Investment Tips for Boomers

It’s estimated that about 8,000 Baby Boomers will turn 65 years of age — every day — over the next two decades.  The days of pensions are pretty much over, so nearly everyone is expected to save and invest for their retirement.  Because of that, you want to do everything you can to ensure financial security during your golden years

Wendy Dominguez, a Principal and President of Innovest Portfolio Solutions, offered the following investment tips for baby boomers in or near retirement.

Boomer:  What happens to stocks when the Fed starts raising short-term rates?

Dominguez:  The short answer is that “it depends,” although usually stocks do well in a rising interest rate environment.  Historically the Fed begins raising rates when economic growth is strong.  Accordingly, an improving economy leads to a better environment for corporate growth and earnings.  With short term interest rates close to zero at present time, risk assets like stocks have done extraordinarily well.  Given the great run that we have had, a significant rise in short term rates by the Fed would likely be a headwind to U.S. equities.

Boomer:  What are the options for investing in a low rate environment?

Dominguez:  Our focus is on total return for investment portfolios.  A diversified mix of stocks, bonds and alternative asset classes can still deliver positive long-term investment results.  Sticking to a long-term asset allocation plan is critical.  Where we see potential danger is when investors reach for yield, a phenomenon that is all too common today.  With bond yields near historic lows, investors have poured money into junk bonds, REITs and other higher yielding investments in order to replace yield.  Junk bonds and REITs have a very different risk profile than high quality bonds.

Boomer:  What is the folly of forecasting the short term?

Dominguez:  Short-term forecasting of the markets is nearly impossible.  Study after study confirm that even the brightest economists have a very difficult time predicting the short-term movements of asset prices.  A focus on the long-term is a central part of our advice to clients.

Boomer:  To what do you attribute the rapid increase in the number of liquid alternatives and should we avoid them?

Dominguez:  The growth of liquid alternative investments has been very large in recent years, though unsurprising.  In a market environment of record low bond yields and near record high equity prices, investors have understandably sought out alternatives.  Traditionally the alternatives space has been confined to institutions and ultra-high net worth individuals.  The increase in liquid alternatives, for better or for worse, is the investment industry’s attempt to make these investments more available to the average investor.  While the interest in these liquid alternative strategies is understandable, investors need to be very vigilant with research and due diligence before investing.  In our analysis of many of these liquid alternatives, we find there is typically a 1-2% annual return reduction over less liquid alternatives.

Boomer:  What are the 3 most common mistakes made in retirement investments?

Dominguez:  The three most common investment mistakes that we see are: not saving enough for retirement, not creating a long-term investment plan and chasing performance.  Unfortunately, many American workers are not saving enough to retire comfortably.  The median 401(k) balance in the U.S. at the end of 2013, according to Vanguard, was $31,396.  Many retail investors also lack a strategic plan and asset allocation for their investments.  A long term-plan can provide the discipline to survive a market downturn.  Finally, exhaustive research suggests that many investors succumb to the herd mentality and chase performance.  Investors buy risky assets at their peak and sell risky assets at their trough: exactly the opposite of what they should be doing.