As hard as it may be for clients to understand, the fundamentals of investing apply, even in tough economies like the one today. Different clients may need to emphasize one proven investment strategy over another, but advisors still can guide them to stick to basics such as the following.
Laddering. The middle of a bear market may not be the best time to tell retirees about the value of creating investment ladders–with annuities as well as other products–but it’s a perfect time to work with those who are about to retire.
Conventional wisdom is that a retiree should have about 2 years worth of expenses in stable, liquid assets to avoid having to sell more volatile assets in a down market. Many clients interpret that to mean having money in savings accounts or money market mutual funds.
A better way to gain higher earnings and liquidity is to create financial ladders. This involves buying a series of low risk investments with staggered maturity dates.
Bank certificates of deposit, bonds and bond mutual funds are typically used for laddering. For example, a client could buy 10 bonds at $10,000 each with maturity dates spaced a year apart for the next 10 years. Each time a bond matures is an opportunity for clients to use the bond’s value for income as opposed to having to sell other investments at a loss in a down market. If clients don’t need the income at that time, they can reinvest in another bond.
Laddering and guaranteeing income. A newer approach to laddering involves laddering lifetime immediate annuities. Using annuities instead of CDs or bonds has the advantage of potentially creating guaranteed income for life.
With the disappearance of many pension plans and uncertainty about Social Security benefits, more and more customers are asking advisors for a way to provide that guaranteed income. Many advisors are helping customers use fixed annuity laddering to create the desired income stream.
The rule of thumb is that the customer can put about one-third of a retirement nest egg into annuities. Many clients are leery of putting that much into an annuity all at once. However, gradually transferring money into a series of lifetime immediate fixed annuities over the course of several years can create an increasing income stream without having to make a large annuity purchase at one time.
Clients can also purchase a series of life income with refund or life income with period certain annuities. In addition to having guaranteed income for life, clients also would then have a guarantee that, if they die early in the annuity payout period, their annuity’s purchase price will at least be returned or its payments will continue to the beneficiaries.
For example, a client could purchase five 20-year period certain annuities of the same amount at 2-year intervals. This would provide annuity payments for 28 years or so, with the later-purchased annuities providing higher payments due to the client’s increased age at time of purchase.
Buy low, sell high. What about the stock market? For clients whose retirements are off in the future, it goes without saying that this is a perfect opportunity to buy.
So, advisors can encourage those clients to begin or increase contributions to company-sponsored retirement plans or individual retirement accounts. Even retirees can benefit from the low prices available when changing their portfolios.
However, clients need to be advised that buying low and selling high does not mean timing the market. Market timing doesn’t work, as many people have learned after losing money when they tried it.
Allocate, diversify, and rebalance. Most of the increase in a portfolio’s value comes from how the assets are allocated. Clients need to be reminded that how they allocate investments needs to match their risk tolerance and projected retirement date. Younger clients have no need to panic if their portfolio value has dropped–as long as their portfolios are properly allocated.
Along with properly allocated portfolios goes diversity. Clients having a large percentage of retirement savings in company stock should strongly consider shifting funds into other investment options in their employers’ plan.
Also, even if a client’s original asset allocation was correct, the portfolio still needs to be periodically rebalanced to ensure the allocation is retained. When rebalancing, the client should also reevaluate the performance of individual investments. If one or another is not performing as expected over the long term, this may be the time to sell it and find a more promising investment with similar characteristics.
Although today is a tough time for investors and clients, in economic terms, there’s never been a better time to be an advisor. Such times are when clients need their advisors the most.