Retirement Risk Revisited

I just turned 60 years old. So this is a particularly important subject to me and many of my friends and family.

I manage about half of the retirement savings for our household. The other half is managed by the experts at American Funds. We also have other non retirement portfolios including stocks, real estate and other investments. For this discussion I will focus on a ‘closed’ investment that was really started in the mid 1990s and evolved to what we have today. ‘Closed’ meaning that no new money will be added to this retirement investment I call the RetirementJS Portfolio.

retirement risk reward

The RetirementJS portfolio return calculated by Schwab Client Services indicates our portfolio has returned an average of 13.08% per year. In that same period the moderately aggressive benchmark returned 11.62%.

Schwab considers my portfolio risky with a standard deviation of 13.43. I have added no new money and allowed all dividends to be reinvested back into the security. 90.6% of the portfolio is US based Large Cap Equity 8.5% are US Based Small Cap Equity. 0.9% is in cash.

Here are my 17 highly risky investments in order of holdings value.

1. MO – Altria Group  13.97% of portfolio
2. CVX – Chevron Corp  9.45%
3. INTC – Intel Corp  8.58%
4. PG – Procter & Gamble 7.76%retirementjs
5. ED – Consolidate Edison  7.71%
6. LLY – Eli Lilly & Company  7.47%
7. VLO – Valero Energy  6.87%
8. NLY – Annaly Capital Mgt    6.53%
9. BRK.B – Berkshire Hathaway   6.30%
10. CAT – Caterpillar Inc.   4.64%
11. GE – General Electric    4.46%
12. WFC- Wells Fargo       4.44%
13. MCD- McDonalds Corp  3.94%
14. MRK – Merck & Co Inc.    3.49%
15. T – AT&T   2.37%
*16. NCR – NCR Corporation  1.50%
*17. CST – CST Brands  0.52%

*spinoff

To bring down the risk (and reward) Schwab recommends that I reduce my Large Cap Equity holdings by nearly 30% and also reduce my Small Cap Equity holdings by 17%. Schwab recommends I increase my International Equity by 10% and fixed income by 35%! Schwab also recommends I keep a little more cash on hand.

Despite the high standard deviation compared to less risky securities, the bulk of these securities pay a high dividend rate. MO pays 3.42% CVX pays 4.12%, Intc pays 3.01%, PG pays 3.09%, ED pays 3.53%, LLY 2.54%, CAT 3.25%, GE 3.17, T 4.86%… One notable exception , BRK.B pays no dividend at all.

I believe the old model for risk and reward analysis is no longer as relevant as perhaps it once was.

-Having 35% in fixed income during this low interest rate environment is foolish and won’t even keep up with the rate of inflation!

-The rule that you have to have so much international exposure has’t held up over the past 2 decades.

-Solid American companies with good management, good products, and good dividends was what I was looking for as I developed the RetirementJS portfolio.

The goal is to keep this portfolio closed until needed unless there is some compelling reason to get out of an investment.

Let the dividends grow and let stock appreciate over the next decade.

 

61 Short Term benchmark was composed of 60% Citigroup 3 Month T-Bill, 40% Bloomberg Barclays U.S. Aggregate Bond.

61 Conservative benchmark was composed of 50% Bloomberg Barclays U.S. Aggregate Bond, 30% Citigroup 3 Month T-Bill, 15% S&P 500, 5% MSCI EAFE (TRN).

61 Moderately Conservative benchmark was composed of 50% Bloomberg Barclays U.S. Aggregate Bond, 25% S&P 500, 10% Citigroup 3 Month T-Bill, 10% MSCI EAFE (TRN), 5% Russell 2000.

61 Moderate benchmark was composed of 35% Bloomberg Barclays U.S. Aggregate Bond, 35% S&P 500, 15% MSCI EAFE (TRN), 10% Russell 2000, 5% Citigroup 3 Month T-Bill.

61 Aggressive benchmark was composed of 50% S&P 500, 25% MSCI EAFE (TRN), 20% Russell 2000, 5% Citigroup 3 Month T-Bill.

61 Moderately Aggressive benchmark was composed of 45% S&P 500, 20% MSCI EAFE (TRN), 15% Bloomberg Barclays U.S. Aggregate Bond, 15% Russell 2000, 5% Citigroup 3 Month T-Bill.


Note: (1010-6129) Standard Deviation (%): A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. Beta: This is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the stated benchmark.

 

Leave a Reply

Your email address will not be published. Required fields are marked *