INVESTMENT PORTFOLIO FOR
By: Diane M. Pearson, CFP®
Understand the hidden risks in your portfolio
When asked to identify what forces pose risks on investment
returns, few investors recognize inflation as a likely
counterpart. Yet for traditionally risk-averse retirees,
increasing consumer prices often pose the greatest risk of all.
Older investors have historically favored lower-yielding
investments such as CD’s, money market accounts and T-bills
which have a far lesser chance of maintaining purchasing power.
Inflation is expected to inch upward as the economy gains its
footing, therefore investment portfolios must be tailored
Be willing to diversify
Investors must be "willing" to diversify.
Diversification is necessary due to current high stock market
valuations and a 40 year low point in the interest rate cycle.
It is important to look beyond traditional stock and bond
allocations to find steady, less risky returns. True
diversification is the process of spreading investment funds
across asset classes that tend not to move in tandem. While
large and small U.S. stocks move in nearly identical patterns,
asset classes such as REITs (real estate securities),
commodities and hedge-like investments exhibit a non-similar
return pattern to the S&P 500. The combination of these
investments in conjunction with bonds and large U.S. stocks
helps protect the overall portfolio in troubling market
conditions, yet participate in market gains. Portfolios built on
this premise are likely to earn returns typically associated
with stocks, while exhibiting far less risk in fact almost
bond-like risk levels.
Understand the relationship between bonds and interest rates
There is no doubt that fixed income investments play a
critical role in the formation of a retiree’s portfolio.
However, the pricing of nearly any fixed income instrument is
directly related to movements in interest rates. Prices of bonds
go down as interest rates rise. Unfortunately for those
currently nearing retirement, this can have a dramatic effect.
With rates at near forty-year lows, it may only be a matter of
time before bond prices begin to crumble as interest rates rise.
It is important to note, however, that not all fixed income
investments have the same sensitivity to interest rate
fluctuations. Some fixed income vehicles such as bank loan
funds, stable value funds, and Treasury Inflation-Protected
Securities (TIPS) adjust their values in the same direction as
interest rates. Investors facing retirement should examine the
fixed income investments in their portfolio to determine how
sensitive they may be to shifts in interest rates.
Make tax-efficiency a priority
Even in retirement, the lack of tax efficiency remains one of
the biggest detriments to overall portfolio performance. The
following are a few tips to increase efficiency:
- Keep detailed records of cost basis – this enables
investors to identify specific share lots for the
tax-efficient selling of gains, and the timely harvesting of
- Do not reinvest dividends – this allows for an easier
and more tax-efficient portfolio rebalancing as well as
provides cash to live on, and spares investors from a
tax-basis paperwork nightmare
- Be aware of asset location – fixed income investment,
hedge-like investments and REITs, where possible, should go
in tax-advantaged accounts because the majority of their
return is made up of ordinary income, while equities are
prime candidates for taxable accounts
Building a portfolio that takes into account both hidden and
obvious risks, diversifying to minimize those risks, and
avoiding unnecessary income taxes will provide a safe and secure
Legend Financial Advisors, Inc.®
5700 Corporate Drive, Suite 350
Pittsburgh, PA 15237-5829
Phone: (412) 635-9210
Fax: (412) 635-9213
Toll Free: (888) 236-5960
Web Site: www.legend-financial.com