Patriot Wealth - June 2018

JUNE 2018


PHONE | 919.322.4113



For those of us in or near retirement, reducing our exposure to financial risk is typically of paramount importance. The unfortunate fact of the matter is that a meltdown in the equities markets could happen at any given time without warning and without ample time to protect our assets. Since retirees don’t necessarily have the luxury of waiting years or decades for a market crash to play itself out, 100 percent exposure in equities isn’t typically recommended for investors in their golden years. In fact, even a 60/40 mix of stocks and bonds (or other relatively risk-free assets) might be too much exposure, which begs the question of how to adjust this traditional formula. Thus we come to the rule of thumb known as the Rule of 100. According to this commonly accepted guideline, the percentage of stocks an individual investor holds should be equal to 100 minus his or her age. For example, a 65-year- old should allocate 35 percent of his or her portfolio in stocks, and the rest (65 percent) should be in relatively risk-free assets such as bonds. At least, that’s what the accepted wisdom claims — but does the math translate into a reasonable balance between risk and reward for today’s retirees and near-retirees? A major issue with the Rule of 100 has always been that it doesn’t leave much room for capital growth for more seasoned retirees. This is especially true today, when seniors are living longer. Assets that are low-yield (such as

bonds) or negative-yield (such as cash, which deteriorates over time due to the ravages of inflation) can dwindle. Consider, for example, an 80-year-old retiree; this individual should, according to the Rule of 100, maintain a mere 20 percent in stocks while the remaining 80 percent is fairly safe but also yielding very little. As an example, if the S&P 500, fully reinvested year-over-year with dividends, yields an average of 8–10 percent, then there’s really not much capital growth here. We’re talking about a small slice of a small slice of the pie, and although it’s certainly low-risk, it’s also extremely low-reward. As for the 80 percent that would be allocated toward bonds in this scenario, bear in mind that the good old days of 10-year T-note yields of 5–10 percent are long gone. In fact, the current market environment puts these Treasury yields at a rate that doesn’t even keep up with the rate of inflation. In other words, bonds aren’t as “safe” as we might think they are, at least in terms of real rate of return. So where does this leave retirees? It leaves us with a somewhat outdated rule that ought to be viewed as a starting point — nothing more, nothing less. Allocating toward equities only what one can afford to lose and dialing back this allocation over time isn’t a bad idea at all. In this way, we can uphold the spirit of the Rule of 100 while being flexible with the numbers as needed.

Investment Advisory Services offered through Retirement Wealth Advisors (RWA), a Registered Investment Advisor. Patriot Wealth and RWA are not affiliated. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

PATRIOT WEALTH | 919.322.4113 | P1

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