We get a lot of questions after every show from baby boomers asking for advice on managing their investments as they approach retirement age, and this week was no different. So we asked our friend Louis Barajas, a personal finance expert in Los Angeles, to help us answer a few.
Our first question this week came from Leanne, a semi-retired breeder of rare dogs in Rosehill, Kansas. She’s concerned about allocation and diversity in her retirement portfolio. Leanne has all of her money, a little more than $115,000, invested in stock funds, and she’s concerned about what could happen if there’s another stock market crash or recession.
“I was wondering if I should pull it out of there and put it in bonds,” Leanne asks. “My fund really took a hit in 2008 — I lost almost half the value — and now it’s back up to where it was.”
Barajas says Leanne’s issue is one that many investors are facing now that the stock market has rebounded.
“A lot of people out there have finally gotten their portfolios back,” he says. “Having more money, we always have to go back to the basics, which are: What is our goal? What is our timeframe? And what’s the risk tolerance that we’re willing to take?”
Barajas says that Leanne’s inclination to diversify is right. Keeping all of your money in equity means that if equities go down, your entire portfolio will go down. If you want to get an idea of just how much your portfolio could be impacted by a dip in the market, Barajas suggests visiting a fee-only or hourly-rate financial advisor for what’s called a Monte Carlo simulation. An analysis of hundreds of thousands of variations measured by standard deviation, a Monte Carlo simulation lets you see what risk you’re carrying with your current portfolio.
But Barajas also says Leanne shouldn’t just blindly invest in bonds for the sake of diversifying her portfolio. “You have to understand it’s like eating fruits and vegetables,” he says. “Bonds may be fruits, but there are different types of bonds — there’s short-term bonds, long-term bonds, municipal bonds, corporate bonds. And it’s like having bananas, apples, and pears — if you’re only eating apples every single day, and not varying the fruits that you’re eating, you may lack some vitamins. The same thing with your portfolio.”
Leanne says that she doesn’t plan on tapping into the account for about eight years, and hopes to make the money last for about five to ten years after that. Barajas says that long term plan should leave her in good shape for continuing to invest in stocks, even if the economy stumbles again.
“If we do go into a small recession or the market goes down again, always look at it as a great opportunity to buy in when there’s a sale on stocks,” advises Barajas. “And, especially if you’re thinking eight to ten to fifteen years out, it’s really important to not get so scared and stay within your original goal, which, in your case, is retirement.”
To hear more advice, click the audio player above. This week, we also have questions about setting up a posthumous charitable foundation from a single man in his 60s; how to know whether your investment advisor is giving you the most bang for your buck; and whether or not there is any financial advantage in getting married for a boomer couple.