Is Your Retirement Portfolio a Leisure Suit?
This article, originally written in September 2005, is republished with minor editing.
The last time I remember seeing someone wearing a leisure suit was at the Wagon Wheel restaurant in Dahlonega, oh, probably ten years ago. It caught my attention because nobody else wore leisure suits at that time. They had been out of style for at least a decade. But this fellow didn’t care. He seemed to be perfectly happy.
In my business, I see some portfolios with out-of-style investments. People sport them around, just as happy as they can be.
For example, investors can get emotionally attached to an individual stock. They’re not holding it because of performance. Nor does it meet an objective investment criterion such as earnings growth, dividends, price momentum, or valuations—no, they keep holding it because it is already there.
Back to my analogy…They just keep wearing it because it’s in the closet and can’t stand the thought of dumping it. They keep sporting around this hideous, double knit, polyester, whatever…hoping that maybe, some day, it will become fashionable again.
In the mean time, growth opportunities are passing them by while the countdown to retirement marches on.
The fear of change paralyzes some investors in a time warp. Becoming comfortable with the status quo is often an investor’s worst enemy.
So, here are some tips on investment fashion.
- Sell off some of the highly valued assets while there are buyers paying the high prices. Technology and large company US growth stocks in years 1999 and 2000 had historically unsustainable returns and enormous valuations. Scaling back, at the least, was in order. This is a lesson we can use to our advantage.
- Consider selling or exchanging expensive investments. For example, variable annuities with total annual expenses (M&E, management, and riders) as high as 2.5 to 3% are not worth the cost, in my opinion. There are often better alternatives.
- Diversify. Getting the right quantity and mix of stocks, bonds, cash, etc. is critical. Unless you know for certain where the next big upward move will be (and no one does), cast a wide net. Too much concentration in any stock, industry, or asset class is risky.
- Focus on performance. Every investor should know the historical returns and risk associated with his/her portfolio—not just the individual investments inside. Choose a method of money management that has demonstrated strong, consistent, long-term results.
Does your portfolio need a makeover? Don’t you think it’s time to dump the leisure suit and slide into an Armani? You’ll feel much better about yourself.