I know what you are thinking. That 80/20 mix of stocks and bonds served you well over the last 30 or 40 years as you kept your head down and worked hard to amass a small fortune in your 401(k). Now the time has finally come to hang up your suit and spend some long overdue time with the grandkids.
You finally hit that point where you feel financially secure enough to weather just about any storm. The mortgage is almost paid off, your investment portfolio is seven figures, and you can almost taste that social security check that you thought you would never see. With a few simple projections it's easy to see that you could live off of your nest egg for the foreseeable future. It's hard to see with the SPDR S&P 500 ETF (SPY) making new highs that anything could possibly go wrong.
But what if this is the top? Do you have a plan in place to shift your assets to a more defensive position?
The biggest mistakes I saw investors that were getting ready to retire make in 2000 and 2008 was to leave their portfolio on autopilot. The mentality of aggressive stock allocations combined with a buy-and-hold strategy just seemed like the right thing to do in your earning years. The fact is you could always make up for any losses in your investments by continuing to work and save. However, the mentality of an investor that is heading into retirement should be shifting dramatically to a more defensive strategy or philosophy that will assist you in weathering the inevitable ups and downs that we will experience in the future.
Most investors that are working and saving rarely have time to check on their portfolios and thus are not as concerned about the monthly swings. Those with the steeliest nerves can even scoff at a year of 40% losses like 2008 because they are in it for the long-term. However, when your entire existence is dependent on the income from your portfolio, you tend to watch it like a hawk. Let's face it, you will have a lot more time on your hands in retirement and will be more vigilant than ever about every penny you earn and spend.
While I am not trying to call a market top right here or suggest that this rally is over, I am recommending that if you are nearing retirement that you consider shifting your mindset to a new defensive dynamic. This should include a complete evaluation of your holdings, strategy, and long-term goals.
1. Evaluate every position in your portfolio. Determine if you have any high fee or underperforming positions. Make sure that when you do retire that you rollover your 401(k) to a brokerage company so that you have full access to every investment opportunity and are not limited to a small subset of mutual funds.
2. Get more defensive. Consider paring back on your equity exposure or set a sell discipline on every position in your portfolio. This does not mean that you necessarily need to immediately flip your allocation to 80% bonds and 20% stocks, but you should be considering making some defensive changes to ensure your portfolio is built to last. You may even want to consider moving to a defensive minded ETF with smaller price fluctuations such as the PowerShares S&P 500 Low Volatility Portfolio (SPLV).
3. Establish an income stream. Having a plan in place to replenish your income with dividends may be a top priority. Consider moving a portion of your portfolio to dividend paying ETFs such as the iShares High Dividend ETF (HDV), iShares U.S. Preferred Stock ETF (PFF), or the PIMCO 0-5 Year High Yield Bond ETF (HYS). Each of these funds pays dependable income and is inexpensive to own.
4. Set goals and evaluate your progress. Setting realistic goals is one of the most important tasks for your retirement years. Whether your goal is 4%, 6% or 8% annually, you should be monitoring and tracking your progress to ensure that your money will last. There will always be years when you don't reach those marks, but you should always strive for positive total returns. Success requires planning, so don't overlook this key step.
By making a few small portfolio allocation changes in the beginning you will most likely save yourself a lot of angst down the road. Keep in mind that you should be regularly evaluating your retirement investment strategy and sticking with your sell discipline if the trend begins to turn lower. Don't take an inordinate amount of risk with your portfolio that could end in disastrous results. By staying balanced and in tune with your investments and expenses you will ensure that your money will last a lifetime.
Additional disclosure: David Fabian, Fabian Capital Management, and/or its clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.