senior-spectrum.com - Peter Cole

Mapping the Road Ahead
For Older Investors

Many seniors have lost value in their retirement accounts over the last several years. John and Mary Smith are a fictitious couple whose current financial situation may sound familiar to you. They have lost more than 50 percent of the value in their retirement accounts over the last two years. They are nervous about the future.

In this column, I will discuss the road ahead for investors like John and Mary.

Many seniors from all walks of life find themselves in positions similar to John and Mary's. Having lost much of the value in their retirement accounts, they are uncertain as to how to move forward.

Here is the all-too-common scenario in a nutshell: during the technology stock boom, John and Mary invested very aggressively, wanting to benefit from the rising tide in stock prices. When the tide in stock prices started to recede, they figured that the tide soon would rise again. They have been waiting for the tide to turn for some time now and are feeling burned and angry. They have not put new money into the market for over a year, and are not happy with the return they are getting on their CDs.

John and Mary know very well what happened with their portfolio in the '90s. They invested far too aggressively, creating a great deal of volatility in their portfolio. They feel they have learned their lesson and are determined not to make the same mistake again. However, that does not help them in deciding what to do now. Should they hang on to their tech-heavy, growth-type investments in the hope that those stock prices will return to higher levels, or should they reinvest more conservatively?

My answer to this question is that they should do some of both. Let me explain. If John and Mary were actual clients, I would recommend that they take some time to analyze where they are in their lives. I would ask them to explore how much risk they are willing to tolerate in the portfolio at this juncture in their lives.

For many seniors, particularly those who are in retirement, a conservative portfolio, weighted toward the income and cash side, is appropriate. After working with these and other issues, we would arrive at adopting an appropriate asset allocation model. This will usually entail a mix of various categories of stocks, bonds and cash.

In order to get from an aggressive portfolio to a more conservative one, we would make an analysis of the stock portion of the portfolio and keep some of the stronger growth-oriented investments, while harvesting the losses in other aggressive growth investments. "Harvesting losses" refers to reporting securities losses to the IRS and thereby reducing tax liability. (This column is not intended to give specific tax advice. Please consult with a tax professional about the tax consequences of any actions you may take with your portfolio.) We might then reinvest in a mix of securities that represent an appropriate mix of stocks, bonds and cash for John and Mary.

Having achieved the asset allocation that fits John and Mary's needs, we may be in a better position to deal with today's volatile stock market. Our goal is to reduce John and Mary's exposure to stock market volatility with bonds and cash. On the other hand, we might maintain a portion of the portfolio in stocks which may position ourselves for growth in a rising market.

Proper asset allocation goes to the heart of investing for seniors. People with a long time horizon may invest very differently from those who are in retirement, or close to retirement. Attempting to time the market (that is, attempting to buy stocks low and sell them high) has often been a perilous strategy. No one can accurately predict the future. Missing the 10 best trading days since 1992 would have cost an investor 43 percent of the average return, i.e. the average return would have been 6 percent as opposed to 10.6 percent.

It is often a good strategy to stay invested in the market, so that one does not miss the best periods. Over the long term, diversification can help reduce volatility while allowing for growth.

In summary, the road ahead for senior investors requires proactive planning and a disciplined investment strategy. Your retirement can be the very best time of your life. Planning well with your money can give you a better shot at having your senior years be financially rewarding.

Peter Cole is a financial services specialist and director of Insight Financial Group in Sacramento.

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