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Expert Insight By: Richard Scott-Ram |
 Bob Cochran 1621 West Ave. Columbus, OH 43212 614-481-8449 pdsplanning.com |
Bob Cochran joined PDS Planning of Columbus, Ohio,
in 1987. He is a member of the Financial Planning
Association, its National Chapter Advisory Council,
and served two terms as President of the Central Ohio
Chapter. He holds bachelor’s and graduate degrees from the
Ohio State University and earned the Certified Financial
Planner designation.
Mr. Cochran is not affiliated with, or compensated by U.S. Global Investors. |
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2001 was a difficult year for most investors, and we grimaced as we watched the value of our retirement
accounts drop. All kinds of questions went through our minds. "Why didn’t I sell and move
to cash?" "If I had sold to cash, when would I have gone back in, so that I didn’t miss out on the
big gains of the fourth quarter?" "Should I be more conservative – why not just put everything in
bonds and be safe?" "The next time, I will be more careful."
To be sure, many investors were lulled into a sense of euphoria by the incredible stock market returns during the 1990s, particularly the second half of the decade. Most forgot that the average return for stocks over the last 30-70 years has been about 10 percent. That’s right – 10 percent. Not 20 percent, not 30 percent, but 10 percent. That still compares very favorably with the average return for bonds, which is about 5 to 6 percent. But, if you think that there isn’t much difference between 6 percent and 10 percent, think again. When compounded over a person’s lifetime, 4 percent can be absolutely huge. That’s the reason investors who are about to retire should think twice about putting everything in bonds or certificates of deposit (CDs). First, inflation could eat into as much as half of the return on CDs and bonds. Second, people retiring today could live for another 35-40 years, which means that their retirement years could last longer than their working years. Simply put, retirees probably need to have a portion of their retirement dollars in stocks. As for investors who are not ready for retirement, stocks are probably still the best long-term investing option. It is important to develop an investment strategy that includes different asset classes and risk levels: bonds, stocks from large, mid-sized and small U.S. corporations, and international stocks. Find a mix, or asset allocation, of these classes that works for you and allows you to sleep at night when the market is going down. Then stay with it! Investing regularly, via payroll deduction, is often the best way to accumulate long-term wealth. Experience has shown that the number of years before you will use your investments (sometimes called the time horizon) is another critical factor. For instance, if you have 5 to 10 years before you retire, you can probably afford to take on more risk than if you are planning to retire next year. It is important to protect your portfolio income when you retire. A good rule is to put 3 to 5 years of portfolio income needs in Treasury notes or short-term corporate bonds, with maturities staggered to match your need for income. This can allow you to be more aggressive with your remain-ing investments knowing that, no matter what happens to the stock market during that 3 to 5 year period, your income needs are protected. In years when the stock market has gains, you might decide to take profits from your equity investments and reinvest the bonds for a later date. In years like 2001, however, you would simply use money from matured bonds or cash. In general, we have found that most retirees can afford to take 4-8 percent of the total value of their retirement plans as income on an annual basis, without getting into the principle. This concept has worked well for many individuals, and I recommend that you consider it. There is no "right" investment strategy for everyone. I urge you to think about your risk tolerance, your long-term goals, your time horizon and your future income needs. The chances are good you will see that, despite the last two years, stocks should probably be an important component of your retirement investments. |
