Preparing Your Portfolio for the Final Years of Employment
By Anthony Rhodes
Well, it's finally here. The moment which you've been preparing your entire working career for is right around the corner. Your retirement is so close that you no longer spend your waking moments pondering the duties and responsibilities of your occupation, but find such instances being replaced by thoughts of sun-soaked beaches and exotic travel locales. The ultimate payout for decades of time and invested labor is at nigh, and all you have to do now is count down to that long-awaited final date, so that you can exit those office doors for the last time, and officially enter the realm of the well-deserved, no longer working.
This dream scenario is played out by most individuals during the final years of their careers, and rightfully should be the expectation of all who have invested such a substantial amount of their lives to their vocations. But while those who have cannily prepared their portfolios for this occurrence are more likely to live out this image, others who have failed to perform such acts may find themselves at the mercy of an unforgiving stock market, and at a time which they are least likely to weather its infamously volatile mood swings.
This week, we'll discuss some strategies which should help you to prepare your portfolio for the final years of employment. In addition, we'll also seek to point out the unsettling reality which can (and does) take place, when we awaken from our dream of a successful retirement, only to discover that it has cruelly been replaced by the nightmare which results when we fail to plan.
Years 10-5
First of all, it's best to view a successful retirement as a journey, and not a destination; equally, as such, a journey which increasingly becomes achievable during the very important period of the final decade of your employment. This is the time in which your portfolio should incrementally begin to shift from a focus on growth or appreciation, to one which centers more on safety or preservation. It's crucial to take this recommendation to heart, because many investors don't consciously comprehend the differences between portfolio time and real time. In real time, a stock market which has had three years of poor performance followed by three years of above average performance equates to 6 years. But in portfolio time, that exact same period may equate to no time having passed at all (because the gains and losses offset one another, leaving you in the exact same place as you were before they occurred). This is why it' s so important to begin shifting your allocation as you move closer to retirement. Now this doesn't mean that you should abandon all expectations of growth, but merely reflects the fact that it's becoming more imperative to hold on to what you've already accumulated, than to risk it in pursuit of greater gains. During years 10-5, I would suggest annually decreasing the small cap portion of your portfolio, and increasing the large cap portion in unison. This action should allow you to continue to achieve a certain degree of growth over this span, while at the same time decreasing your exposure to risk.
Years 5-1
The final 5 years of employment only magnifies our theme of preservation, and therefore demands strict adherence to it. At this point, your portfolio should be swelled by decades of tax-deferred growth, and well-positioned to provide you with many years of investment proceeds as you pursue your lofty dreams of retirement. However, that little voice which resides in all of us may take this opportunity to seek to convince you to roll those investment dice one more time, in the gluttonous hopes that the differences between a 6% return and an 8% return, could determine whether you'll be flying first class or coach to those upcoming exotic destinations. Instead of transitioning the lion' s share of your portfolio to fixed income instruments (bonds) which you should do, perhaps one more year of technology investing will put you over the top, and practically guarantee that those beachfront activities will take place at 5 star resorts, instead of the plain old 3 or 4 star varieties. When or if this occurs, simply recall the woes of all those investors who surprisingly lost a substantial amount of their portfolios' value when the stock market unexpectedly decided to serve up some humble pie. Whether it was 1929, 1987, 2001 or others, each and every one of those individuals would have gladly exchanged their misery simply for breaking even over those periods, and a 6% improvement would have looked like manna from heaven! Decreasing your exposure to risk should be the primary investment objective during the final 5 years of your employment. So my recommendation of shifting the vast majority of your assets to bonds should be both welcomed and performed without a moments' hesitation.
We all envision our retirement as a wondrous period full of exotic travel, sun-soaked leisure and endless relaxation. Such acts ought to transpire, as they represent the culmination of years spent toiling our attention, time and energies towards our various occupations.
But just because something should take place, doesn't necessarily mean that it actually will. So, positioning your portfolio to best handle those crucially significant final 10 years of employment, moves you one step closer to converting that vision to reality.
(Anthony Rhodes is the President and owner of wealth management firm The Planning Perspective www.theplanningperspective.com )
By Anthony Rhodes
Well, it's finally here. The moment which you've been preparing your entire working career for is right around the corner. Your retirement is so close that you no longer spend your waking moments pondering the duties and responsibilities of your occupation, but find such instances being replaced by thoughts of sun-soaked beaches and exotic travel locales. The ultimate payout for decades of time and invested labor is at nigh, and all you have to do now is count down to that long-awaited final date, so that you can exit those office doors for the last time, and officially enter the realm of the well-deserved, no longer working.
This dream scenario is played out by most individuals during the final years of their careers, and rightfully should be the expectation of all who have invested such a substantial amount of their lives to their vocations. But while those who have cannily prepared their portfolios for this occurrence are more likely to live out this image, others who have failed to perform such acts may find themselves at the mercy of an unforgiving stock market, and at a time which they are least likely to weather its infamously volatile mood swings.
This week, we'll discuss some strategies which should help you to prepare your portfolio for the final years of employment. In addition, we'll also seek to point out the unsettling reality which can (and does) take place, when we awaken from our dream of a successful retirement, only to discover that it has cruelly been replaced by the nightmare which results when we fail to plan.
Years 10-5
First of all, it's best to view a successful retirement as a journey, and not a destination; equally, as such, a journey which increasingly becomes achievable during the very important period of the final decade of your employment. This is the time in which your portfolio should incrementally begin to shift from a focus on growth or appreciation, to one which centers more on safety or preservation. It's crucial to take this recommendation to heart, because many investors don't consciously comprehend the differences between portfolio time and real time. In real time, a stock market which has had three years of poor performance followed by three years of above average performance equates to 6 years. But in portfolio time, that exact same period may equate to no time having passed at all (because the gains and losses offset one another, leaving you in the exact same place as you were before they occurred). This is why it' s so important to begin shifting your allocation as you move closer to retirement. Now this doesn't mean that you should abandon all expectations of growth, but merely reflects the fact that it's becoming more imperative to hold on to what you've already accumulated, than to risk it in pursuit of greater gains. During years 10-5, I would suggest annually decreasing the small cap portion of your portfolio, and increasing the large cap portion in unison. This action should allow you to continue to achieve a certain degree of growth over this span, while at the same time decreasing your exposure to risk.
Years 5-1
The final 5 years of employment only magnifies our theme of preservation, and therefore demands strict adherence to it. At this point, your portfolio should be swelled by decades of tax-deferred growth, and well-positioned to provide you with many years of investment proceeds as you pursue your lofty dreams of retirement. However, that little voice which resides in all of us may take this opportunity to seek to convince you to roll those investment dice one more time, in the gluttonous hopes that the differences between a 6% return and an 8% return, could determine whether you'll be flying first class or coach to those upcoming exotic destinations. Instead of transitioning the lion' s share of your portfolio to fixed income instruments (bonds) which you should do, perhaps one more year of technology investing will put you over the top, and practically guarantee that those beachfront activities will take place at 5 star resorts, instead of the plain old 3 or 4 star varieties. When or if this occurs, simply recall the woes of all those investors who surprisingly lost a substantial amount of their portfolios' value when the stock market unexpectedly decided to serve up some humble pie. Whether it was 1929, 1987, 2001 or others, each and every one of those individuals would have gladly exchanged their misery simply for breaking even over those periods, and a 6% improvement would have looked like manna from heaven! Decreasing your exposure to risk should be the primary investment objective during the final 5 years of your employment. So my recommendation of shifting the vast majority of your assets to bonds should be both welcomed and performed without a moments' hesitation.
We all envision our retirement as a wondrous period full of exotic travel, sun-soaked leisure and endless relaxation. Such acts ought to transpire, as they represent the culmination of years spent toiling our attention, time and energies towards our various occupations.
But just because something should take place, doesn't necessarily mean that it actually will. So, positioning your portfolio to best handle those crucially significant final 10 years of employment, moves you one step closer to converting that vision to reality.
(Anthony Rhodes is the President and owner of wealth management firm The Planning Perspective www.theplanningperspective.com )
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