As life marches on, our wants and needs change. The things that thrilled us at 20 no longer seem quite so alluring by the time we blow out the candles on our 50th birthday cake.
Investment needs also evolve with each passing year. As our time horizon shrinks, we must be more careful about where we park our money, says Steven Lifland, Carl Maneval Smith professor of accounting and finance at High Point University in High Point, N.C.
In the following interview, Lifland talks about investing after middle age. He also offers some thoughts about which sectors are most likely to perform well in 2014.
What’s the ideal portfolio strategy for a middle-aged investor?
No matter if we are talking about an investor who is young, middle-aged, approaching retirement or in retirement, the length of the respective investment horizon is critical. There is going to be a positive relationship between the horizon and the degree of risk that an investor should be willing to undertake. This means that the longer the horizon, the more risk that is acceptable.
Any investment strategy should include, if possible, contributions to a 401(k) or 403(b) retirement account. If your employer does any type of matching, there is little excuse not to participate in the plan.
Opening up a personal IRA account makes a lot of sense if (workplace) plans are not available to you.
Investing in markets and forming your own portfolios brings freedom of choice, but also relatively more risk — (and), you hope, relatively greater returns. Always remember to diversify your holdings so as to be able to ride out any economic storm. Pay off your credit card debt and put that cash flow into your investments.
The middle-aged investor has to be somewhat conservative, and as the investment horizon approaches retirement years, wealth preservation usually takes center stage. The traditional movement toward bonds and government-backed securities can provide the safety and liquidity that the investor desires.
Last but not least, having adequate health and life insurance is crucial. You may want to inquire about disability insurance, too. Any unforeseen illness or accident could easily wipe out any nest egg that you have accumulated. You must protect this to the best of your ability.
How about the investor who is approaching retirement?
This investor is into his or her 60s with maybe five or seven years to go until retirement. However, it is not uncommon today to find investors planning on retirement in their early 70s. While this trend is real, the unknown factor is your health, and (whether) your skill set will allow you to be part of the workforce.
There is Social Security, and here the investor must understand that the benefits max out at age 70. Can you wait that long? The hope is that a 401(k) or 403(b) or a planned IRA are in place by this time. The preservation of existing wealth is the primary concern, and the investment strategy must address this.
It (may) be late to consider here — it should have been done in your middle-age period — but having a long-term health care plan may prove to be vital. The potential need (for) individual care or moving into a nursing home (has) to be considered. The movement toward “downsizing” all that you do is an ongoing process.
This is a challenging period of your life. However, you have had other life challenges and have met them with determination and planning. It is no different here. The components of your investment strategy — diversified portfolio; paid-off mortgage(s)/car loan(s)/credit card debt; and having health, life, disability (and) long-term care insurances — all need to be in play.
What about the investor who is in retirement? Is there a rule of thumb that should be followed?
Much of what is discussed in questions one and two is pertinent for those investors who are already in retirement. There is no more high risk-taking, and the maintaining of wealth — as well as the sustainability of wealth — is now the focus of any strategy.
If possible, part of your diversified portfolio can still be in stocks that carry relatively more risk than other securities in your portfolio. The reason for this strategy is to be able to leave monies for a spouse or children or grandchildren whose investment horizons are still quite long.
The best action you can take to help out your spouse and/or children is the purchase of long-term health care that can shield them from a burdensome health bill in the future.
What sectors of the market are poised to outperform now?
Successful 2013 sectors that may do well in the future are “consumer discretionary,” “health care” and “industrials.”
The consumer discretionary sector includes manufacturing segments such as automotive, household durable goods, apparel, and leisure equipment. The service segments incorporate hotels, restaurants, media production and services, and other consumer retailing services.
Keep in mind that this sector is highly influenced by discretionary demand and income. Consumers may “want” something, but they don’t “need” it. If money becomes tight, this sector will suffer.
The health care sector has two major components. The first is the group of firms that manufacture health care equipment and supplies and provide health care services. The second group is made up of firms engaged in research and development related to pharmaceuticals and biotechnology products.
With an aging population, the demand in this sector should remain strong. As the Affordable Care Act continues to assimilate into society — the Supreme Court has upheld most of its key features — there will be less distraction for the sector.
The industrials sector includes major players in aerospace and defense, construction, engineering, and manufacturers of industrial machinery. The offering of commercial services and supplies is also included. There are major infrastructure players, such as the airlines, road and rail transportation services.
In general, invest in the sector, or in several of the largest and safest companies within these sectors. Identify those industries that appeal to you and further review their growth potential, and check for reasonable valuations.
Emerging markets have lost some steam recently. Are they a good buy, or are they still too expensive?
The consensus of the market appears to be with the latter. Emerging market funds have been losing support as the economic news has tended to discount their values.
One major factor impacting emerging markets is the potential for rising interest rates in the United States. The (Federal Reserve) has begun to reduce its bond-buying program as a way to taper its current stimulus policy.
Another situation is the possible slowdown in China. Investors need to be cautious, as manufacturing activity was at a six-month low in January 2014.
A nagging concern has to be that the economies of the emerging markets face “house cleaning” in order to become economically sustainable in the future.