Five years after the Great Recession, investors approaching
retirement face decisions that have never seemed tougher on how
to allocate their portfolios. With interest rates hovering near
zero for years, one thing is certain: The days when seniors on a
fixed income could rely only on fixed income investments are long
"What's worked in the past is not going to work in the
future," said Scott Eldridge, director of portfolio management at
Richmond, Va.-based Caprin Asset Management, which has
approximately $1.1 billion under management.
Still, experts believe fixed income is a critical component of
any portfolio, whether for retirees or those getting set to
retire soon, though they differ on the appropriate
A rough 50/50 split between equities and fixed income has been
proven over time to offer the most stable and productive returns,
says Chris Mier, managing director with Chicago-based Loop
But Jennifer Vail, head of fixed-income research at U.S. Bank
Wealth Management, thinks the allocation to fixed income should
be higher. Investors should allocate their ages, plus 5
percentage points, she said. A 67-year-old would allocate 72% to
Vail believes it's never been more critical for investors to
work with professionals who can help run scenarios to take some
of those "unknowables" out of retirement planning.
"Given that we're unwinding the most unconventional monetary
policy the universe has ever seen, it's not the best time to be
trying to do this on your own," she said. Professionals can also
help investors determine how close they are to being fully
funded, and whether they can invest more conservatively or need
to take on more risk.
Whether investors choose to work with a professional or go it
alone, most experts advocate a diverse mix of types of
fixed-income products. Caprin advises clients to own a mixture of
individual bonds and bond ETFs, Eldridge said.
Owning bonds allows investors to reap some income while the
bond is outstanding and then recoup the entire amount when the
debt matures. ETFs offer the advantages of having a professional
manager evaluating the individual bonds and rolling them over
when they mature, but with more liquidity than traditional bond
Mier also suggests holding individual bonds, but doesn't think
most individual investors need ETFs. Low-cost bond mutual funds
are the best way to go, he said.
There's broad agreement among experts when it comes to the
types of debt to invest in. Municipal debt, despite some recent
shaky headlines, remains both safe and very attractive for many
reasons, especially its tax benefits.
Eldridge advocates municipals backed by a specific revenue
source, like hospitals. Mier says the winning combination is a
mixture of municipals and corporate debt.
U.S. Bank thinks the best value is in high-yield debt, like
corporate bonds, and some exposure to emerging markets. For more
risk-averse investors, mortgage-backed securities may be a good
play, Vail said. Treasuries have become so rich in recent years
that most experts advise against them, even for the most
Experts also suggest stretching for yield through duration,
rather than less desirable credit qualities.
"The desire for income is so strong and rates are so low that
we've seen investors substituting credit risk for rate risk,"
Eldridge said. "That's not always the most prudent decision.
These are the kinds of markets where mistakes could be made and
not show up for a while."
That's another reason to hold municipals, Mier said. The muni
yield curve is much steeper than that of other types of debt,
meaning longer maturities offer much better returns.