Race To Retirement
Talk about scary. Last year, 81-year-old H. Burt Hiester's
portfolio slumped 4%. Almost all of the loss came from the REITs
he held. Aiming for dividend yield, the retired Cumberland, Md.,
insurance salesman focused on mortgage REITs. But that category
lost 2% on average last year, according to NAREIT.com.
And that was during a great year for most investors, as the
S&P 500 soared 32.39%.
So Hiester, who trades through TDAmeritrade, is on high alert
for what's ahead because he knows that this year's market is
supposed to be tougher and choppier. He's married, so his
portfolio impacts his wife as well.
Adding to his concern, the Federal Reserve's ongoing tapering
of bond buys looms like a guillotine over bond proxies such as
his REITs. Ditto for the prospect of outright rate hikes at some
And the widely expected slow-growth economy is a head wind for
the other big portion of his portfolio, royalty trusts invested
in oil and gas production.
So Hiester, like millions of investors who are retired or
planning for retirement, has grappled with how to tweak his
portfolio this year. How should he respond to all of the question
marks hanging over the market?
Investors using a proven individual stock strategy base buys
and sells on the rules of their investment blueprint.
What about other investors? Investors relying on mutual funds?
Do not zig and zag much, advisers urge.
If you've already got a target asset allocation, stick with
it, says Judith Ward, a senior financial planner for T. Rowe
If you don't have one, get cracking on one, she adds.
Your portfolio should be diversified. Your weightings in
stocks, bonds, domestic and foreign, should reflect your goals,
time horizon and risk tolerance, she says.
Rebalance once a year. And don't try to outfox the market. "If
you're diversified, when the market does its (volatility) thing,
you've always got something that does well and you're not
depending entirely on things that are not doing well," she
What about hands-on shareholders who want to fine-tune their
asset allocations? That's the sort of advice Lisa Emsbo-Mattingly
gives fund managers at Fidelity Investments, where she is
director of research for asset allocation.
Fed tapering and the prospect of higher rates is more of a
hurdle for non-U.S. stocks and funds than domestic ones, she
says. Be wary of emerging markets that have not taken steps to
cut their trade deficits. Fed tapering and rate moves will make
it harder for them to get financing. Their currencies risk being
Japan has similar problems. "Proceed with caution on Japan
stocks and its trading partners," Emsbo-Mattingly said.
In contrast, Europe has taken its bitter medicine. "It's one
of the most exciting places on a cyclical basis," she said.
The U.S. has largely adjusted to rising rates and Fed tapering
so far. "Rate-sensitive parts of the economy, like housing,
should benefit. Anything that uses debt, so the financial system,
commercial real estate, residential real estate, consumer
durables should benefit from this environment."
She would steer away from companies that export to emerging
markets. "Companies in the commodity complex and energy will
continue to see lackluster pricing and volume growth," she
In tech, Emsbo-Mattingly is comfortable with bets on strong
players in mobility, the cloud and information technology.
She's wary of hardware and semiconductor names.
"Semiconductors are a global cyclical, hurt by weakness in
In health care, she likes biotech leaders. "Historically, they
love this low-rate environment," she said.
Eddie Yoon, leader of Fidelity's health care sector team,
likes segments that should benefit from cost-cutting pressures,
such as information technology firms that will help hospitals
control costs. He also says the advent of low-cost gene
sequencing will generate many new business opportunities over the
next 10 years, just as the birth of the Internet did.
He runs $6.2 billion Select Health Care , which heldIllumina (
), a leader in sequencing, as of its last disclosure.
In bonds, Emsbo-Mattingly likes investment-grade debt and
Treasuries as a hedge against any shock that jolts equities.
Brian Burmeister, a Schwab Private Client portfolio
consultant, also advises retirement-oriented investors to adjust
Those who already hold emerging-market stocks and funds that
have declined should consider harvesting capital losses to offset
taxable gains. "Then turn around and re-establish some positions
to take advantage of low valuations, and do it in a way that
avoids the wash sale rule," he said.
Likewise, this is the time to buy into emerging markets at
bargain bin prices, he adds. "Demographically, that's where
growth will come in the next few decades."
But beware of companies in the Fragile Five markets -- Brazil,
India, Indonesia, South Africa, Turkey -- whose rate hikes and
monetary reforms are too young or not yet begun, he says.
As for China, Burmeister urges caution until recent reforms
prove their value.
Investors, especially in high income-tax states, should
consider municipal bonds and funds for home-state and federally
tax-exempt income. Prices were beaten down a lot last year, he
And if your concern is volatility, then rebalance. "Harvest
some gains from last year and rotate those proceeds into asset
classes that underperformed, including bonds," Burmeister
Harvesting gains and restoring your target allocations among
stocks and bonds, big and small, U.S. and foreign, taxable and
tax-exempt, puts you back within your risk tolerances for each
category, he says, adding, "That gives you the freedom to not
worry about market movements."