Investing to Retirement [Archive]

Spaf

06-19-2007, 12:13 PM

The following is information I had from whomever. Some came from members. A lot is from mutual funds. Some of the portfolio models may overlap a bit. But to some degree they give a picture of tolerance, risk and reward.

.......................................

Investing to retirement

Bear market is a period of 180 days or more during which stock prices drop at least 20%.

Bear Markets = Defensive stocks: Utilities, Financial.

Index funds buy stocks that compose a particular index, such as the S&P 500, and the number of each stock purchased is proportional to the weight of that stock in the index. Index funds are considered to be a good investment because few funds beat the indexes, and fees are minimal.

Inflation: Average inflation = 3.1%. Historically Inflation = 4.0%

Investments by age

1.
AGE 26-45: AGGRESSIVE
Now is the time to be brave. Invest in higher risk stocks with greater growth potential.
100% in stocks
0% in bonds
0% in cash

2.
AGE 45-55: GROWTH
These are the peak earning years. Broadly diversify your stock portfolio.
90% in stocks
10% in bonds
0% in cash

3.
AGE 56-65: BALANCED
The house is paid off and the kids are out of college; focus on higher – dividend – yielding stocks.
60% in stocks
30% in bonds
10% in cash

4.
AGE 66-75 CONSERVATIVE
High – dividend – yielding equities such as utility stocks are the way to go during the early retirement years.
10% in stocks
70% in bonds
20% in cash

5.
AGE 76+ SHORT-TERM
With no wages and a supersafe portfolio, your return starts to suffer and your savings begin to dwindle – but you should be OK with what you have left.
0% in stocks
10% in bonds
90% in cash

Portfolio Construction:......Bonds%........Stock%........(St ocks Intnl)
...........Safe...................Age............. 100 - age......20%
...........Avg....................Age - 10.......110 - age......33%
...........Aggressive...........Age - 20.......120 - age......40-50%

Retirement: For retirement you need 70% - 80% of your present income.

.......A withdrawl rate much above 4% generally is too high.

.......A balanced portfolio 50% stock/40% bond/10% short-term: 60% chance of exceeding 25 years.
.......A conservative.......20%..........50%.........30%... ............: 20%
.......A short-term............0..............0..........100%.... ...........: 0%

.......Time Horizon..Stocks..Bonds..Cash
.......<5 yrs..........30........30.......40
.......5-15 yrs.......50........25.......25
.......15+.............70........20.......10

Returns: Stocks in history have averaged an annual rate of return of 12.2%. Historically they have averaged 11% and bonds 5.2%.

Risk v Reward Profile: Dave did a risk vs rewards profile: The risk/reward equation is illuminating. If the market goes up 10% on the year and you are 40% in the G-fund which pays 5%, you net (.4x5 + .6x10) = 8%. If the market goes down 10%, you net (.4x5 - .6x10) = -4%. You get 80% of the potential gain but avoid 60% of the potential loss. If 60G then it works out to (.6x5 + .4x10) = 7%; or (.6x5 - .4x10) = -1%. You get 70% of the gain and avoid 90% of the loss.

Tolerance: the amount of variation allowed from a standard.