The Ideal Baby Boomer Portfolio: Allocating Capital For A Safe Retirement

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Includes: JNJ, KO, USB
by: Hedgephone

Summary

Don't get caught up in the latest frenzy.

Stay the course and buy individual bonds over most bond funds.

Don't let volatility ruin your sleep.

Investors in today's markets need to recognize risk. Nothing lasts forever. Trees don't grow to the sky and stocks don't rise straight up forever.

We think that a portfolio consisting of 30% stocks, 30% mix of timberland and real estate (not Reits), 10% hedged equity/managed futures, 5% gold, 5% cash, 20% in 5-10 year treasuries makes a good deal of sense for most investors, including baby boomers considering retirement. This is an investment mix, not including your home.

The real estate/timber component of the mix is so important, because like President Trump we think that "real estate is the best investment." Real estate can serve as an uncorrelated inflation hedge, a place to live, a place to farm, a place to rent, a place to run a business, and a place to raise a family. Even Peter Lynch in his book "One Up On Wall Street" suggests that one should not buy stocks unless first owning a home. A mortgage can leverage up your inflation hedge, but we wouldn't recommend buying any stocks if you have any debt elsewhere. We also wouldn't rush out and buy Weyerhaeuser (NYSE:WY) trading at 40X free cash flow, or the lumber ETF Wood (NASDAQ:WOOD), or any other lumber stock without spending at least 100 hours researching each individual public timber investment. Lumber futures prices are quite bid, and stocks are up huge. The actual land makes more sense to me, and for full disclosure that is my biggest asset.

For extremely sophisticated real estate developers, debt makes a ton of sense if the returns justify the risk. Trump is a master at managing debt, and for that reason we are bullish on the U.S. in general, just not stocks. For retirees, you should pay off all of your debts before reaching for yield on Wall Street.

Once you have amassed enough wealth to be concerned about inflation, my 30/30/20/10/10/5/5 mix of equities, timber, bonds, managed futures, gold, and real estate makes sense.

From the bond point of view, interest rates are low and there is a lot of duration risk to manage. Investors in bonds may want to keep maturities short, or look to municipal bonds to protect capital. The current 5 year bond yield is 1.85% and we expect that to rise over the next few years. Laddering into the 5 year seems wise, as owning the individual bonds until maturity locks in a profit. To successfully ladder into the treasury market, investors basically need to dollar cost average. Put a certain fixed percentage of your holdings into the bond market each month. Stocks only have a 2% dividend yield or so, but they come with aggressive risk as we are currently riding the 3rd longest bull market in history.

As for the 30-33% in stocks, look to buy dividend payers at reasonable valuations. Make sure that you will outlive the lifespan of the company you invest with -- Coke (NYSE:KO) looks acceptable after not moving for 5 years, as does Johnson and Johnson (NYSE:JNJ). We like U.S. Bancorp (NYSE:USB), though the recent run-up may consolidate for some time before the shares look attractive again. People smarter than myself could go up to a 40% equity allocation if covered calls or married put option strategies are employed.

Sure, we doubt such a "shotgun" mix will outperform a 100% equity portfolio in the short run. Over the long run, however, such a conservative approach to allocation will allow enough flexibility to buy stocks on margin if the wheels fall off of the bubble. You will have plenty of dry powder if a real buying opportunity emerges for equities. If the CAPE goes from 29X to 9X, say, we would buy with both fists, and also buy in the money calls. It may never happen, but if it does we hope we are smart enough to buy stocks.

Gold is a good inflation hedge and also a hedge against sovereign debt. The world is awash in low interest loans. Debt is a dual edged sword that slices both ways -- debt creates momentum in bull markets while margin calls create air pockets in bear markets.

Timber investing is a long held secret of the super-wealthy. Inflation is the wind in your sails here, while cutting 5% of your timber stock yearly should provide an adequate return on capital. The returns are much higher if you cut the wood yourself, or use the lumber to develop your own real estate. A Norwood portable sawmill only runs $5,000 or so, and in some states like Alaska, cords of firewood sell for around $500 or so -- not bad for a day's labor.

At today's levels, investing more than 50% of your savings long the equity market is an act of pure faith in our view. Props to the faithful but we are around 50/50.... feeling dumb for missing out, but sleeping very well. We don't get the "FOMO" because we trade for ourselves.

Congrats to Fear and Greed trader for nailing it all last year... He crushed it, and me, not so much. Look to his articles for a great summation of the bullish argument.

Disclosure: I am/we are long USB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.