With this age group, Armstrong would start with a 70/30 split of equities and fixed income investments, gradually moving to a 60/40 split as the client ages. “As you get older, you want to transition to more conservative investments,” Armstrong said. “Unless you were so behind that you have to gamble [on riskier investments] because you don’t have enough to retire.”
As you mix fixed income with equity products, your risk falls at a greater rate than your rate of return, so there’s not a big penalty, Armstrong said. “Managing risk is more important” than the yield, he said. “I’m obsessed with risk management because you increase your chances of having enough to live off of for 40 years without running out of money.”
Yuste said when determining a portfolio mix, she looks at a client’s age, income, savings and expenses. “Then you can figure out ‘What rate of return does this person need to continue their lifestyle? What is their life situation? Do they have college to pay for? Parents to take care of? Grandchildren to raise?’ ” she said.
For this age group, Yuste likes a mix of 50 percent stocks, 30 percent bonds and 20 percent alternative investments, such as Real Estate Investment Trusts, or REITS.
Pareto’s overall strategy is to achieve diversity of asset classes. “We use a client’s risk tolerance — ‘How will they feel if the market goes down?’ — to figure out the division of stocks and bonds, and the specific investments,” she said. Pareto likes a mix of 40 percent bonds, 26 percent domestic stocks, 22 percent international stocks, and 12 percent alternative strategies.
There are two buckets to his strategy, Armstrong said. One bucket has moderate risk. The other provides store value, from which you draw your income. The goal is for the two buckets to provide for your growth needs. “With a married couple, odds are that one of you will survive to age 95. You have to make that portfolio last a long time,” he said.
Yuste said everyone is going to experience a down market at some point in time, so if you can protect yourself in a depressed market, you’ll end up with more in your pocket. “It may not go up as much, but it’s not going to go down as much either,” she said. “You can adjust the portfolio to match risk tolerance by adjusting the percentage of stocks in a portfolio. … Equities are the roller coaster, bonds are the cushion.
“Historically, equities are the only investment that outpace inflation,” Yuste said. “but bonds have done excellently in the past 10 years. They’ve pretty much been even in growth.”
Pareto’s overall strategy is “to take a picture of what the world would look like, and capture it in a portfolio,” she said. That’s typically a 50/50 split of U.S. and foreign investments. But in the past three years, because of the European crisis, Pareto said she’s been shifting more to U.S. large cap stocks with a dividend-oriented strategy, to provide more stability.
On the stock side of his portfolio, Armstrong likes index funds and exchange traded funds (called ETFs) because they broaden asset class and exposure at the lowest costs. He uses small, small value, large and large value stocks because they increase the return on the portfolio, and if diversified enough, don’t change the risk profile.