“You don’t need a huge allocation,” he says. But if inflation does make a comeback, placing 5% or 10% of a portfolio in these investments will provide some protection.
Both Connelly and Wilson also worry about duration risk. “Unless rates go significantly negative, there is little room for bond prices to rise,” Wilson says.
Even an intermediate bond fund with quality holdings could suffer an 8% to 10% decline if interest rates rise, he explains. The fallout could be significant across an array of asset classes, including most bonds as well as both dividend-paying value stocks and long-duration technology shares.
Growth Of Capital
In today’s world of lofty asset prices, there’s another source of retirement income besides dividends and interest—growth of capital, which means selling appreciated assets. For many clients, it can entail a major shift in their mindset, notes Cheryl Holland, president of Abacus Planning Group in Greenville, S.C.
“It can take them three to five years to get comfortable with the concept,” she says. But “markets are so high and inflation is rising. We’ve never had that mix of data in my career.”
Persuading clients to sell appreciated assets after a decade of 14% annual returns requires educating them about a total return approach. “If [they] are not tapping into investment gains,” clients could be exposing themselves to additional risks, says Chad Carlson, president and chief investment officer of BDF in Itasca, Ill. Those potential risks could leave them in a position where they are either going to underspend or be under-diversified.
Before she was a financial advisor, Connell of Portia Capital recalls losing arguments with high-tech executives about their failure to diversify in the late 1990s. It doesn’t give her any pleasure that she was right.
David Yeske, managing director of Yeske Buie in San Francisco, seconds the notion that diversification helps, and says he’s relied on broad global diversification for decades. “For 10 years prior to the Great Financial Crisis, our clients didn’t have a lost decade,” he says, referring to the 2000-2010 period when U.S. stocks flatlined.
Asset allocation decisions also are critical. Yeske is an outlier in this area. His clients’ portfolios typically have 80% in equities, slightly tilted outside the U.S., and 20% in bonds until they retire, when another 10% is shifted into fixed-income assets.
Yeske views the fixed-income allocation more as a stable reserve than a source of income. “A 30% allocation [to bonds] will sustain a seven-year bear market” in stocks, he explains.
Financial advisors aren’t the only ones seeing soon-to-be retirees walk into their offices asking how they can buy the pensions they never had. A former Fidelity executive reports their retail branches see it almost daily.
The clients are seeking pensions, but more than a few end up buying annuities with little or no commissions. The retired executive cites the case of a relative who recently took about 50% out of the gains he had made in his managed account since the March 2020 lows in the stock market and used half the appreciation to buy an annuity. These products may offer guarantees, but they’re like all other sources of retirement income today: In other words, nothing is cheap.