Hardly a day goes by that doesn't bring some fresh worries from Europe. The global economic slowdown is dampening commodity prices. And on the home front, experts say the presidential election is adding fuel to the fire of market volatility. Is it any wonder that many financial planners are sticking with U.S. blue chips? "We're not buying Facebook," says Jason Jenkins, the president of Assetwise Investments in San Diego, Calif.
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Ironically, the initial public offering of this high-flying social media company was supposed to lure skittish Main Street investors back to the markets. Yet the IPO's flop might actually have driven some investors into hiding.
All of these uncertainties make this an excellent time to rebalance a portfolio, says Lee Rosenberg, president of American Investment Planners in Jericho, N.Y. Along with the now standard advice from financial planners to focus on large, dividend paying stocks and ultra-short term bonds, he's advising clients to stash real estate investment trusts into the alternative asset portion of a balanced portfolio. Rosenberg has stopped recommending commodities, including gold, to clients. "Commodities are dead," he says. "They expand with economic growth." And that has become a scarce commodity recently.
Financial planners also advise sticking with a long-term strategy, especially when saving up for distant goals like your children's college tuition or your own retirement. Yet the best of them are constantly tweaking their clients' portfolios to adjust to the markets ups and downs. Each month, SmartMoney talks with advisers about what they are telling clients at various life stages. Here are their recommendations.
The Portfolios:
- 32-year-old professional planning to return to grad school
- 50-year-old couple with two kids in college
- 57-year-old empty nesters
- 25-year-old carefree bachelor
- 40-year-old couple with a kid headed to college
- 70-year-old multimillionaire couple with lots of potential heirs
- 35-year-old couple with a young child
- 42-year-old couple; one spouse in unemployed
- 75-year-old widow
- 34-year-old recent newlyweds
- 55-year-old single parent, kids finished college
- 65-year-old marathon runner
- 45% Stocks
- 30% Bonds
- 5% Alternatives
- 20% Cash
Any cash needed to cover school costs need should be protected from market volatility, advisers say, so that you're not required to sell investments to cover tuition. Those savings can be set aside in a checking account or money-market fund, where it won't generate much interest, but will be protected from market losses, says Drew Kanaly, chairman of Kanaly Trust in Houston. Another option is to tuck savings for upcoming college expenses in short-term high-quality bond funds that will offer slightly higher yields. Soon-to-be grad students should still be putting money away for retirement, says Kanaly, by contributing enough to a 401(k) savings account to take advantage of an employer match. And with retirement decades away, stock portfolios should also include foreign stocks, pros say.
Asset Allocation- 50% Stocks
- 30% Bonds
- 10% Alternatives
- 10% Cash
This couple will need more cash on hand and should be more conservative with their investments until the kids are out of college, says Anne Ward, an adviser with Allodium Investment Consultants in Minneapolis. With interest rates hitting new lows, you may be able to use a low-interest loan, such as a home-equity loan, to cover some of the college expenses, she says. Retirement, however, is still 15 years away and you both could live another 40 or more years so it's important to continue contributing to your IRA or 401(k). Use intermediate-term bonds, both taxable bonds and tax-free municipal bonds, instead of long-term bonds, which will see steeper price drops if interest rates rise, says Ward.
Asset Allocation- 55% Stocks
- 28% Bonds
- 15% Alternative Assets
- 2% Cash
Now that the kids are out of the house, you can use your free cash to boost your retirement saving, says Anne Ward, an adviser with Allodium Investment Consultants in Minneapolis. The Internal Revenue Service allows people age 50 and over to make annual catch-up contributions of up to $5,500 a year to a 401(k), 403(b) or other qualified retirement plan. That's in addition to the $17,000 limit for annual contributions. Make headway on any remaining debt, such as a mortgage, to reduce your cash needs in retirement, she says. And consider buffering your portfolio from market volatility by investing in alternatives that are not directly correlated to stocks and bonds, including commodities like real estate and tactical funds that can short assets.
Asset Allocation- 60% U.S. Stocks
- 20% Foreign Stocks
- 15% Bonds
- 5% Cash
At your age, advisers say you should focus on stocks, including emerging markets stocks. It is too soon to predict a rebound in European stocks, so that will limit the amount of money you put into foreign funds, says Lee Rosenberg, president of American Investment Planners in Jericho, N.Y. Although bonds are meant to balance out the volatility in the portfolio, those with longer maturities pose their own risks now because their prices will fall when interest rates rise so focus on short-term bonds with maturities from one to three years. Rosenberg recommends keeping cash on hand so you don't run up your credit card bills.
Asset Allocation- 50% U.S. Stocks
- 15% Foreign Stocks
- 20% Bonds
- 15% Cash
To prepare for college expenses, you should start moving any money meant for tuition into cash-like investments. "The last thing they want to see is that money they accumulated to take a 20% hit," says Joseph Montanaro, a financial planner with USAA Financial Services in San Antonio. Consider shifting money meant to cover the first two years' worth of expenses into a certificate of deposit or savings account, he says. Short-term bonds can be used for holding cash meant to cover costs for years three and four. The rest of your savings should go to your retirement savings, says Montanaro. Consider putting 60% in stocks and 25% in bonds, including a sliver of high-yield bonds, and the rest in cash, he says.
Asset Allocation- 45% Stocks
- 40% Bonds
- 10% Alternatives
- 5% Cash
Because you want your assets to last beyond your lifetime, you have a longer time horizon than some other investors your age, advisers say. Consider using alternatives to shield your portfolio from market volatility, including managed futures, private equity and hedge fund products, says Jimmy Lee, president of Strategic Wealth Associates in Las Vegas.
On the bond side of your portfolio, many experts recommend short-term bonds that mature in three years or less. For someone in your tax bracket, tax-free municipal bonds or Treasury Inflation Protected Securities can lower your tax burden and help you keep pace with inflation, advisers say. To minimize the downside of your investments, you might look at tactical mutual funds that give portfolio managers the flexibility to invest across asset classes and move into sectors they believe have value, says Lee.
Asset Allocation- 55% Stocks
- 20% Bonds
- 10% Alternative assets
- 15% Cash
You're saving for long-term goals like college and retirement, so most of your portfolio should be in stocks, which have greater potential for long-term growth. Keep your portfolio tilted toward U.S. blue chips. Stash short-term bonds in the fixed-income side of your portfolio. Among alternative assets, real estate investment trusts and market neutral funds can help balance out portfolio volatility, says Lee Rosenberg, president of American Investment Planners in Jericho, N.Y. He is not recommending commodities as an alternative asset class now because he says they are dependent on economic growth.
Asset Allocation- 40% Stocks
- 10% Alternatives
- 25% Bonds
- 25% Cash
Going from two incomes to one can be a tough balancing act. You need to put more money in cash and short-term bonds than the typical investor your age. You can boost the income from your portfolio by owning dividend stocks, which also tend to be less volatile that many other types of investments, says Lee Rosenberg, president of American Investment Planners in Jericho, N.Y. He recommends lightening up on foreign stocks and keeping the fixed-income portion of your portfolio in a fund that owns bonds with one to three year maturities.
Asset Allocation- 15% Stocks
- 45% Guaranteed Investments
- 25% Bonds
- 15% Cash
Without your spouse's social security checks, you will want to supplement your income with a guaranteed investment like an annuity, which is a type of insurance. You should keep a small portion of your portfolio in high-quality dividend stocks. Experts recommend keeping part of your bond portfolio in Treasury Inflation Protected Securities, or TIPS. Although inflation isn't a problem now, it could reduce your spending power over time if you are living on a fixed income.
Asset Allocation- 50% U.S. Stocks
- 25% Foreign Stocks
- 15% Bonds
- 10% Cash
Like many newlyweds, you are probably spending much of your income setting up your new home together. Experts say that most of the money you can afford to put aside should go into retirement accounts. Jason Jenkins, the president of Assetwise Investments in San Diego, Calif., favors large, dividend-paying U.S. stocks now. Keep a relatively small portion of your nest egg in short-term bond funds, he says, and some cash on hand so that you don't run up your credit cards.
Asset Allocation- 55% Stocks
- 30% Bonds
- 5% Alternatives
- 10% Cash
Now that you're through paying college expenses, you might have more cash available to add to your retirement savings, says Anne Ward, an adviser with Allodium Investment Consultants in Minneapolis. With retirement 10 years away and hopefully a long life ahead you still need a large stock portfolio to produce returns that can last you well into retirement. Shield your savings against market volatility by using tactical funds that can short the market.
Asset Allocation- 55% Stocks
- 25% Bonds
- 10% Alternatives
- 10% Cash
Being that you are in good health, you may want to delay receiving Social Security benefits until age 70 to take advantage of delayed retirement credits, advisers say. Social Security benefits are increased by 8% each year a person waits beyond full retirement age, for a maximum 32% boost at age 70. You can also help prepare for a long retirement by maintaining a hefty stock allocation, says Anne Ward, an adviser with Allodium Investment Consultants in Minneapolis. Buy high-quality dividend stocks that should be less volatile than the overall stock market because they're issued by large, stable companies, she says. Same goes with the bonds in your bond portfolio.
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