Investment Choices at Retirement
Some Ideas for Deploying Your Money After You have Called it Quits
Sep 21, 2008
There is a plethora of financial advice available and an equally voluminous amount of investment options as well. Your own tolerance for risk and level of affluence to a large extent will determine what type of asset mix you are comfortable with. The evolution of our global markets has enlarged your investment choices whether retirement is looming soon or years from now. Here are some ideas and alternatives.
Stock Market Portion
There a number of ways to participate in the stock market depending on how much risk you are willing to assume. One question you are going to ask is how much in domestic equities? Given that, are you going to buy large capitalization companies, mid-cap or small-cap stocks? What industries? The odds are fairly good that people retiring are going opt for more conservative companies that pay a dividend.
Another option one could consider is international / foreign markets. There are some additional risks one should be aware of in this category. First is currency or foreign exchange risk. This is typically a longer term risk but can have short term consequences as well. In addition to that, there is a marked difference between developed countries and markets and emerging markets. Liquidity is also an issue in this case.
A third category to consider is investing in exchange traded funds (ETFs) or index funds that are pegged to a highly recognized index such as the S&P 500 in the United States, the FTSE 100 in the United Kingdom or the Nikkie 225 in Japan. There other equally important indexes around the globe. Additionally, you should consider whether either of these types of funds are passive or actively managed.
Bond Market Portion
Fixed income investments share some of the same risks and rewards that equities do. Your first choice is domestic or international markets. In this case, currency risk is a consideration even if one buys sovereign debt.
The second risk is volatility vs. reinvestment risk. Volatility is measured by a concept known as "duration" which is a combination of maturity and cash flow from interest payments. Longer maturity issues have a larger duration than short ones. Cash flow from interest payments affects the duration. Bonds at a premium have a shorter duration than at par and both have a shorter duration than a zero coupon bond.
The third major risk is credit risk. Sovereign debt has the least amount of credit risk. Next government agencies, then investment grade corporate debt and last are less than investment grade debt, commonly known as "junk" bonds. The less credit worthy an issuer is the greater the income but the greater the credit risk. There are also a number of choices in funds, be they passive or actively managed.
Alternative Investments
For the more affluent investor that is not risk averse, there are "alternative" investments. Within this broad category are choices such as hedge funds, equity real estate and private equity. There are also different strategies within each group. The whole idea behind alternative investments is a "non-correlated" return. In other words, the return is not dependent on a broad market performance.
One usually has to be an "accredited investor" to participate in alternative investments as they are quite risky and often illiquid in nature.
Asset – Liability Management
The concept of matching assets to liabilities is used by banks and pension funds and can be used by you as well. Depending on when that retirement date is, you should make some strategic decisions now. The bottom line is, once you do call it a day match the income from your investments to the bills you have to pay.
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