For those in retirement, or a few years from retirement, my advice to you is this, "beware of advice." To be more specific, I'm talking about generalized advice (no pun intended). Generalized advice is what you, and thousands of others get from magazines, blogs, cable shows and financial networks. Forget bonds, buy stocks, buy gold, sell commodities, use options, hold cash, own your age in bonds, buy and hold, day trade. Some, or even all of this advice could be found in a one-month magazine issue, or even throughout a one day financial network broadcast.
If you are planning to live off your retirement savings for 10, 20, or even 30 years, "winging it" is not the best investment plan. For example, some recent advice given is to sell bonds and buy dividend paying stocks. Well, maybe you shouldn't own treasuries at this time if you are in need of yield, but I also know that many of my retired clients would rather own the certainty of a short-term investment grade corporate bond yielding 3.5% versus a stock with the same dividend which could easily lose 10 to 20 percent of its value.
For many retirees looking to replace their paycheck, having yield support for their needed withdrawals is crucial. Many of those that followed advice ten years ago to keep 100% of their nest egg in stocks for your "30 year" retirement has seen two devastating market corrections, all while money flowed out of the portfolio for living needs! I tell retirees all the time, fees and taxes can hurt a portfolio, but drawdown can kill it. Whether the market takes it down due to improper allocation with too much risk, or you take it down by withdrawing too much too soon, always be aware of the effects of drawdown.
Taking advice from any source that doesn't know your net worth, spending habits, risk tolerance, whether you plan to leave an inheritance or spend all your assets, is simply unwise. Generalized advice for investing is much like a waiter recommending the "special of the day" to everyone that sits down at a table. Most should look over the pages of the menu and decide for themselves what is palatable.
In an era where many people feel the grass is always greener somewhere else, many people tend to venture outside their simple goals and objectives. It seems we get pulled away from what we need, to what we feel we "deserve." If the market has averaged 7% (after inflation) for 100 years, then this is what we should expect each year going forward, right? Of course not. You don't have to be jealous however. Stock ownership in 1952 was only 4.2%. In 1980, 13%. In 1989, 32%. In 1998, 52%. So who are all these people that averaged 7% a year after inflation? So don't be jealous of your neighbors, their grass has just about the same number of brown patches yours does.
So what advice am I giving you, even though I told you not to take this type of advice? First, be realistic. Expect, deserve, need, want, all culminate into one type of investment return, which is the one you actually get. If a safe return is 3 to 4 percent in a short-term investment grade corporate bond, and you are looking for 7%, then you should expect some volatility and risk. If you are trying to obtain a better return than what bonds are offering by investing in stocks, then don't be shocked if your principal declines. As we have heard a million times, no one can predict the market; maybe it's about time we all start believing it.
Second, plan your cash flow carefully. If you are withdrawing 4% from your nest egg annually (or taking monthly), make sure you have a proper allocation to income producing holdings. Core bond holdings (corporate or municipal bonds), Preferred stocks, MLPs (preferably non-K1) as well as some specialty ETFs (Global bonds, High-Yield, TIPs and Convertibles) may be appropriate for you. Consider duration and don't chase yields. Invest in a way that gives you the best chance to take advantage of future rate cycles, especially in your core bond holdings. While each persons allocation should be tailored to needs and tolerances, the allocation pictured is a good example of a portfolio that can provide good yield to support your income needs, but could also provide the ability to participate in the equity markets. If you can support most, if not your entire withdrawal rate with yield, then you won't feel like you have to take a "pay-cut" if your equity holdings take a hit. Take care of your income needs first. If you then have room for equities and can tolerate the risk, then allocate a portion to equities. You want to "get paid" if the market moves sideways, or even down. You need to allocate your retirement portfolio to minimize drawdowns, especially once you begin taking withdrawals. Remember, the stock market seems to take the elevator down and the stairs up. You don't want to end up in a nine foot hole when you can only jump up to eight feet.
Third, enjoy your retirement days. Not too many on their death beds have made "should have day-traded more" their last words. Low volatility plus constant cash-flow equals a high sleep tolerance. We all know what stress does to our bodies. When you retire, your nest egg becomes your employer. Treat it well and it will provide you with a permanent paycheck, job stability (fun in retirement), and hopefully a little bonus every now and then.
Lastly, as we come full circle, filter your advice. You have your own individual needs, goals and tolerances. Let your realistic objectives guide the allocation of your investment portfolio. There will always be a daily special offered to the masses. Just don't let your eyes trick you into taking on more then you can stomach. Your retirement savings is too important to trust to the spin of the market roulette wheel.