Thursday, September 23, 2010

Perils of the financial safety net
by Jan M Rosen Sep 23, 2010

SHAKEN by what seemed to be an earthquake in the world's financial markets two years ago, millions of retirees fled to safety, shifting their holdings into savings accounts, Treasury bills, money market funds or certificates of deposit.

Now, they are suffering from the aftershocks: With short-term interest rates well below 1 per cent, their assets are not producing enough income for daily living expenses.

What to do? There is no quick answer to that question but four leading financial advisers offered a variety of ideas for investing with significantly better yields while limiting risk.

Diversifying portfolios is a main theme and it's important to analyse cash flow and assess financial priorities, distinguishing between needs like money for food and utilities and favourite outlays like family gifts that may no longer be practical.

Some may discover that, although portfolio values have fallen in the last two years, their assets are still sufficient for their long-term needs. Others may have to rethink their financial plans and tailor their portfolios accordingly. What follows are the advisers' suggestions:

Dr Jason T Thomas, chief investment officer of Aspiriant, a wealth management firm, emphasised the need for a diverse portfolio with a strong equity stake meant to provide solid cash flow. In trying to avoid risk, many people have incurred "purchasing power risk", he said, because the return is lower than the level of inflation.

Dr Thomas also favours real estate investment trusts because they are "an opportunity to buy into a depressed market" and many pay dividends of 5 per cent and higher.

Commodities are "an unloved asset class", but holding them or an exchange-traded fund that holds them is a way to hedge against rising prices of raw materials in the future.

When buying high-yield bonds, he prefers a fund because of its professional management and diversified holdings. He said he would avoid most Treasury and corporate bonds for now because interest rates are so low. As rates rise, bond prices fall, so holders may have to keep the bonds until maturity to get their principal back. In repositioning a portfolio, Dr Thomas said: "Don't do it all at once; do it in steps."

Mr Mark L Pollard, wealth management adviser and senior vice-president at Merrill Lynch warned: "In desperate times, people do desperate things. If you blow your capital, it's gone. It maybe necessary to temper expectations."

Still, he said, a prudent investor can do much better than staying in cash or Treasury bills. A portfolio of high-quality stocks can yield dividends of 4 per cent and offer a potential for long-term capital appreciation.

Retirees who have enough for basic expenses from other holdings, pensions or Social Security and are bullish on the underlying stock might find the notes attractive for generating income, provided they are comfortable with the downside risk.

Mr Jamie Kalamarides of Prudential Retirement said retirees in their late 60s may live for 30 more years; many fear they may outlive their money. Yet, as investors, they tend to be risk-averse.

He recommended slowly shifting to a diversified portfolio from money market funds and CD's. Traditionally, that would include preferred stocks and bonds, and perhaps a fixed annuity for guaranteed income. Today, he said, Prudential and others offer a new generation of annuities with a guaranteed minimum-withdrawal benefit.

The product is meant to overcome misgivings about traditional annuities while providing lifetime income, appreciation if the market rises, flexibility in withdrawing money and money for the estates of holders who die within 20 years.

Ms Elizabeth Schlueter, national practice leader for the private wealth management group of JPMorgan Chase, advised retirees to look at the total return of their portfolios, not just interest and dividends. "We believe as a firm that it is important to stay invested," she said, with diversified holdings of equities, bonds, mutual funds and alternatives like hedge funds, commodities and currency but changes in a portfolio should be made over time, not suddenly. The New York Times

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