Most retirees don’t want to spend much of their time stressing over their portfolios. And, even if they’re working with an advisor, they may not benefit much from certain investments that can have extra costs and complex strategies.
These realities, says Christine Benz, Morningstar’s director of personal finance, mean those in retirement should generally avoid three investment categories, which she highlighted in a recent televised interview.
“You will maybe hold some of those investment types within more broadly diversified funds,” she explained, “but you’re not holding them as standalone offerings. They’ll just tend to provide you a little more peace of mind.”
Foreign Currency Bonds
Though they can benefit investors in the accumulation phase of life, these holdings are volatile.
“The reason is that you hold bonds to act differently than your equity portfolio — when, in fact, foreign-currency-denominated bonds tend to have a lot more volatility than, say, core U.S.-dollar-denominated bonds,” Benz explained, pointing to research conducted by Ibbotson Associates. “So, you want to be careful before adding foreign-currency-denominated bonds.”
PIMCO’s hedged Foreign Bond Fund (PFOAX), for instance, is less volatile than the non-hedged sister product (PFUAX). “It has had a standard deviation of 4 over the past decade vs. 9 for the unhedged version. So, that’s a huge difference in volatility,” she noted.
Retired investors could own some foreign-currency-denominated bonds inside broadly diversified products, like the Loomis Sayles Bond Fund (LSBRX). “But I think that dedicated foreign-currency-denominated bond fund probably isn’t a necessity for most retiree portfolios,” Benz stressed.
Emerging Markets Funds
This is another category with volatility issues.
“When you look at the standard deviation, 4 in an emerging-markets fund relative to a foreign-stock fund, you see at least somewhat higher volatility,” Benz explained, “not quite as high as we saw with the hedged- vs. unhedged-bond portfolios. But you still do see a volatility discrepancy.”
There’s also the issue of duplicity.
“These days, most broadly diversified foreign-stock funds do have a healthy share of their portfolios in emerging markets — anywhere from 10% to 20%. So, take a look at what you have already before layering on an additional emerging-markets fund,” the fund expert said.
In addition, these funds can be costly.