In recent weeks, I’ve written a series of articles outlining various asset-allocation models. The models were geared toward investors nearing retirement with $1 million to invest. Of course, concerning asset allocations, there are countless variations investors can create. Investment objectives, time horizons, and risk tolerances will help shape allocations. Additionally, the market environment in which we live will also play a role in shaping allocations. As I mentioned in, “A Conservative Asset Allocation For Income-Focused Investors”:
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“Today isn’t exactly an ideal investing environment for putting together an income-producing portfolio. Bond yields are still at historically low levels and stocks are generally not cheap. Nevertheless, thousands of people are reaching the traditional retirement age each day. Those people will have to play the hands they are dealt.”
Playing the hands we are dealt can be a frustrating experience. In today’s low interest-rate environment, investors are forced to choose between taking on more risk to capture “real” yields or waiting in low-yielding instruments (cash, for example) until the interest-rate environment changes. The recent series of asset-allocation articles approached things from a “play the hands you are dealt” perspective. If we were in a different financial-markets environment, the allocations would have been different. Here are two examples of how things might change in different market environments:
Just as asset allocations likely changed during your non-retirement years, so too can allocations change during your retirement years. If preferred stocks and exchange-traded debt offered across-the-board yields of 9% as opposed to 6% to 7%, a higher allocation would be appropriate. If corporate spreads-to-Treasuries were at recessionary levels, rather than the current slightly unattractive levels, higher allocations to non-investment grade bonds would be acceptable. Finally, if broader-market equity indices were 30% to 50% off their 52-week highs, a higher allocation to equities would be tolerable. But we are not in those environments today. And investing as if we are could prove to be quite imprudent.
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