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Retirement > 401(k)s & IRAs
Smart asset management
March 6, 2000: 6:08 p.m. ET

Expert suggests a combination of stocks and bonds as an ideal strategy
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NEW YORK (CNNfn) - The unpredictability of the market, with its constant upswings and downturns, is a risk that weighs heavily on the mind of every investor. Minimizing the risk through smart asset management is an important lesson that is never too early or too late to learn.
    In response to a reader's question, Frank Armstrong, president of Managed Account Services Inc. in Miami, recommends as a general rule of thumb to the nervous investor a combination of stocks and bonds to safeguard assets against market volatility.
    

    Ask the Expert a question.
    

    I'm 55 years old and the stock market volatility is really starting to make me nervous. I'm planning to retire in 10 years. Should I change my 401(k) so it's in bonds?
    Market volatility is always disconcerting. But there is no evidence that it is getting worse. The day-to-day point fluctuations are getting higher as index values increase. But in percentage terms monthly and annual variation is no higher than before. We all may be more conscious of the market movements because of the greater coverage by the media. Every little stock market wiggle is analyzed as if it portended the entire future of capitalism.
    With ten years before you retire, you still have a fairly long time horizon. While there is never a guarantee, the odds are well in your favor that a heavy exposure to equities will pay off handsomely. Think how you would feel if you had missed out on the last ten years in the market.
    But as you approach retirement you probably will want to scale back to your preferred retirement asset allocation.
    Even if you were going to retire tomorrow, you still might be wise to hold at least 50 to 60 percent of your plan in stocks. With earlier retirement, longer life expectancies, and persistent inflation, the retiree must invest to supply both a reliable income and a hedge against inflation. Stocks alone could be far too volatile. Bonds alone will not generate enough total return. But a combination of stocks and bonds offers the highest probability of meeting both needs successfully.
    As a rule of thumb, I believe that a retiree should have enough in short-term bonds and/or cash to meet his or her pension account income needs for the next five to seven years. So, if you expected to draw down 6 percent of your capital each year for income needs you would want to have 30 to 42 percent in fixed investments. That way if the market takes a dive, as it probably will sometime during your retirement, you will have plenty of time for it to recover. Meanwhile you can draw down the bonds. That way you protect your growth assets during market declines.
    Exactly how you manage the transition from stocks to a balanced portfolio is up to you. Too early and you are likely to miss out on a lot of growth, too late and you may be exposed to a market downturn at or near your retirement. Here's a suggestion that you can modify to meet your needs:
    1. Determine your optimum asset allocation at retirement. For starters you might consider 60 percent stocks and 40 percent bonds.
    2. About five to seven years before you expect to retire begin shifting equal amounts once a year into short-term bonds so that the year you retire you are at your preferred asset allocation.
    Retirement may be defined as 30 years without a paycheck! Some will be retired for longer than they worked! Back to top

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