When the boat is rocking people naturally cling more tightly to the rail – which, given today’s economy, says much of what one needs to know about investing for retirement.
“Individuals are scared, and rightly so,” says Tony DePasquale, founder and President of Elysien Private Wealth & Real Property in Henderson. “They want safe, and they want to know that the people they are getting advice from are honest with them, and know what they’re doing. Over the years there has been a lot of volatility, (so) they are looking for safety and for things that are different. They don’t think that the normal stocks and bonds are places where they want to be.” As a result, companies like his are seeing a lot of interest in alternative investments, “a lot about hedge funds, a lot about gold or commodities. Managers have needed to expand their expertise into other areas to try and find that yield.”
Investors with a properly diversified portfolio, he remains convinced, “can find a decent yield — and when I say decent yield I mean you’re going to make more money than you are with a CD or a fixed annuity or things like that. If you’re looking for guaranteed principle and 8% and 9% returns, that’s exceptional. If you’re looking for something to keep you up with inflation on a safe footing, yes, you can do that.”
Which are the safe investments for retirement planning? “People will say, ‘I don’t want to take on a lot of volatility, I don’t want to lose my money or lose any interest’ and so on,” DePasquale explains.
“I’m hearing clients say, ‘Get me to someplace safer, Brian, get me someplace safe,’” says Brian Loy, CFP, CFA, President of Sage Financial in Reno. “You have to redefine safety for them, and go back through the risk. If they can afford to take no risk, which means very little return, then fine. But most people need to have some of their money at risk. You need to talk to them about the risk of inflation, and how diversification can help reduce the risk of loss but won’t reduce the volatility. But I think there is this big move to ‘get me somewhere safe,’ and you’ve got to go through that with people. You can’t afford to retire with money in a bank account.”
The kicker, Loy points out, is that “there is no such thing as safe. Safe-safe is (something) guaranteed, where you put in a dollar and tomorrow you pull out a dollar. That’s called a bank account, a CD, a Treasury Bill, and those things are paying less than half-a-percent in interest. But when inflation turns back on and you have to pay money to Uncle Sam for your income taxes you’re actually losing money, so safety of principle doesn’t mean preservation of purchasing power. The focus today is risk: how do we manage and reduce risk as much as possible. That’s what’s changed in our business since the 911 of the financial markets, 2008.”
“I think that is the most difficult issue right now, trying to find income from fixed income portfolios in a very low interest-rate environment,” says Reed Radosevich, Nevada President for Northern Trust, a global investment management, asset and fund administration, fiduciary and banking services firm. “Therefore, what we have seen is that a lot of people have been investing in a number of different types of investments that maybe can return more than the 1/2% to 1% that CDs and Money Markets are paying right now. Things like high yield bonds are still attractive; they’re paying 7% to 8%.”
He and his colleagues are also seeing high-dividend paying stocks that they like, such as large-cap blue-chip stocks that are paying 3% to 5% “because certainly we think that U.S. domestic large-cap equity stocks are still over-weighted in portfolios for clients. They are paying great dividends right now.” As a hedge against inflation, Radosevich and his colleagues are using both commodities and gold. They also like Treasury Inflation Protected Securities (TIPS), “while the treasuries are still paying very low rates due to the artificially low-interest-rate environment created by the Fed.”
Reaching for Returns
“Some investors trying to prepare for retirement find themselves working against themselves,” says Bob Martin, Regional President of BNY Mellon Wealth Management, established in 2007 from the merger of Mellon Financial Corporation and The Bank of New York Company, Inc. “It’s interesting in that they’re not necessarily doing the right things. Some of them are reaching for returns, so they’re taking on more risk to get that better return.” What should have happened as retirees got older was that their portfolios should have gotten more conservative, “but we didn’t necessarily see that. We saw them tend to the aggressive to build that nest egg. Unfortunately, they’re kind of chasing returns now, and one of the ways you get returns is that you take on more risk.”
While many older Americans have gone back into the workforce, Martin points out, some of BNY Mellon’s wealthier clients are trying to do a better job of managing their taxes by, among other methods, taking exemptions. “We’ve got an exemption for those wealthy families this year that expires at the end of the year, where they can put $5 million in a separate trust to get it out of their estate.”
Martin notes that statistics show half of all retirement assets residing in IRAs and 401k’s. “You’ve got people, once again, looking at whether or not Roth IRAs make sense.” From an active management standpoint, he adds, “as they have gotten closer to having kids go to college or retirement or other milestones in their lives we’re having them get more conservative with those funds that they have set aside for that particular purpose.”
What BNY Mellon does is help clients think of their monies separately, Martin says, as if they were residing in “various buckets. Part of it is the core money they’re going to live off of to retire. A lot of our clients have a fair amount of wealth, so part of that wealth is what we refer to as legacy wealth, which is money they’re going to pass on to children, family and friends. That is a longer horizon, so they can be a little more aggressive with those funds. Then we’ve got philanthropic needs for several of these clients, and they’re a little more aggressive with some of those, as well.”
An important part of the conversation that Martin and his colleagues have with investors centers on their risk tolerance. “We talk about the fact that, ‘Okay, we used to make mention that if your portfolio was to go down 25% in a year would that bother you? We’re kind of saying if it goes down from 35% to 40% would it bother you?”
What to do?
Advisors at Northern Trust still like the equity markets. “We think that there are a lot of tail winds in equities,” says Radosevich, “meaning the low-interest-rate environment is pushing people to have to invest in the stock market to receive a reasonable return.” At the same time, they are still underweighted internationally “because we still want to see some clarity in Europe.”
Radosevich and his colleagues are neutral in emerging market stocks, but think that with China starting to relax its monetary policy there may be some opportunities in emerging market stocks going into the second half of the year.
“Certainly, as we meet with clients we caution them that they need to take a long-term investment approach, and that it’s not wise to try and time the stock markets,” he notes. “As you near retirement, or if you need the liquidity, certainly you need to start moving a higher percentage of your investment into more liquid assets like Money Markets and bonds versus equities.”
While he and his team think the best opportunities are in equities rather than bonds, Radosevich acknowledges that investors need to make sure that they plan well in advance to start creating liquidity from their portfolio “so you’re not having to sell stocks back at the bottom of a pullback.”
Radosevich repeats that investors looking ahead to retirement should not try and time the market. “They shouldn’t try and speculate the markets, meaning trying to make a quick profit, and they should be diversified. Our biggest thing is that we think equities are the place to be, especially the US large-cap equities. But you need to take a long-term perspective, and you need to be well diversified. Leave the speculation to the pros, and certainly don’t sell out at the bottom.”
Investors with a long-term time horizon, he adds, have got to ride out the volatility of the stock markets, “because returns are commensurate with risk — and risk means that there is more volatility than you would have in either a Money Market of even a bond portfolio.”
“There is no question that this great recession has had some people having to rebuild their retirement plans,” notes Loy. “If they’ve had a lot of their money invested in real estate or even the stock market they may have gotten pummeled, and so they’re trying to rebuild.”
Sage Financial’s approach is to understand where clients are trying to go and developing an investment plan specific to them. Some people, Loy points out, are what he calls “belt-and-suspenders” kind of folks, for whom you have to have a safer investment portfolio that has very little volatility. That means that from day to day, month to month the value shouldn’t change much. On the other string you’ve got people who need to get returns down the road, and so have much more aggressive portfolios.”
“There are safe things out there,” says Martin, “but you’re not going to get much of a return. So if you want safe and a return, that’s where the challenge comes into play.” BNY Mellon, he notes, has a lot of clients who are invested in longterm municipal bonds. “One of the differences between an active manager and a passive manager is that an active manager will continually monitor the credit of those bonds, because that is the risk you have with muni bonds: will that municipality have an issue?”
The reality that a lot of people tend to lose sight of, Martin feels, is that as he puts it, “Cities aren’t going to go out of business. The city of San Antonio, or Las Vegas, isn’t going to go away. They have some innate ability to tax more and give less in services, so they control their inflows and outflows.” That said, however, there are going to be municipalities that have financial issues, though usually there are signs that those issues are coming. “It doesn’t happen overnight. Usually there are signs over a period of years, where they get to that level.”
Some of his firm’s clients, Martin reports, are more than casually worried about inflation. But as he explains, “Until we have some job creation, which is a huge part of inflation, we’re not going to have inflation. We’re going to have it eventually, but not any time soon.”
Having commodities in a portfolio is a good idea, DePasquale believes, “to an extent. But it’s just like any other position: it has to be hedged with other positions. Gold, for example, is a great hedge against inflation. It works inversely, usually, to the stock market, so it’s a good position to have. But people who think it’s the end-all, be-all — ‘I’ll throw all my money in there because it’s something that’s safe, something that I can hold’ – are incorrect.”
Anyone reviewing the price of gold over time, he points out, will find that “it spiked up in the ‘70s and then crashed all the way back down to pre-market levels, then went back up again. So it’s like any other market: it can go up and it can go down.” Investors who believe they have found a basket in which to place all their eggs, DePasquale is convinced, “are, I think, going to be sorely disappointed when we start seeing the dollar come back, which at some point it eventually will.”
The power of knowing, DePasquale contends, is not to be underestimated. “The first thing I would say to anybody who is looking to invest is if you don’t know what you’re doing, work with professionals, and make sure the person you’re working with has your best interests at heart. Don’t invest in anything you don’t understand. If it’s too complicated for you to understand it’s probably not a good idea for you to invest in it. Look for liquidity and don’t take on too much risk for yourself.”
Given the jittery times, that advice would seem to make a lot of sense.