New Look at Asset Allocation for Retirees

09/14/2017 2:52 am EST

Focus: STRATEGIES

Tony Daltorio

Editor, Investors Alley Premium Digest

When suggesting a sample allocation for a 66-year old retiree, I think it is wise to tread a different path from what Wall Street tells you when it comes to stock allocation, suggests Tony Daltorio, editor of The Growth Stock Advisor.


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When I began my career in the investment industry, the general “rule” was that the allocation to stocks should be 100% minus your age. Then it became 120% minus your age.

I think today it's to be 100% invested in stocks even 10 years after death. Just kidding, of course. I would tell people the smart move was to drastically lower their stock allocation in the 2-3 years before retirement and the 2-3 years after retirement.

That way your capital is preserved at the most crucial time in your investing lifecycle. For example, if the stock allocation in a portfolio was at 60%, I would recommend a steep drop to around only 20%.


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Consider that a 25% drawdown would almost certainly end your dreams of a nice retirement. In that case, your $100,000 portfolio would suddenly be worth only $75,000. Then you would need to earn a 33% return (which likely would take years) just to get back to even.

Keep in mind too that between October 2007 and March 2009, the S&P 500 index lost 55% of its value. But after that crucial period surrounding your planned retirement date passes, you must raise the stock allocation back to normal levels. You'll need the growth to offset those rising costs of healthcare and other necessities.

Let me work through one example for you. Please keep in mind though that since every one of you has unique circumstances, you will need to consult with a licensed financial professional to work out a specific plan for you and your family. I'm just providing a basic example here.

Let's assume for the example that this person has already gotten through that period surrounding their retirement date that I spoke about and is 66 years old. What should his or her portfolio look like?

I will use only ETFs in this example, not individual securities. I will also try to stick to exchange traded products (ETFs and ETNs) that are available for no fee (commissions) at discount brokers like my former employer, Charles Schwab, and others.

Again, I repeat, this is only an example. Don't run out and buy these ETFs before doing your own due diligence. With no end in sight to inflation in the healthcare sector, I would be aggressive and put 65% into stock funds, while including some global exposure.

Even though I'm no fan of index funds, I have no problem with our example investor putting 5% or so into a S&P 500 index fund. Then, here is a possible allocation for the person I described:

I would put about 25% into U.S. funds that emphasize dividends such as the Wisdomtree U.S. Quality Dividend Growth Fund (DGRW), which has risen 11.5% so far in 2017.

Next, I would put 20% into international stocks. But do NOT put this money into index funds, which perform poorly internationally.

The reason is simple  – in emerging markets, for example, 77% of all stocks are excluded from the indexes. So, I would opt for ETFs such as the Wisdomtree Global ex-U.S. Quality Dividend Growth Fund (DNL) and the Wisdomtree Emerging Markets Quality Dividend Growth Fund (DGRE). These ETFs are up 16.7% and 14.8% respectively year-to-date.

Finally, on the stock side, I would consider putting 15% into specialty funds that emphasize growth such as the John Hancock Multifactor Technology ETF (JHMT) and the John Hancock Multifactor Health Care ETF (JHMH). These funds have risen 16.4% and 17.0% respectively year-to-date.

I would put only 20% into fixed income funds at this time because of the high current valuations of bonds around the world. I would include government, corporate and emerging market fixed income securities, but steer clear of high-yield bonds.

Some possibilities here include: SPDR Bloomberg Barclays Long Term Treasury ETF (TLO), Pimco Investment Grade Corporate Bond Index ETF (CORP) and the PowerShares Emerging Market Sovereign Debt Portfolio (PCY). The performance of these funds year-to-date are: up 5.8%, up 4.0% and up 6.3% respectively.

Finally, I would put 15% into alternative assets including real estate and precious metals. In the real estate sector, I would look for a fund that offers global exposure.

One such ETF is the SPDR Dow Jones Global Real Estate ETF (RWO). Its portfolio contains over 200 of the world's top real estate firms and REITs, with roughly 60% of the portfolio in the U.S. This fund is up 3.2% year-to-date.

A fund for precious metals is the ETFS Physical Precious Metals Basket Shares (GLTR). It owns physical bullion in all four of the major precious metals in the following approximate proportion: Gold –†58.31%, Silver –27.93%, Platinum –8.00%, Palladium –5.76%. GLTR has risen 7.3% year-to-date.

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