Editor’s Note: Gambling.
You see, there’s a rush when it comes to throwing money down on the table. That’s what make it highly addictive. As with investing, it’s always best to have an exit strategy.
But what scares us the most at Wealthy Retirement is how easily people gamble with their retirement.
And I’m not talking about going “all in” on black with your retirement savings. I’m talking about making a seemingly innocuous mistake that could cost you big during retirement… overweighting your portfolio with equities.
Bond Strategist Steve McDonald will be the first to tell you that bonds often lack the same excitement as stocks. But that doesn’t mean they don’t play an important role in your portfolio.
– Rachel Gearhart, Senior Managing Editor
If the 85 attendees at a recent seminar are an accurate representation of the retirement community – and I know from experience that they are – 95% of us have too much money in stocks.
My presentation started with this question: “How many of you are more than 55 years old?” Everyone except about five people raised their hands.
Then I asked, “Of those of you with your hands up: Who has at least 55% of their money in less risky investments like bonds?”
Only four hands remained.
Not only did 95% of an audience of almost exclusively retired persons not meet the minimum required percentage of bonds for their age and risk tolerance, but most didn’t own any bonds at all.
The simplest way I can put it is we hold too much in stocks, and it’s driving the risk level in our portfolios through the roof. At our age, we need less risk, not more.
For years, I have been pounding the table (obviously not hard enough because no one seems to have heard me) to reduce the risk in your portfolios by holding a percentage equal to your age in lower-risk investments.
If you’re 60, 60% of your portfolio should be in bonds. At age 70, 70% of your portfolio should be in bonds. As you approach retirement or if you’re already there, you must downshift to lower-risk holdings.
The right bonds for your age add price stability to your portfolios in all but the most extraordinary scenarios. And it is account stability that will prevent panic-selling during market dips.
Watching your account drop 20%, 30% and, in the case of the 2009 debacle, as much as 60% is the surest way to cut and run at the worst possible time. And this urge to sell and cut your losses only increases with age.
Bond prices are more stable than stock prices. And bonds reduce volatility in our portfolios. In turn, that will reduce panic-selling and keep you in the money… not losing money.
Another reason to hold more bonds is that they are very predictable.
The interest rate is cast in stone; it cannot be reduced or canceled because of a bad market or a dip in revenues. You know exactly, to the day, when you will receive all your interest payments and all your principal: $1,000 per bond.
This predictability means there is no guesswork with bonds. You know from day one, before you invest one cent, what your minimum return will be and when you will be paid.
You can earn a lot more than the minimum, but that’s for another time.
Lastly, bonds are exceptionally reliable. Depending on which type you’re comfortable with, bonds have very high long-term success rates.
Treasurys are guaranteed. No risk – zero!
General obligation, tax-free bonds have a track record of paying exactly as promised over 99% of the time. Yes, even during the 2008 and 2009 collapse and the Depression.
Investment-grade corporate bonds, rated BBB- and higher, have a long-term 98% success ratio.
And the so-called “bad boys” of the bond world, junk bonds (those rated below BBB-), have higher rates of return than all other bonds… they pay as promised 94% of the time.
We must increase stability, reliability and predictability in our portfolios as we age. We do not have enough time to recover from sell-offs and corrections, and we cannot afford the losses associated with higher risk and more volatile holdings.
Don’t get me wrong, you should hold some equities no matter your age – but in amounts appropriate for your age and risk level.
If you are older than 55 and hold only stocks (as most people do), you’re gambling with your retirement. And I promise, you will lose that bet.
Start reducing your risk level with bonds now… or pay the price down the road.