For several reasons, retirees are being forced to assume greater portfolio risk. Historically low-interest rates have the double impact of raising bond prices and reduced income. So, investors must seek riskier alternatives, either in lower quality (junk) bonds or looking to real estate or more stocks for income. Most company’s stocks are paying higher dividends than their bonds today. And the Federal Reserve just announced that they’re encouraging inflation.
While many investors and advisors utilize questionnaires or ‘risk scores’ to identify a target portfolio allocation (such as 60% or 70% stock), there is a better way. Target allocations often require systematic withdrawals, where every holding in the portfolio is pared slightly for each income distribution. This creates the ultimate short-term risk for each investment.
By separating investments based on time frames, you can practically eliminate short-term market risks to next month’s income and allow your remaining investments adequate time to generate attractive returns.
For example, Integras Partners employs multiple strategies for increasing timeframes. The first 18-30 months of distributions are set aside in their low-risk Liquid Asset portfolio. The next layer is an Income Strategy seeking higher yields across bonds, stocks, and real estate. Recent volatility has fostered tactical opportunities in Structured Notes, as well.
These early layers permit the rest of the portfolio to seek attractive longer-term gains in more aggressive strategies, which are now insulated from short-term volatility risk.
