Buying Stocks When You’re Old: It Depends

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The Wall Street Journal recent had an article, What You Know About Retirement Investing Is Wrong, where it recommended that elderly people invest more in stocks as they get older.  I think the advice is wrong, unless you understand it this way:

Stocks are longer assets than bonds. Use your bonds to pay for your spending in the early years of your retirement, and don’t sell your stocks.  Once you run out of bonds, start selling your stocks, if the dividend income isn’t enough to live on.

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But even this idea is weak.  If a person followed this in 1997 with a 10-year horizon, their stocks would be worth less in 2008-9, even if they rocket back out to 2014.

Asset allocation is more difficult than it is in the textbooks, or in the syllabuses for the CFA Institute or for CFPs.  It is a blend of two things — when does the investor need the money, and what asset classes offer decent risk adjusted returns looking forward?

If long-dated, volatile asset classes offer great returns looking forward, but the client has a short time horizon, he can’t invest much in risk assets.

If long-dated, volatile asset classes offer great returns looking forward, but the client has a long time horizon, he can invest a lot in risk assets.

If long-dated, volatile asset classes offer poor returns looking forward, but the client has a short time horizon, he should stay in safe assets.

If long-dated, volatile asset classes offer poor returns looking forward, but the client has a long time horizon, he should stay in safe assets.

Stocks do tend to do well over the long run, but few of us live in environments where that growth is uniform.  The stock market zigs, zags, booms, and busts.  What if it busts when your are old?

Personally, I think it is wiser to maintain a more balanced investment posture in retirement, because the future is not predictable.

Via: alephblog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.