The tragic events of last Sept. 11 changed everyone’s priorities, with preservation of life and family moving to the forefront and staying there.
A bear market that wiped out $6.5 trillion of the value of American stocks has also had a powerful effect on people, who are now working to preserve their holdings rather than take on undue risk to get rich.
“There’s been a psychological change from `Go, go, go’ to `Let’s keep what I have,'” observed Mark Balasa, co-president of Balasa Dinverno Foltz & Hoffman financial advisers in Schaumburg.
Also under fire is long-held logic that a person can afford to be more aggressive with stocks in his 20s or 30s, before gradually moving into more fixed-rate choices through his 40s and 50s and then sliding entirely into bonds and certificates of deposit in his 60s.
While there remains some wisdom behind that, perhaps young people shouldn’t be pressured to be gung-ho. Maybe older folks don’t have to totally buy into fixed-rate choices. We may be in an era in which people must set their own rules rather than rely on past formulas.
“It’s foolhardy to accept the myth that when you’re young you should take a lot of risk simply because you’ve got time to make it up,” warned Vern Hayden, certified financial planner with Hayden Financial Group LLC in Westport, Conn. “I don’t believe you need to change your investment strategy a whole lot until you’re within five years of retirement.”
Since young people gain more in the long run from the powerful effect of the compounding of stable investment choices, selections throughout life should be based primarily on one’s own investment personality, Hayden is convinced.
“A very poor guideline to follow is the old rule of thumb that says you should subtract your age from 100 to determine the percentage of your holdings you should have in stocks,” cautioned Ray Ferrara, chief executive officer of ProVise Management Group LLC in Clearwater, Fla. “Not every 55-year-old should have 45 percent in stocks and 55 percent bonds, since asset allocation should be tailored to individual circumstances.”
Ferrara contends it’s also a big mistake for parents to invest less for retirement or tap their retirement funds to pay for a child’s education. Helping out is commendable, but it makes more sense for a child to take out loans than it does for parents to squander their retirement hopes.
“I think the older you are, the more important it is to still have some risky assets in your mix, but just not as much,” believes James Paulsen, chief investment officer of Wells Capital Management in Minneapolis. “Everyone–and I don’t care if you’re 100 years old–should still have some equities because you never know if you’re going to live to be 110.”
Despite the prevailing logic that senior citizens should be completely in bonds, Balasa notes that historically a portfolio that’s 20 percent in stocks has proven to be less volatile than one that’s 100 percent in bonds.
“On the other side of the coin, with today’s ongoing concerns about stocks, even people who are 20 years old should have some bonds in their portfolio,” added Balasa.
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Following are Hayden’s recommendations based on an investor’s confidence:
– The “bunker” portfolio for squeamish investors is 55 percent bond funds such as Sit U.S. Government Securities (VIPSX) and FPA New Income Fund (FPNIX); 30 percent balanced (stock and bond) funds such as First Eagle SoGen Global (SGENX), the Clipper Fund (CFIMX) and Oakmark Equity & Income I (OAKBX); and 15 percent money-market mutual funds.
– The “conservative” portfolio is 50 percent stock funds that include Royce Low-Priced Stock (RYLPX) and Thornburg Value (TVAFX); 40 percent bonds; and 10 percent money markets.
– The “moderate” portfolio is 65 percent stock funds such as the Oakmark Fund (OAKMX), Hartford Midcap (HFMCX) and FMI Focus (FMIOX); 25 percent bonds; and 10 percent money markets.
– The more aggressive “growth” portfolio is 80 percent stock funds such as Growth Fund of America (AGTHX); 15 percent bonds; and 5 percent money markets.
– By asset class, here are Ferrara’s favorite funds for individuals who are constructing their own portfolios:
– In small-cap stocks, Sentinel Small Company (SAGWX), Third Avenue Value (TAVFX) and Royce Low-Priced Stock.
– From larger-caps, Washington Mutual (AWSHX) and Clipper Fund.
– On the growth side, Legg Mason Value Trust (LMVTX).