Outlive your assets?

by Jerry Beto

On the other hand, most financial consultants agree that younger investors should invest mostly in stocks, which offer the potential to substantially grow in value over many years. By the time retirement rolled around, any money made in the stock market could then be shifted into fixed-income securities.

But the times are changing. People are living longer, healthier lives. The chance of you outliving your assets becomes a real possibility. Although price inflation is virtually nonexistent today, history shows that this probably won't be the case forever. During periods of high inflation, a fixed-income portfolio may not earn enough to offset a rise in prices.

To stay ahead of inflation and help insure that their clients don't outlive their assets, many financial consultants today advise their clients to keep a portion of their portfolios invested in stocks, even after reaching retirement.

However, the percentage of your portfolio that should comprise stocks also depends on several other factors, including the time period in which you will need the money and your tolerance for risk. Your financial consultant can recommend a mix of investments tailored to your individual circumstances.

But as a rule of thumb, the percentage your portfolio that should be invested in stocks vs. bonds corresponds with your age. For example, if you're 50 years old, about half of your portfolio should be invested in bonds and the other 50 percent in stocks. At age 65, sixty-five percent of your portfolio should be comprised of bonds and 35 percent should be allocated to stocks and so on. This technique allows your portfolio to take advantage of the wealth-preserving characteristics of bonds, while still maintaining some exposure to the potential growth offered by stocks.

As a stock investor, you should be prepared psychologically for the value of your investments to go down as much as they go up. For example, if you were a stock investor in the 1994, stocks (as measured by the Standard & Poor's 500 Index) returned a paltry 1.3 percent on average, according to Zack's Investment Research of Chicago. Chances are that you would have been very disappointed if you had invested in stocks that year alone.

But you probably would have been ecstatic had you invested in stocks the following year when the average S&P 500 return climbed to 37.6 percent. To reduce risk, many investors buy stocks and hold them for the long term, typically a minimum of three to five years. According to this example, if you had invested over a five-year time frame (1993-1997), your average return, excluding transaction costs and taxes, would have been 21 percent. Keep in mind that past performance is not a guarantee of future results and that you cannot invest directly in an index.

If stock investing appears too risky for your tastes, you may be better suited for a bond portfolio, but remember, there is risk in being too conservative. If inflation rises above what your bonds are returning in your portfolio, the value of your assets is worth less every year inflation outpaces your investment returns.

Just because you've stopped working doesn't mean you need to retire from stock investing. ---TP