Rethinking retirement
By Laura Bruce • Bankrate.com

Frank Armstrong, CFP, author of "The Informed Investor: A Hype-Free Guide to Constructing a Sound Portfolio" and founder of Investor Solutions Inc.

"There is so much road kill on the financial highway. It's horrible, what's happened to people, whether they've been victims of brokerage firms or their own poor behavior. The temptation is to say, 'I'm nearly destitute, and so I need to take a lot more risk to get back on track.' That's a formula for disaster. Do what you should have done five years ago; get back to basics. Do an investment plan that makes sense. It shouldn't be inordinately risky.

"Global diversification is a well-established way to control risk. We do that by using index funds. You can probably increase the expected return by tilting the portfolio to some degree to smaller company stocks and to value stocks.

"You're not taking on more risk, you're taking on different risk. We underperformed people doing tech stocks in the bull market, but for the last three years we outperformed the market on the equity side by at least 35 percent. We lost a cumulative 8 percent over those three years, while the S&P probably lost 50 percent.

"There is no risk-free strategy. This is the one with the highest probability of success for the next 100 years and the highest probability of success next year. But it's not a guarantee it will outperform every day. It's not instant recovery; it's a solid strategy. I can't restore people's wealth -- it's gone -- but I can put you on solid footing today."

Jason Flurry, CFP, Planmark Capital Management

"Stay well-diversified. Look at what goes into making investment returns. Most of the media focus is products -- fund A over fund B, or XYZ stock over ABC stock. Research says that's responsible for a small percentage of success. The biggest component is asset allocation.

"It's in the down markets that people throw away their plan. If a plan is properly allocated and it went down, there's nothing to do but sit tight. Normal fluctuations are to be expected as much as cold winters in the north.

"Go back and profile yourself. There are financial profile questionnaires online. How much risk are you comfortable taking? What is your time horizon? What are your resources? Use conservative growth -- use 7 percent or 8 percent instead of 10 or 12 percent.

"For most investors who are around 55 years old, a middle-of-the-road portfolio of 60 percent stocks and 40 percent bonds works well. But on the fixed income side, you're not compensated to go long-term on bonds. Go more short-term on bonds; the one-year to five-year yield curve is steeper than normal right now. The sweet spot in the yield curve is about eight years.

"Don't try to out-guess the market. It's the retail experience vs. the institution experience. The institutions use asset allocation, they leave the money and ride out the storms. The retail investor tends to trade a lot and buy and sell at the wrong time. The right allocation forces you to sell the things that get too far to the positive. Take profits and sell at the high and buy bonds on the low end to rebalance the portfolio.

"It's pretty boring: Follow your grandmother's advice and don't keep all your eggs in one basket. There is no long-term advantage to owning concentrated positions."

David Nawrocki, professor of finance, Villanova University

"Don't overlook the effect inflation has on investment portfolios. Generally, when inflation is in the 4 percent to 12 percent range, equities do very poorly. It goes with the business cycle. The economy heats up, inflation heats up and you have restrictive monetary policy -- it's not conducive to strong equity returns.

"During recovery, what we're in now, equities do well and they should do well until inflation gets up to about 4 percent. I don't expect any quick jump until maybe the middle of next year. It should be a good market until then. The last time we were in this situation was 1992-1993, and we had pretty good stock market years.

"Our suggestion is to reduce stock holdings from 70 percent to about 30 percent when inflation rises above 4 percent. But if interest rates are shooting up, long-term bonds aren't a safe haven either. Go to money markets and intermediate bonds and TIPS (Treasury Inflation Protected Securities.)

"We also see it as a benefit for a retirement portfolio to have a constant cash outlook. It helps anytime you can reduce having to liquidate investments."