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CNBC ANCHOR BECKY Quick recently summed up today’s retirement investing dilemma in one sentence: “You’re never going to make enough money if you have 40% of your money in bonds.” She, along with many pundits, believe the old standby recommendation to invest 60% in stocks and 40% in bonds—the classic balanced portfolio—is dead. Google “60/40 asset allocation” and the majority of recent articles have titles that include such words as “eulogy,” “endangered,” “dead,” “the end of” and “not good enough.”
Likewise, I regularly chat about investment strategies with friends and none is rushing to buy bonds or extend maturities at today’s low interest rates. Even “bond king” Jeffrey Gundlach suggested in a December 2019 interview that “corporate bond exposure [in the U.S.] should be at an absolute minimum level right now.”
While many articles and pundits deride the old balanced portfolio, surprisingly few articles suggest a simple yet sound alternative. CNBC’s Quick inadvertently identified it when she stated, “I have some cash so that I make sure that I have a cushion… but I don’t have anything in bonds.”
Quick’s views mirror that of my friends and me, as we invest in today’s low-interest rate environment. Our approach: Maintain enough cash to weather a stock pullback, while investing the rest entirely in stocks. How much should you keep in cash? Think about how much money you need each year from your portfolio to supplement other income sources, like Social Security, pensions and income annuities.
Since the Second World War, there have been a dozen major declines of 20%-plus. From the start of these bear markets, it took an average of almost three years for share prices to return to their earlier peak, with the absolute longest taking seven-and-a-half years.
In other words, the historical data suggests retirees might hold cash equal to three years of portfolio withdrawals at a minimum and perhaps five years if they’re more conservative. Buoyed by this backup source of spending money, we then should have little to worry about if we invest the balance of our assets in a diversified stock portfolio, even though the resulting stock allocation will likely be significantly above the old 60% recommendation.
Obviously, folks still working can hold even less cash. I was 100% invested in stocks when I was in the workforce. But retirees may have to be more conservative with their cash allocation, unless they have the flexibility to generate extra spending money by, say, initiating Social Security payments, working part-time, borrowing or selling nonfinancial assets.
John Yeigh is an engineer with an MBA in finance. He retired in 2017 after 40 years in the oil industry, where he helped negotiate financial details for multi-billion-dollar international projects. His previous articles include Our To-Do List, Death and Taxes and Take a Break.
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William Bernstein, a noted investment advisor, writes
This is exactly what I’ve been doing and the first time I’ve seen anyone else recommending the same. Thank you
I am 72. I have 90% of my portfolio in dividend paying equities. Yes, the value may go down, even a lot as they did in 2000 and 2008 but after both crashes, they cam back and values increased. A lot of my portfolio is with Fidelity and when I go for a portfolio reviews, they tell me to increase my bond allocation. They even say the company will not allow them to recommend a portfolio with such a high equity allocation. But my portfolio does better than any they would recommend. I live off the dividends. Again it is true that companies such as GE have cut dividends substantially but most raise the dividend annually, usually more than inflation. And the dividend rate in many cases is above even the long term bond rates.