So you are now just a decade or so from retirement and don’t want another 2008 market crash to wipe out our nest egg, forcing you to work for longer than you are planning. Finding safe investment options is a goal, but at the same time you don’t want to be too conservative because you do need to continue realizing capital appreciation so your nest egg can support you during your 'golden years'.
The balance between safety and growth is more difficult than one may think. If you get too safe, the growth will lag and you may not have a large enough retirement account. If you get too focused on growth, you may be taking on more risk than you should, which could leave you vulnerable to a big market crash.
While Exchange Traded Funds offer diversity, I personally don’t like very many of the mixed portfolio options available today (a fund that holds a combination of investment options such as stocks, bonds, RIETS, MLP's, currency, futures, etc.) and especially don’t like the 'age-based target funds' offer through many 401(k) plans and other mutual fund companies. Now I want to make it clear I am always a proponent of a well-diversified portfolio and I believe that idea holds true more so for those in this age group than investors who are younger.
With that being said, investors in their 50's should be thinking more about buying a few different ETFs, as opposed to the one-stop shops. I have found that the one-stop-shop ETFs typically tend to be either too conservative or too aggressive and this causes them dramatically trail the market returns or be way too exposed to a market pull-back.
Another issue I have with the one-stop-shop ETFs is that they may not make sense for your personal situation. For example, if you already own a large bond fund, you don’t need another large amount of your money in bonds. Or if you have a large stock portfolio, maybe because of a stock purchasing program through a large corporation you worked for, you may not want to be buying more equities.
So there is nothing wrong with having a portion of your money in say the Vanguard Total Bond Market ETF (PACF:BND) or any of the other bond funds available. Just know, these investments are not likely going to produce outsized returns in the form of capital appreciation and may lose value when compared to inflation if you own them for too long of a period. But, in the short term, a bond fund will offer you protection against a possible stock market crash. Lastly, while the Federal Reserve has indicated interest rates will continue to rise, bond investors could see losses due to higher rate bonds coming to market in the future.
Another good option, would be buying shares of any of the major index ETFs, such as the SPDR S&P 500 ETF (PACF:SPY) which tracks the S&P 500 or even something much broader like the iShares MSCI ETF (NASDAQ:ACWI) which tracks a market-cap-weighted index of the large and mid-cap global stocks. The ACWI will give you access to 85% of the developed and emerging markets.
But perhaps you already have plenty of exposure to both bonds and equities, maybe a REIT index fund like Vanguard REIT Index (PACF:VNQ) or an MLP ETF such as Alerian MLP ETF (PACF:AMLP) would be a better option. These ETFs would give you different exposure to the capital markets and offer income, something that you could use now to further build your nest egg now and later perhaps live off.
Lastly, remember that despite being a decade or so away from retiring, your retirement may be as long as 30 years. So getting too conservative today with all of your nest egg may not be the best idea. Putting a percentage aside in a low-risk option in case the market does take a turn for the worse is a good idea, but having too much money in a slow-growth vehicle could cause you to have a shortfall later down the road.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: Matt Thalman did not own shares of any equity mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
