Choosing the Portfolios That Work for You

One of the most frequent requests from readers is for advice about which of my recommended portfolios they should follow. The short answer is that most of you should follow more than one portfolio. Here’s why.

Retirement is likely to last a long time for most of you. There will be several phases to your retirement. In the meantime, investment markets will be volatile and changing. There was a time when we could create a “retirement portfolio” and let it ride for the length of our retirement. That’s not such a good idea now.

For a long time I’ve recommended that your retirement assets be in several portfolios, just as retirement will be in several stages.

Assets you will need to spend in five years or less shouldn’t be invested in risky assets. By risky I don’t mean investments that are gambles on which you could make a fortune or lose your entire investment. Risky assets are those with volatile market prices. These include stocks (including conservative index or equity income mutual funds), real estate, commodities, and even long-term treasury bonds, among many others.

You don’t want to worry about being able to pay your bills over the next few years. In addition, many people will abandon their long-term investment strategies because of short-term market changes when they worry about paying their bills. The proper time period for this portfolio depends on how aggressively the rest of your assets are invested. The more aggressive you are, the longer this portfolio should last. For most people five years is right.

I frequently call this the safety fund. You know this money is safe and you’ll be able to pay your bills over this period. You also can call it the income or expense fund. This portfolio is invested in super-safe assets, such as treasury bills, money market funds, certificates of deposit, and immediate annuities. You’re not reaching for yield here. You’re trying to preserve the purchasing power of your capital and ensure your expenses are paid.

The safety fund should perpetually have enough money to last five years. Each year you shift some money from the rest of your portfolio to the safety fund to replenish the money spent over the last year.

The safety fund means if they are long-term shifts in the markets and your financial position, you can make gradual rather than abrupt adjustments in spending.

The rest of the portfolio could be divided it into two portions: an intermediate portfolio to be spent in six to 10 year and a long-term portfolio that won’t be touched for 10 years or longer. The intermediate portfolio should be balanced and diversified. With the longer-term portfolio you can invest in riskier investments that will be volatile in the short-term but are likely to deliver above-average returns over 10 years or longer.

Here’s how to put these portfolios together.

First you establish the safety or income fund with conservative assets.

Second, invest part of the portfolio for six to 10-years. Most of our recommended portfolios are appropriate for this, including the Balanced Portfolios, Income Growth Portfolios, and Retirement Paycheck Portfolio.

Finally, invest the rest of your assets for the long-term. You can take a bit more risk here, but you know I don’t recommend that you invest in very risky assets. We can earn safe, solid returns without taking big risks. You could invest this money in any combination of the Sector Portfolios, “Hedge Fund” Portfolio, or the Invest With the Winners Portfolio.

You can slice and dice your assets even more if you want, but your finances don’t need to be that complex. You can sail through retirement with peace of mind, earning safe, solid returns, by dividing your assets into two or three pools following our time-tested investment principles and recommendations.

March 2010 RW.