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Building a Portfolio For Retirement
By JLP | March 12, 2008
Investing during retirement is a tricky business. Not only do you have to consider yourself a long-term investor, you also live off your assets, which makes you a short-term investor. If you lean too much to one side or the other, you run the risk of jeapordizing your retirement. The key to investing in retirement is to limit volatility. Sure, you can purchase an annuity but they can be costly and can limit your flexibility. Is there a better way?
Back in January I wrote about a short post on reducing a portfolio’s volatility by equally allocating seven asset classes in a portfolio. That post was in reference to a Wall Street Journal article I had read on the topic, which highlighted the work of Craig Israelsen, a professor at Brigham Young University. I contacted Dr. Israelsen and asked him a few questions about his work. He was kind enough to send me a copy of a MUST-READ article he had written that was published in the Nov/Dec 2007 issue of the Journal of Indexes.
I then put together another model portfolio based on Dr. Israelsen’s work using exchange-traded funds. I assumed a beginning value of $1 million, with a 5% withdrawal for income, which put the beginning portfolio value at $950,000. I then allocated 14.25% to six of the asset classes and 14.5% to the cash class. Here’s what I came up with (you can click on the graphic to see a larger version):
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Not too bad considering what market is doing so far this year. Of course there’s a lot more to consider than just two months of returns. That’s why I urge you to read Dr. Israelsen’s article. If you have any questions, leave a comment and I’ll see if I can get Dr. Israelsen to answer them.
Topics: Investing, Retirement Planning |