You have worked hard your entire life and now you are looking forward to your retirement. Most of your “Retirement Portfolio” has resided in your principal residence and your company retirement plans. Up to this point it has been easy. Most likely, your retirement plan didn’t offer you many choices. Perhaps you made a few calls to your friends to see what they were doing and then allocated your retirement savings between four mutual funds. Nevertheless, the markets have treated our generation extremely well, and as we reach retirement our portfolios have grown to tidy sums indeed. But now we must manage these funds to last the rest of our lives.
The Need for a Comprehensive Retirement Plan
We have found that successful investing is best achieved by preparing a detailed and comprehensive retirement plan before beginning the investment process. The retirement plan will answer many questions about how the money needs to be invested, how much risk you should take based on your existing resources, what you can afford to do in retirement, the risk of outliving your resources, and many other important issues. The savings associated with a good plan are usually 2-10 times the cost of the plan, and sometimes considerably more.
Effectively Managing Your Investments
The first step in the investment process is deciding which method of management you are going to use. To manage your portfolio effectively, you realistically have three choices, as described below. The one that is right for you depends on your level of investment expertise, the amount of time you can devote to managing your investments, and what you are willing to pay.
- Purchase mutual funds through a discount broker.
For people interested in managing their own investments, using mutual funds removes the daunting task of selecting individual stocks and bonds. This is the best option for portfolios of less than $150,000, because it allows for good diversification at a reasonable cost. On the downside, mutual funds do not offer control over taxes in taxable accounts and for larger portfolios the fees can be high in comparison with other options.
- Work with a full-service broker.
Individual stocks offer investors with larger nest eggs lower total costs than mutual funds and provide greater control of your taxes. If you are interested in managing your own portfolio of individual stocks, we recommend using a full-service broker who can provide you with new ideas and research reports. It is vitally important to understand that a broker is not an advisor or a fiduciary (someone who must, under law, always act in your best interest). A broker is in the business of selling stocks for a commission and pushing certain stocks to help his or her corporate clients who are trying to raise capital. Never give a broker free reign or discretion over your investments, because the broker’s interests are inherently in conflict with yours.
- Use an investment advisor.
If you don’t have the time, expertise, or inclination to do it yourself, you can hire an investment advisor. An investment advisor does act as a fiduciary in managing your investment portfolio and is legally responsible for understanding your needs and your risk tolerances. Firms in this category would include bank trust departments and independent investment management firms such as BWFA.
Selecting Your Proper Portfolio Model
Your next step is to determine the proper mix of assets, which will enable you to achieve both your income and capital growth needs. This will lead you to an appropriate asset allocation and Portfolio Model. Having already prepared a Retirement Plan is extremely helpful in this process.
Here at BWFA, we have constructed seven Portfolio Models that encompass risk profiles ranging from aggressive growth to capital preservation. Each Model has a different percentage of aggressive stocks, long-term growth stocks, growth and income stocks, foreign stocks, and fixed income investments to maintain the proper risk profile for our clients and still meet their retirement income needs.
Rebalancing and Reallocating Your Portfolio
Unfortunately, the job of portfolio manager is never finished. You should rebalance your portfolio from time to time, as market volatility will shift your planned allocation. In the late 90’s, a Conservative Growth Model could have developed into an Aggressive Growth Model as technology stocks soared. Constant rebalancing could have preserved some of those gains and reduced portfolio volatility as tech stocks collapsed.
Finally, you should consider reallocating your portfolio as your goals, time horizon, and risk preferences change. Is your Portfolio Model still appropriate for you today? My guess is that most investors have lower risk tolerances today than five years ago. Good luck! And call us if you want to discuss how we would handle your situation.