Achieving the balance
The proper balance can’t be explained comprehensively in this article, but I want to get you pointed in the right direction. The balance is a mix of the right savings, investments, and insurance products that allows you to withdraw a reasonable amount of income each year of retirement while at the same time growing your portfolio to last a lifetime. You have to know what the products are, why you use them, how you use them, and when to use them. Having knowledge of the economy and markets is a big plus.
What. The choice of savings or investment products spans the cosmos — savings accounts, CDs, bonds, stocks, mutual funds, options, convertible stocks or bonds, closed-end funds, exchange-traded funds, unit investment trusts, private money managers, annuities, life insurance products, long term care insurance — the list goes on and on.
Why. Some of the choices above provide for a stable principal, some are for income, some are for growth, and some provide a combination of outcomes. Whatever the expected results, you can be certain how each choice delivers its result will involve a pro and a con in its relationship with the rest of your portfolio. Know the pro and con for each choice to off set and balance the results with the other holdings in your portfolio.
When you shop for an advisor, ensure he or she understands not only what the choices are but also why and how to use them. Know how many choices your advisor offers. If an advisor offers only a few choices, he or she will make those choices work for you even if other choices in the cosmos might work better for you.
Also consider all of your various accounts and how what you do in one account balances with what you do in other accounts. If your advisor is working with only one of your accounts, he or she might duplicate another account or counteract another account because all accounts might not be visible to the advisor.
How. Once you understand why you use one choice over another, how you use the choices can affect your other accounts. Let’s say the desired outcome is generating income. You might purchase an immediate annuity to generate a steady fl ow of guaranteed income for life. Or you could purchase dividend-paying stocks or a closed-end fund or a bond or an income-generating mutual fund or sell covered options and so on.
The purchase of an immediate annuity creates options for you and your advisor in your other accounts because you established a guaranteed lifetime income stream. You might be able to move a little further out on the line to assume some potential for greater growth. Or you might be able to reach for greater income with more aggressive income investment vehicles like junk bonds or closed-end funds.
If you purchase a long-term bond mutual fund for income instead of an immediate annuity, things change for other portfolio choices. Realizing interest rates are at all-time lows right now, the outlook for bond prices is down in the future. Here’s where the economy and market insight help. Expecting the value of your long-term bond fund (and your account value) to go down in the future, how will you and your advisor off set this issue with other portfolio choices? On the flip side, while your bond fund goes down in value, you can expect the income payments to increase. How does this change other choices in the portfolio? Maybe you don’t have to rely on the other choices to provide as much income, so you can focus on making up the loss in value of the bond fund with other growth choices. Usually decreasing bond prices leads to growth vehicles increasing in value. Maybe you don’t need to bulk up on growth options as much and instead can bulk up your income producers so you have more spendable income.
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Balancing Your Portfolio
The perfect portfolio balance would allow you comfortable current income while simultaneously growing your portfolio so you never run out of money in your lifetime.
Having too much protection can cause you to use up your principal. (CDs, savings accounts [FDIC], cash)
Being too aggressive can cause you to gamble away your principal. (bonds, stocks, mutual funds)
Find the right balance by investing somewhere in between. (investment growth and cash in hand)
APRIL 2013 MILITARY OFFICER 61
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