The markets continue to provide difficult options to investors. In the typical market conditions of the last 50 years I think a sensible portfolio allocation was not that challenging to pick. I would choose a bit more in stocks than bonds than the commonly accepted strategy. And I would choose to put a bit more overseas and in real estate.

But if that wasn’t done and even something like 60% stocks and 40% bonds were chosen it would seem reasonable (or 60% stocks 25% bonds and 15% money market – I really prefer a substantial cushion in cash in retirement). Retirement planning is fairly complex and many adjustments are wise for an individual’s particular situation (so keep in mind this post is meant to discuss general conditions today and not suggest what is right for any specific person).

I wrote about Retirement Savings Allocation for 2010: 5% real estate, 35% global stocks, 5% money market, 55% USA stocks. This was when I was young and accumulating my retirement portfolio.

Today, investment conditions make investing in retirement more difficult than normal. With interest rates so low bonds provide little yield and have increased risk (due to how much long term bond prices would fall if interest rates rise, given how low interest rates are today). And with stocks so highly valued the likelihood of poor long term returns at these levels seems higher than normal.

So the 2 options for the simplest version of portfolio allocation are less attractive than usual, provide lower income than usual and have great risk of decline than usual. That isn’t a good situation.

I do think looking for dividend stocks to provide some current yield in this situation makes sense. And in so doing substitute them for a portion of the bond portfolio. This strategy isn’t without risk, but given the current markets I think it makes sense.

I have always thought including real estate as part of a portfolio was wise. It makes even more sense today. In the past Real Estate Investment Trusts (REITs) were very underrepresented in the S&P 500 index, in 2016 and 2017 quite a few REITs were added. This is useful to provide some investing in REITs for those who rely on the S&P 500 index funds for their stock investments. Still I would include REIT investments above and beyond their portion of the S&P 500 index. REITs also provide higher yields than most stocks and bonds today so they help provide current income.

While I am worried about the high valuations of stocks today I don’t see much option but to stay heavily invested in stocks. I generally am very overweight stocks in my portfolio allocation. I do think it makes sense to reduce how overweight in stocks my portfolio is (and how overweight I think is sensible in general).

Investing in commodities is another option that I have not considered seriously before (other options were adequate and I was comfortable with them). I am getting closer to spending time researching investing options in those areas but I still haven’t seriously looked at them. There are more interesting than they have been previously given how the other options look today.

I did experiment with peer to peer loans. I have withdrawn most of my investment from that but it is worth consideration, especially for someone seeking current income. I have achieved a bit under 5% return on those investments. Not a great return but it beats what bonds will give you. Likely peer to peer investing returns will suffer in a recession (probably even more than bonds will).

In retirement, today for someone living in the USA I would consider a reasonable portfolio allocation something like:

• 30% total USA stock market index fund
• 15% global stock market index funds
• 10% emerging market index fund (that includes China, such as the Vanguard Emerging Markets fund – VMO)
• 10% global REIT fund
• 20% money market fund
• 15% short term USA treasury fund

If there isn’t a substantial portion (say above 30% – from social security and other sources) of retirement income that currently comes from annuities I would strong consider buying an immediate or deferred fixed annuity to bring in about 10% to 20% of retirement income (to bring total annuity income to 20-40% of income). The low interest rates now do result in disappointing returns but the increased yield due to life expectancy across the population provides a good effective yield. Annuity income can substitute for bond income in a person’s financial situation; so a higher annuity income level can make a higher stock portion of a retirement portfolio reasonable.

Of course the investment portfolio for someone’s particular situation needs to be adjusted for their overall financial situation. How old are they, are they early in retirement, what is life expectancy? Are they married? How much of their income is provided by annuities and what sources of annuity income do they have (social security, annuities, pension…)? Wether they own their own house and how much equity they have in their house? How much of their investment portfolio do they need to spend on current expenses each year…

In retirement, I personally would choose something like:

• 45% individual stocks that I pick (USA and overseas)
• 10% emerging market funds
• 5% global REIT fund
• 5% global health care fund
• 10% rental house
• 23% money market fund
• 2% peer to peer lending

A portion of my individual stocks would be stocks picked for current and future income (dividend stocks with a good chance to increase dividends in the long term – like Abbvie and possibly some REITs).

Another consideration is that you likely need to increase how much of current income to save for retirement than I suggested in 2013 (due to lower expected investment returns).

I do believe it makes sense to hold quite a bit more cash (money market, CDs…) today that normally makes sense (I plan on added a post soon sharing more detailed thoughts on this idea). Since bonds yield so little today and have greater risk at these levels it makes sense to use cash to reduce risk.

Owning and renting physical real estate is also an attractive idea given the existing situation. Investing that way requires quite a bit of effort, energy and attention. I have rented the first house I bought (that I had lived in for 7 years) since I bought my second house. And when I have been overseas or out of state for several years I have rented my second house. I am now in the process of selling my second house, not for investment reasons but just to make my life simpler (and to diversify – the large increase in value of both houses has left my portfolio heavily concentrated in those 2 houses).

There are also issues with buying physical real estate, such as I can easily sell 5% of my shares in Apple, I can’t easily sell 5% of my rental property. But I think purely as an investment physical real estate makes a great deal of sense (especially in the existing conditions). If someone is comfortable taking on all the issues owning real estate brings it would make sense to have up to 20% of assets invested in that area it seems to me.

Related: Investment Options Are Much Less Comforting Than Normal These Days (2013) – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation – Saving for Retirement (2006)

Comments