A Peak Earning Years Portfolio

BusinessWeek taps several pros for their best strategies for restoring your nest egg and keeping it secure

By David Bogoslaw

When it comes to building, or rebuilding, your retirement nest egg during your peak salary years, from age 40 to 55, the investing choices most people make to achieve growth in their portfolios may be substantially less aggressive in the future than they were before the financial debacle of 2008-09.

And long-held beliefs, such as that you can minimize portfolio risk with diversified bets across a range of noncorrelated or minimally correlated asset classes, have been turned on their head by the collapse, which sent all asset classes except Treasury bonds reeling in the closing months of last year. That, along with heightened fears of job losses, have made it extremely tough to persuade some people to stay invested and keep investing in the markets, say financial advisers.

"It would be a mistake to view the last six months as a template for how asset classes work relative to each other," says Jeffrey Layman, chief investment officer at BKD Wealth Advisors in Springfield, Mo. He concedes that there's a strong correlation between emerging-market stocks and commodity prices but sees the increased correlation among other assets as a temporary phenomenon, the result of massive deleveraging and forced selling.

The 50% to 60% drop in major stock indexes arguably makes it much less risky to put your faith in stocks in the future, just as investors seem to be well-compensated right now for taking added risk in the bond market by investing in investment-grade corporate and junk bonds, which are paying much higher yields than Treasuries with comparable maturities, in contrast to a couple of years ago.

New Respect for Annuities

The massacre on Wall Street has convinced many financial advisers of the need to put a portion of clients' investment portfolios in some kind of annuity product to ensure annual income on top of their Social Security checks.

Clifford Michaels, president of New York's Institutional Investment Advisors and president of the Financial Planners Assn., recommends you put as much as 10% of your portfolio into either a fixed or variable annuity. You pay a fee to the insurance company only on variable annuities.

"At the end of the day, investors want to know they can withdraw X amount of dollars [a year] for life. That's why it makes a little more sense than it ever has before," he says. "Don't you think there are millions of investors who wish they had a guarantee on their income at retirement [after all the market carnage]?"

His one caveat: Stick with the bigger insurers such as John Hancock Income Securities Trust (JHS) and MetLife (MET) since you can't be sure the smaller providers will survive until you retire.

At the very least, you need to put a few serious questions to your financial adviser to make sure he or she isn't just following a plan developed for a bygone era.

Lower Your Expectations

It's become clear through daily discussions with clients over the past several months that their risk tolerance is much lower than they believed it was, says Michael Sangirardi, a senior financial adviser at Ameriprise Financial Services (AMP) in New York. And for many of his clients who either worked in financial services or professions such as accounting and consulting that get much of their work from that industry, newfound fear of losing their jobs and a lack of income stability has also reduced their appetite for risk, he says.

That means investors need to plan on less portfolio growth. That's something Tom Orecchio, a principal at Modera Wealth Management in Old Tappan, N.J., has long tried to convey, especially to people who began investing in the 1980s and '90s and have experienced mostly upward-trending markets.

"Investors need to reduce their expectations because stocks have dramatically outperformed their historical averages," he says. He sees the negative returns of the past decade as simply a reversion to the mean. Since the stock market performs in cycles, he believes that if the current downturn continues for an extended time, we can expect a period where long-term average returns rise thereafter. But if this downturn ends too soon, before the down cycle has been fully exhausted, investors should temper any positive expectations for stock returns, he believes.

Patricia Raskob, president of Raskob Kambourian Financial Advisors in Tucson, Ariz., says she makes it a point to reexamine each client's risk tolerance every spring based on big-ticket purchases and other major expenditures they expect to make over the next year. She works with each client to create a unique portfolio based on his or her circumstances. Even for clients in the middle of their peak accumulation years, she distinguishes between short-term money, which needs to be available to cover major expenses over the next three to five years, and longer-range investments. She uses individual bonds with laddered maturities, certificates of deposit, and bond mutual funds to generate short-term money.