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ASSET ALLOCATION is usually a set-it-and-forget-it exercise. At least, that’s how I’ve handled it until now. I decided on my appetite for risk, then set my stock-bond ratio accordingly.
I tallied everything once or twice a year, and then rebalanced. I’d apply a portion of my winning positions to my less successful asset classes. Rebalancing this way forced me to buy low and sell high. Combined with dollar-cost averaging, it’s an investing approach that’s served me well for more than 20 years.
Each year, I’d also consider how much I wanted to keep in cash investments. Now that I’m semi-retired, I’d been looking to reduce my stock exposure and add to cash. At least that was the plan, until now.
The current “transitory” spike in inflation has forced me to me to rethink my entire approach. Here’s why: If the current inflationary bout should persist, my cash assets could lose nearly a quarter of their value over the next five years. This has me looking to trim my cash investments substantially, not add to them.
Next, I’m concerned about what life will be like 20 years from now. The remaining baby boomers will swell the ranks of the over-80 crowd. They’ll be selling investments to pay for health care and many other senior-oriented necessities.
The cost of these services has risen faster than consumer inflation for years. I don’t imagine that trend reversing now. The general investment selloff required to meet these expenses may depress returns for all of us.
This creates a dilemma as I weigh my asset allocation. Higher inflation means low—or negative—real returns on cash and bonds. I may be required to own more stocks just to have a fighting chance against that loss of purchasing power. Of course, that would increase my investment risk during retirement—not the usual approach.
Asset allocation, alas, is no longer a set-it-and-forget-it exercise for me.
I would consider cash as part of fixed income. Because bonds yield so little and could be hurt by rising interest rates I have slim fixed income holdings but heftier cash holdings. Both cash and fixed income lose to inflation but I would contend the safety of cash offsets the puny extra yield of interest sensitive bonds.
The questions (IMO) in retirement are:
Bonus: What should you NOT do in retirement?
10 Things Not to Do When You Retire:
Thanks for this list. It’s longer than mine.
Since my spouse of 30 years died, I have had to take a different path. And I still have a teen at home and two in college.
Many income based government rules (EFC for college, IRMAA for Medicare, IRS tax tables for example) are unfavorable for widows/widowers, as the expenses of running a household do not drop 50% with the loss of a spouse.
Inflation, any additional unfavorable changes to tax laws, and rank stupidity, are the more obvious risks I face financially. These are common to many early retirees.