Baby boomers and money
Barry Glassman, CFP, Glassman Wealth Services
By Barry Glassman, CFP
WTOP Financial Contributor
WASHINGTON -- If bigger is better, then the baby boomers, some 76 million strong and the largest generation in U.S. history, can consider themselves large and in charge.
This generation, born between 1946 and 1964, has wielded influence on just about every aspect of American life and continues to do so. Boomers have more discretionary income than any other age group and control some 70 percent of the total net worth of all American households.
But even with this financial firepower, many boomers face some serious threats to their financial health as they enter their retirement years.
Almost half of boomers haven't saved enough to provide for a comfortable retirement. And unlike past generations, boomers might have up to 30 years of retired life ahead of them.
It's a problem that's been made worse because many boomers' wealth and retirement savings were set back by the bear markets of the dot-com crash and the more recent financial crisis.
However, the low-interest rates the Federal Reserve used to breathe life back into a flailing economy present the greatest challenge for boomers looking to retire.
The cartoon in this article is one I commissioned back in May 2010, and it says it all: Boomers and retirees have been in a yield drought for far too long.
It continues to be a challenging investing environment for those close to or in retirement.
Stocks are not cheap; bonds yield next to nothing and the markets continue to be volatile, all of which adds anxiety to uncertainty at a time in life when boomers are looking for more security in their investments.
What's a boomer investor to do when he can't tolerate the volatility or afford the potential 30 percent, or more, loss to a portfolio in the stock market, but needs greater returns than the paltry yields on less-risky bonds?
Many investors don't realize that a portfolio doesn't have to look like a barbell, with cash and bonds on one end and stocks on the other. Several investments have the potential to provide risk and reward greater than bonds, but less than stocks. I like to call them "the stuff in between."
What is ‘The Stuff in Between?'
In putting together a wish list for "the stuff in between," I went to Glassman Wealth's investment research team and asked them for investments that have:
- A potential of a 4 to 8 percent total annual return;
- A history of half or less the volatility of stocks;
- Possibly low or no correlation to stocks.
With these criteria in mind, these are three of my favorite "stuff in between" strategies:
1. Hedged Equity
Most are familiar with stocks or stock mutual funds -- you own them expecting they will go up in value as the companies grow over time. When there are amazing days (both up and down) in the stock market, your stocks or funds are likely to follow.
Hedged equity is different. In addition to owning stocks you expect to go up, this strategy also bets that some stocks go down. If a fund holds short positions, those investments actually increase in value if those stock prices fall.
Glassman Wealth currently uses a hedged equity fund called the Robeco Boston Partners Long/Short Research Institutional Fund, a fund that has long and short stock positions in its portfolio.
When Robeco's analysts conduct research, they look to invest in companies that are doing well. They want companies that have strong cash flow, growing market share and proper capital structures. They also want companies that are reasonably priced or a bargain compared to their peers.
But along the way, they bump into companies that are losing market share, that are priced at euphoric levels or those that have too much leverage.
This gives them two complementary investment opportunities:
- Owning shares of companies they hold because they are doing well and they
to continue to do well in the future;
- Shorting shares of companies they believe won't do well when compared with their peers and they expect these to fall in value.
The net effect is a hedged equity strategy that provides some exposure to the stock market with less volatility. Hope over the long term is that this strategy will provide a 7 to 9 percent total return with half or less of the risk of stocks.
Can it lose money? Absolutely. If the stock market plummets 400 points, this strategy will also be down, but potentially, it won't be down anywhere near as much as the stock market.
2. Long-Short Bond Funds
Similar to hedged equity, long-short bond funds look to invest in bonds and other fixed-income investments while hedging against rising interest rates. Glassman Wealth currently uses two funds to accomplish this: Driehaus Active Income and Driehaus Select Credit.
For the past several years since the Federal Reserve all but flattened interest rates, retirees have had to make a tough choice: Invest in longer-term bonds with a higher yield but with more interest-rate risk, or lower-quality (junk) bonds with a higher yield, but more credit risk.
One example of Driehaus' long-short bond strategy is buying longer- term corporate bonds to take advantage of the higher yields, and then taking a portion of the portfolio and shorting Treasuries to hedge against rising interest rates. If and when interest rates increase, short Treasury positions add protection against falling bond prices.
Over time, we hope to see this investment achieve half of the return of stocks with a third of its volatility -- very much similar to what we expected from bonds 10 years ago.
For more bond strategies, read The best way to invest in bonds in a rising interest rate environment.
3. Short-Term High-Yield Bonds
Lower-quality companies issue bonds, also known as high-yield or junk bonds, that offer higher yields for investors who are willing to take more risk. But the risk with these types of bonds can often act similarly to that of stocks.
Basic high-yield bonds (junk bonds) do not, therefore, fit the criteria for this list. But by shortening the duration of a higher-yielding corporate bond portfolio, risk is lowered to a more acceptable level for clients.
I like the Osterweis Strategic Income Fund because it invests in short-term, high-yield bonds with an average duration of two years. By investing in bonds with short maturities, you reduce volatility but still enjoy a better yield than you would get from bonds issued by higher-quality companies.
The hope is to achieve a 4 to 6 percent total annual return with half the risk of high-yield bonds and one-third the risk of stocks.
Your investment choices are not just stocks and bonds anymore, especially given this never-ending low-yield environment.
Boomers and retirees do have options to help them squeeze more yield out of their portfolios without having full exposure to the stock market and its ups and downs.
The "stuff in between" fits the profile of what most boomers and retirees want to achieve: attractive yields and return with potentially less volatility.
Editor's Note: Barry Glassman, CFP®, founder and president of Glassman Wealth Services in McLean, Va., is a nationally recognized leader in investment and wealth management. His fee-only firm offers successful professionals, executives and business owners financial guidance and resources to effectively manage their family's wealth. Follow Barry on Twitter at @BarryGlassman.
© 2014 WTOP. All Rights Reserved.