise in bond yields presents an opportunity for retirees, Willis said. “For investors nearing retirement, the current surge in bond yields presents an opportunity to earn higher yields than we have seen in recent years, which can provide a higher income stream for the same level of bond investment than before The Prices have gone up,” she said. Equity to bond ratio For Thomas Poullaouec, head of multi-asset solutions, APAC, at T. Rowe Price, by the time you retire, equities should make up between 40% and 50% – sometimes up to 55% – of a portfolio with the rest mostly in bonds. He said that at the other end of the spectrum — if investors are retiring late, they should invest about 20% to 30% in stocks. Holding a “reasonable” amount of stocks helps protect against inflation and longevity risks, Poullaouec said. “Holding money is even riskier than stocks if you want to achieve a decent life in retirement.” But retirees should focus on “low beta, minimum volatility” stocks, he added. Pick stocks wisely Willis of the Wells Fargo Investment Institute agreed that the key for those nearing retirement may be optimizing strategy rather than abandoning stocks entirely. “During periods of heightened volatility, it may be wise to switch from riskier stocks, such as small caps to large caps, and from high-yield bonds to investment-grade bonds, as time horizons narrow,” she said. Buy cheap, focus on dividends Retirees should look to dividend-paying stocks to give them some income, said Nick Ferres, chief investment officer at Vantage Point Asset Management. “For investors approaching retirement, the focus should be on companies that have above-average dividends for income, but [also] focus on balance sheet strength, cash flow and growth or ability to sustain dividends,” he said. 5-10% growth. But the price you pay for an asset is what matters most to your future returns, Ferres pointed out. “It usually pays to buy an asset cheap,” he said from the September low right now in October said the “big bottom” in stocks could come in the first quarter of next year.