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You should continue to grow your nest
egg even when retired--unless you’ve been blessed with more money
than you will ever spend! Last week I discussed in detail how
retirees can boost their income without taking on unnecessary risk.
This week, I’ll explain ways you might safely grow your portfolio
while minimizing risk.
I believe that higher returns can be achieved with less risk when
the strategies used to invest in the stock market are tailored to
market conditions. Unfortunately, few advisors recognize this need
and leave their clients to ride the roller coaster of worry.
The traditional approach to growing a portfolio involves allocating
a portion of the assets to large, medium, small and international
stocks. The appropriate mutual fund is chosen and it is expected
that once you put your money into it that you will keep it there for
5-10 years. Making changes prior to then, this approach says,
reduces your chances of doing well.
This philosophy is based on the idea that stock market performance
will be consistent with what it’s done in the past. If large company
stocks have averaged 10% over the last 50 years, they should average
10% in the future. And they may. But the question is how long will
it take?
There may be extended periods of time where the markets perform
significantly above their historic averages (the late 1990’s) and
times when the stock markets perform well below their average
(2000-2002). The buy and hold strategy is a valid strategy. Everyone
should use it for a portion of their portfolio. That doesn’t mean
that I want to rely on it when the economy is in recession!
If you are retired or near retirement, you can’t afford to base the
safety of your nest egg on the hope that the markets will someday
revert to their mean. That’s why so many are uncomfortable investing
in the stock market. That’s why we’ve heard so many horror stories.
You can achieve the growth you desire while limiting your downside
loss to less then 10%. The key to doing so is matching the strategy
used to present market conditions. People lost money in the stock
market from 2000-2002, not because there was a problem with the
markets, but because they were relying on a strategy that works
poorly in those conditions.
There is no such thing as a perfect strategy. Each has strengths and
weaknesses. By analyzing the type of markets that should exist the
next few years, you can then deploy those strategies designed to
work best in that type of market. Don’t put all your eggs in one
basket, though. I will bias a portfolio toward a particular
strategy, but I utilize multiple strategies to reduce risk.
I’m basing my current growth strategy on several important facts
about today’s market conditions. First, the Bull market is entering
its third or fourth year. That is longer then the historical norm.
Second, that Bull market was fueled mainly by low interest rates.
But short-term rates have risen from a low of 1% to the current
4.5%, and are expected to rise further. Third, rising energy prices
have crimped consumer spending, as well as spurring price increases
across the board.
All these taken together means that, although the underlying economy
is very strong, it will be facing some stiff headwinds the next year
or two. Most analysts expect only single digit returns from the
indexes.
In markets where the indexes only produce single-digit returns, you
don’t want to rely on index-oriented strategies. In those markets,
individual stock picking and dividends take on much greater
importance.
As a result, I’m relying more on individual stocks or selected
closed-end funds, especially ones that pay the investor first
through healthy dividends. In fact, my growth-oriented portfolio of
stocks produces an income stream of 5-6% a year just from dividends!
Just as an experienced sailor has to adjust the sails to deal with
changing winds, investors need to modify their strategies to take
advantage of changing markets. Don’t choose a skipper that sticks to
only one strategy. Have an advisor that seeks to maximize your
return, no matter what the market conditions. Doing so should
provide growth while limiting your risk of loss.
I’ll personally respond to your questions, free of charge. Go to
http://www.guardingyourwealth.com and click on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
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