• However, avoiding bonds leaves the traditional asset allocator with and equity-only portfolio, which is not a good match for many retirees' risk tolerances, and likely does not produce sufficient, reliable cash flow to fund 4 percent annual distributions. What can we do to curtail stock market volatility AND make up for what we used to get in income from the bonds?
• Shedding high quality bonds is a tough leap for many investors and advisors. Contemporary investors are very familiar with equity bear markets, but most have not experienced a bond bear market. The only reason a looming bond bear market is not dominating investors’ minds and planning is because it has not started yet. They may soon find themselves scrambling to figure out what to do, since they have never had to deal with a bond bear market in their lifetime.
• This all points to the same conclusion: Investors should determine how to best complement their core equity portfolio with some form of alternative investment strategy. There is already a wide variety of approaches being practiced, in what has become a feeding frenzy for product providers and money managers. Despite this, there is still room for innovation in this area.
• I think the logical complement to the stock-bond portfolio is a long-short stock portfolio, with an income emphasis. This effectively combines and equity-income approach with a bear-market strategy, to be allocated flexibly as markets change over time. To date, long-short has generally been about preservation and growth, and not retirement income.
Robert Isbitts is founder and chief investment strategist for Sungarden Investment Research.