Having said that, in today's economy, why would a new retiree invest in bonds? Over the next several years, bonds are going to tread water at best as the Fed stops buying bonds and raises interest rates.You could easily lose 2-3% (or more) per year on bonds in the coming five years, and the thing is that it will take years to make that money back if you stay in bonds.
Dividend stocks are a better option, but I would say a new retiree should keep 20% or 30% in moderately aggressive stocks, 40% to 50% in dividend funds or stocks and no more than 20% or so in bonds, and those should be mid-term, not long term bonds.
You are kinda wrong, but not completely.
Essentially, there is a multitude of retirement accounts, and people managing those accounts tend to follow the same behaviors. And the account owners generally try to put larger amounts of money into those accounts. But when a company pays a dividend, the value of the stock decreases by the same amount.
So a person may, for example have an account that pays a monthly dividend, but if their account keeps decreasing by that amount month after month - it just isn't providing that much of a benefit. They could just sell the stock.
Your second question is about how to handle bear markets, and recessions. The answer to that is a person must constantly have somebody monitor their accounts and adjust as necessary so to not lose too much money. Either by taking a more bearish position, or keeping a much higher position of cash. I recommend a 50% cash position for people who don't know what they are doing, and don't actively monitor their account. Because that's how much money my friends lost in 2008, when they didn't want to be in cash, and they didn't want to sell their rapidly declining stock because they "might miss it when it goes back up."
Retired people who passively ignore their accounts and invest in dividend paying stocks tend to do poorly when a market tanks and the people on TV tell them not to sell. It's tragic.
I agree with "I like turtles". Good advice. I just want to make one other point. A new retiree could divide his money up into buckets and treat each bucket separately. In one bucket, he might keep the money he needs for living expenses for the next year. It might be in a relatively liquid asset like a money market fund. In the next bucket, would be assets he plans to use in the next 2-5 years. That would be conservatively invested, perhaps earning only 2% in dividends. The rest of the money could be in long-term investments that have good potential for growth, even if they don't necessarily pay high dividends right now. The goal is to make the overall portfolio last at least 30 years in case you live to be 95.
Some people are so frugal that they live off $2000/month social security and $2000/month in dividends and never even have to use their nest egg at all. $600,000 invested at 4% will give you $2000/month in dividends. Stock dividends usually increase over time, so you will probably be able to keep up with inflation over the years.
a retirement portfolio is a generic term. each person's investments suit their risks and no one's portfolio is identical.
keep in mind first that interest rates are at all time lows, meaning, if one invests in bonds, they will drop in value as the higher return goes up with interest rates for each bond. so do not invest in bonds or preferred stocks.
the choice is to use stocks which increase their dividend each year (like PG), and good growth stocks like google or qualcomm which have technological value for the future.
even beware of mutual funds which have 'bonds' in their equity income mix, the value will drop. better to go into a stock index fund.
in fact any mix with bonds is doomed to go down due to that bonds will drop as interest rates rise. CD's would be a safer bet if you want income.
Explain in more detail please.
Correct me if I'm wrong, but don't most retirement portfolios work by accumulating a large principal (usually in the millions) over one's working years, and then investing that principal in income-paying assets - i.e. dividend stocks and bonds? If this is true, what other dividend-paying assets might a retirement portfolio invest in?
Secondly, how do retirement portfolios weather bear markets and recessions? I know that a popular investment are ETF's which usually mimic the market's direction and grow by an AVERAGE 10% annual rate. But during recessions these can fall by 30-40%. For retired people who depend on their investments for income, how do they handle setbacks like this?
