Why Your Retirement Investments Are Better Off Boring
Dare to be dull! That's the investment gauntlet tossed down by fellow CBS MoneyWatch blogger Allan Roth in his recent post. As an actuary, I take this challenge very seriously. In fact, when it comes to investing recommendations, I can offer Allan some pretty stiff competition in the dull category. My response to Allan's challenge? When it comes to retirement investments, you're better off boring!
All kidding aside, Allan and I definitely agree about the advantages to using simple, low-cost investments for your IRAs, 401ks, and retirement savings. And also that you can manage your investment risk through asset allocation.
You can see the protection offered by asset allocation on a slide (see below) that I typically show at my retirement planning workshops. Suppose you had invested $100,000 at the beginning of 2008 in several Vanguard mutual funds with different asset allocations. What would be the asset values by September 30, 2010? The graph below offers a visual answer:
You'll see that with the Wellesley fund -- invested about 40 percent in stocks -- you'd have accumulated over $114,000. But with the Wellington fund -- invested about 60 percent in stocks -- you'd be a few hundred dollars short of your original $100,000 investment. While this isn't good news, you still would have survived one of the worst periods of investing and done better than the S&P 500. Not bad!
In a previous post -- Asset Allocation: My Grandfather Had It Right -- I suggested the following asset allocation for people approaching or in the early years of retirement:
- No less than one-third on stocks, to protect against inflation, and
- No more than two-thirds in stocks, to protect against short-term market declines.
In my recent post Recession-Proof Your Retirement Savings, I showed how you could have used the above Vanguard funds to generate retirement income during the "lost decade" from 2000 to 2009, and you would have survived just fine by the end of the decade.
Here's more from the dull and boring category: I'm also a fan of using immediate annuities for a portion of your retirement income, if you don't have a substantial pension from work. Immediate annuities provide a monthly paycheck for the rest of your life, no matter how long you live and no matter what happens in the economy. That's the ultimate in dullness and boredom! But it's also a safe way to generate a regular retirement income. I'll soon be writing about the best way to buy and use immediate annuities in my ongoing series on generating retirement income.
Here's one last thing to consider: If your thrill-seeking retirement investments cause you to be broke when you reach your seventies and eighties, your entertainment might be confined to rocking on your porch or flipping the channels on your TV. But Allan and I will be able to do more exciting things -- vacationing in Peru, anyone? -- due to our dull and boring retirement investment strategies.
More on CBS MoneyWatch
Dare to Be Dull Investing
IRAs and 401k: 3 Ways to Generate Lifetime Retirement Income
Recession-Proof Your Retirement Savings: Part 1
Recession-Proof Your Retirement Savings: Part 2
Asset Allocation: My Grandfather Had It Right
View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops
and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.
Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.
