In Defense Of My Boomer Portfolio

by: John Gerard Lewis

In my last column I proffered "A Portfolio for Older Boomers" that was presented as an appropriate and conservative income-oriented approach. The recommendation consisted of a 60% allocation to individual corporate bonds, 10% to mortgage real estate investment trusts (mREITs), and 30% to a few solid dividend stocks.

Some readers questioned whether that portfolio was truly conservative, and none of the three components was spared. Certain critics were resistant to corporate bonds, either because today's prices seem poised for a fall or because, post-"financial crisis," they don't trust corporate America in general. Others viewed the mREIT picks as nothing short of wild speculation. And some sniffed that older people should have no stock ownership whatsoever.

Let's tackle these in reverse order.


Despite holding generally to the John C. Bogle maxim that your percentage of bond holdings should roughly equal your age, I have no particular argument with the objection to holding any stocks at all, if being extra risk averse helps you sleep at night. But even the staid Mr. Bogle makes room for equities, which can hedge against inflation prospects.

Of course, the older you get the less you need to worry about inflation eroding your estate, and thereby affecting what's left of your life, so going 100 percent into fixed-income is okay with me. It all depends on individual circumstances, and if you can live comfortably on income-producing securities alone for your remaining tenure, there's no objection from this corner.


Those who assailed the mREIT component described them as too hard to understand or too risky. Point taken on the former. A "stock" that operates as a trust, the earnings of which arguably don't matter because the security is bought for the dividends that are produced by strategic arbitrage of short- and long-term interest rates is (whew!) admittedly a bit arcane.

But the allocation was limited to 10%, and my recommendation was not necessarily for you to manage this portfolio yourself, unless you really do know what you're doing. For most people, portfolio management is best left to a professional money manager. A 1% fee (or less) is a small price to pay for returns that can be much higher. My "Stable High Yield" model portfolio at, for example, is one vehicle by which investors can benefit from the high yields of mREITs and professional management thereof. There are other ways to do this as well.

Corporate Bonds

Regardless of whether any stocks are included in the older boomer's portfolio, I view a collection of at least 10 multi-industry, BBB-rated corporate bonds as sufficiently safe to qualify as prudent for an older person. By its nature, such a basket is investment-grade and diversified. No, they're not insured like bank CDs that offer, say, 1.3% for five years. Instead, the "insurance" for these corporate bonds is a byproduct of diversification and the investment-grade status.

Opposition to holding bonds at this time is understandable, if they are viewed primarily as tradable holdings. After all, it's hard to fathom interest rates going much lower and prices going correspondingly higher. Rates have been low for a long time, and the cautious warn that they'll be going up someday. They don't know when, but it is a legitimate concern. Others take comfort in the prospect of QE III, another round of quantitative easing that is suddenly very much on the table, that would prolong this historic era of low rates.

Which side is correct? I don't know, but that's no impediment to a profitable bond investment strategy. I don't trade my bonds - I ladder them, and hold them to maturity. (If they're callable, I make sure when I buy them that the yield-to-worst is acceptable.) The aforementioned "Portfolio for Older Boomers" divvies up the allocation to some short-, medium- and longer-term bonds, the latter of which extend up to 10 years. It's a conventional laddering strategy that allows for reinvestment. If interest rates rise, you can reinvest the proceeds from your matured bonds at those higher rates.

Taken together, this is a bona fide conservative approach for people who have reached a state of "critical mass," i.e., people who can afford to live off of their investment income.

Distrust of corporate America? Well, none of these companies has a printing press, but the only domestic entity that does - the U.S. Treasury - is currently paying bond rates that supply negative, not positive, purchasing power. You'd be about as well off, maybe better off, by sticking your money in the mattress. I wouldn't vigorously oppose that idea. Funds would be close by. But for the sake of convenience, I'd install a zipper.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I do hold positions in various dividend stocks, mREITs and corporate bonds.