By June Fletcher
The stock market's volatility, continuing Congressional debate on the future of Medicare, Medicaid and Social Security, and S&P's downgrade of the United States has made plenty of retirees and pre-retirees nervous. With memories of 2008's market meltdown still fresh, many are wondering if their portfolios will be able to survive many more major hits, as well as a possible double-dip recession.
Since the Dow dropped more than 600 points yesterday (though recovering somewhat today), a number of media investment gurus weighed in on what people should do—if anything—to salvage their portfolios and retirement. A sampling of their advice:
Robert Laura, president of Synergos Financial Group in Howell, Mich., doesn't see the need to make portfolio changes, according to Bankrate.com. He was quoted as saying that this time last year, similar concerns were in the news, pushing down the market—and yet it recovered and provided year-end gains. The article also notes that while the economy is slowing, it is also expanding, and companies' profits remain strong.
Traditionally, investment advisers recommended that retirees keep about half of their portfolio in equities--though lately, some, like MoneyWatch.com's Jane Bryant Quinn, have suggested a much more modest allocation (as a rule of thumb,some recommend 100 minus your age). The rest should be in diversified bond funds. If you are risk-averse but still want to invest in stocks, load up on dividend-rich sectors that people with need even if the economy falls into recession, like utilities, health care and consumer staples, Jonathan Burton suggests on MarketWatch.com. If your appetite for risk is greater, stick with high-quality stocks that you plan to hold for the long term and be wary of stocks that invest in emerging markets and China. Mutual funds set up to make money in bear markets may also be good hedges.
Scared by market uncertainty, investors have been flocking to annuities, which protect principal and guarantee income are backed by insurance companies, according to InvestmentNews.com.
Annuities come in many forms, including variable, fixed and income and one size does not fit all. For instance, fixed-savings annuities, also known as deferred annuities, have guaranteed interest rates and tax-deferred benefits, and are most appropriate for pre-retirees. Immediate income annuities, which offer guaranteed income for life but require a large lump-sum premium, are better for retirees.
The downside: interest rates paid out have fallen precipitously from a few years back; there can be hefty fees and the investment is only as secure as the company behind it, according to Zachary Dristol on AnnuityNewsJournal.com.
Although certificates of deposit are a relatively safe place to park your money, returns are abysmal, according to an article by Suzanne Kapner, Robin Sidel and Dan Fitzpatrick in The Wall Street Journal. On Aug. 5, banks around the country cut interest rates on CDs, which are now at 0.79%, compared to a high of 4.53% in September 2006. In the short term, banks are expected to lower CD rates further.
Mortgage rates remain near all-time lows, according to the Journal. So this is an excellent time to refinance or buy a new home, assuming you take out a fixed-rate loan. However, stay away from home equity lines of credit, which have variable rates that are likely to rise down the road.
Interest rates on short-term Treasury bills fell in yesterday's auction to their lowest levels in three weeks. Because short-term interest rates are likely to remain low for some time, retirees who are living off interest income should consider rebalancing their portfolios and investing in index funds, according to Robert Powell on MarketWatch.com. Keep some cash, however, so you'll be able to reinvest when interest rates eventually rise. If you are heavily invested in bond funds, you should watch interest rates closely, too, since they fall when interest rates rise.
Live below your means, if possible, Mr. Powell suggests, and prepare to work longer or perhaps part-time. Consider long-term care insurance if you qualify for and can afford it.
During the two most recent recessions, gold futures grew while the Dow Jones Industrial Average plummeted, Mr. Burton notes. Now that a double-dip recession is again a possibility, gold is poised to go even higher, he writes. All central banks will be looking to increase their physical stores of gold, which is becoming a reserve asset. Gold can be held in many forms—jewelry, coins, bars, futures and options contracts, exchange-traded funds and gold-mining shares. But when it comes time to sell gold in its physical form, beware: There are many fly-by-night operators who try to scam consumers by telling them their gold's not real or is worth less than it really is. Check out Money.org and Gold.org to learn more about the precious metal and how to buy and sell it safely.