Financial Planners Largely Keeping Faith in Stocks
Ooops. Alan Greenspan has just discovered that, when the odor of money is floating on the air, you can't expect the multimillion-dollar-bonus crowd to "just say no." It was a flaw in his thinking, Greenspan concedes, in apparent shock.
So what about the financial planners who advise pre- and newly post-retirement clients to hold a substantial portfolio of stocks? Are there flaws in that theory of asset allocation?
I put that question on the Web site used by members of the National Association of Personal Financial Advisors. The resounding answer: No. They've kept the faith in a financial portfolio that's 50 to 60 percent invested in stocks for people facing a retirement of 20 to 40 years.
Given the history of the markets, that appears to be the only way to stay ahead of inflation, says Jay Hutchins, president of Comprehensive Planning Associates in Lebanon, N.H. He sees your choice as either accepting investment risk or "disinvesting and virtually guaranteeing that you will run out of money if you live longer than 10 or 15 years."
Diversified portfolios fail you in a panic, says Tom Orecchio of Greenbaum & Orecchio in Old Tappan, N.J. Everything goes down at once. But while the strategy may not work day-by-day, it works over time, as different markets fall or rise at different rates of speed.
You have to be able to wait out the panics by holding enough cash and safe, liquid savings to see you through. "Advisers are rethinking what is a safe amount," Orecchio says.
I suspect that investors are rethinking that, too.
In general, the planners who answered my questions said retirees should have enough money on hand to pay their bills for the next five years. Helen Modly of Focus Wealth Management in Middleburg advises cash accounts for two years' worth of expenses plus enough bonds coming due in each of the next three years to pay those bills, too.
Burt Hutchinson of Fischer & Hutchinson Wealth Advisors in Lewes, Del., favors insured certificates of deposit, insured bank money-market accounts and short-term government bonds.
Five-year CDs are currently paying as much as 5 percent (5.21 percent at Discoverbank.com, with a minimum deposit of $2,500). They're attracting advisers who might have turned up their noses at banks just a few years ago.
Tom Fisher of Fisher Financial Strategies in Cambridge, Mass., is rethinking his advice for people in their 50s. A couple of years ago, he would have advised adventurous investors to hold as much as 65 percent of their portfolios in stocks. Today, he thinks a smarter target might be 55 percent.
Investors without a sufficient cash reserve may be tapped out, especially if you're likely to lose your job. You can't afford the risk of losing any more than you have already. Cut some of your losses, Hutchinson says, and move the money to safer investments. That doesn't mean "sell everything," but sell enough to create the fixed-income allocation that you should have had all along.