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Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

What if you were to ignore the conventional wisdom on retiree portfolio allocations and set about creating a new strategy? What type of allocation would you come up with?

In this month’s issue, Michael Kitces, publisher of Nerd’s Eye View (a financial planning blog), and Wade Pfau, a professor at The American College, give you the answer. They suggest increasing equity allocations in retirement. No, that’s not a typo. Kitces and Pfau suggest retirees will be better off if they start with a small allocation to stocks (e.g., 30%) and then progressively increase it so the portfolio is mostly allocated to stocks—about a 70% weighting—late in life.

This is the exact opposite of the glide path every target date fund follows. These funds, which are designed to adjust their allocation as an investor ages, shift from heavily weighting stocks to a final allocation of between 20% and 30% in equities. (“Glide path” is financial lingo for a portfolio allocation that evolves over time to a certain goal.) Many advisers also suggest investors transition to a more conservative portfolio allocation in retirement.

Kitces and Pfau’s suggested glide path isn’t a call on the direction of interest rates, either. They ran multiple simulations over a 30-year period to see what allocation made sense. Their analysis led them to one conclusion: Boost your equity allocations and reduce your bond allocations throughout retirement.

Before you make a judgment about which camp is right, read the article here. As you read it, keep in mind that the biggest risk facing retirees is not what interest rates or what the stock market will do next month or next year, it’s longevity. Longevity risk is the chance of a retiree outliving his or her savings. Given current and likely future medical advances, a healthy person in his or her late 60s could rationally expect to live an additional 30 years or even more. That’s a long time for savings to last and why even our conservative asset allocation model has a significant (50%) weighting to stocks.

Those of you who are not only comfortable owning stocks, but like those with rapid growth potential, will soon be able to participate in crowdfunding equity investments. (The Securities and Exchange Commission is expected to publish rules sometime this year.) Crowdfunded companies will be small and emerging companies offering equity in exchange for capital. Proponents describe crowdfunding as akin to democratizing venture capital. There are others, including myself, who worry about the combination of high failure rates, hype and a lack of proper analysis leading to big losses.

There will be some crowdfunded companies that will defy the odds and earn their investors large returns, however. This is why when I was offered a review copy of “The Little Book of Venture Capital Investing” (John Wiley & Sons, 2014), I reached out to its author, Lou Gerken. Lou has worked in venture capital, understands what’s involved in early-stage investments and knows what pitfalls to watch out for. He responded with a step-by-step plan for analyzing crowd-funded investments, which begins here.

I also want to call your attention to Stephen Horan, Robert Johnson and Thomas Robinson’s article, “Selecting a Valuation Method to Determine a Stock’s Worth.” This is the first of two articles they are writing for the AAII Journal based on their new book, “Strategic Value Investing” (McGraw Hill, 2013). The second is a screening article specifically using criteria in AAII’s Stock Investor Pro, which will appear in the May issue.

Wishing you prosperity, Charles

Charles Rotblut, CFA
Editor, AAII Journal
twitter.com/CharlesRAAII

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


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