Invest, Exceed Goal, Then Stop Taking Risk


At what age should you change to a more conservative allocation, and what should that allocation look like? The answer depends on who you ask or where you look.

Target date funds, for instance, use glide paths. Over time, a glide path changes a portfolio’s allocation from being more aggressive to being more conservative. This evolution is intended to reduce the risk a person is exposed to as retirement approaches. It’s a logical approach from the standpoint of reducing the damage from a bad sequence of returns occurring near the expected retirement date. Some detractors will point out that such strategies are the most aggressive when the least amount is invested—when the investor is young, has a lower salary and is just starting to set aside money for retirement. There is relatively little money to benefit from the power of compounding. Other detractors criticize target date funds for being too aggressive at retirement or not continuing to evolve for a long enough period of time after the retirement date.

Among the alternatives to target date fund glide paths is a strategy proposed by professors at the University of Waterloo and a portfolio manager at Canadian money management firm PWL Capital. They used a fixed allocation of 60% stocks/40% bonds to demonstrate how their target wealth approach works. The portfolio is rebalanced annually to maintain the allocation. Though there is nothing new about a 60/40 allocation, what happens next is interesting: Once the wealth target is exceeded (the study’s authors suggest aiming to overshoot the target in order to reach it), the portfolio is de-risked. This occurs by allocating an amount equal to the targeted wealth to risk-free assets. This shift is not time-dependent—meaning an investor does not make the change, say, at the planned date of retirement, but rather when the goal is exceeded. In other words, you move your retirement savings out of the market once your retirement is funded. Continue Reading »

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Highlights from this month’s AAII Journal

AAII Sentiment Survey

Optimism rebounded, but remains below average for the 20th out of the past 21 weeks. Plus, members discuss how the market’s record highs are influencing their outlooks. More about this week’s results.

This week’s results:
  • Bullish: 35.4%, up 8.5 points
  • Neutral: 35%, down 6.5 points
  • Bearish: 29.5%, down 2.0 points
Historical averages:
  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

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The Week Ahead

Just two members of the S&P 500 are scheduled to report earnings: H&R Block (HRB) on Tuesday and Kroger (KR) on Thursday.

The Federal Open Market Committee (FOMC) will hold a two-day meeting, starting on Tuesday. The meeting statement will be released at 2 p.m. ET on Wednesday along with the committee members’ updated forecasts. Chair Janet Yellen will hold her quarterly press conference at 2:30 p.m. A quarter-point (0.25%) rate hike is widely expected to be announced. Insight into the central bank’s plans to unwind its balance sheet may also be provided.

The week’s first economic reports will be the May Producer Price Index (PPI), released on Tuesday. Wednesday will feature the May Consumer Price Index (CPI), May retail sales and April business inventories. The June Philadelphia Fed business outlook survey, the June Empire State manufacturing survey, May import and export prices, May industrial production and the June housing market index will be released on Thursday. Friday will feature May housing starts and building permits and the University of Michigan’s preliminary June consumer sentiment survey.

The Treasury Department will auction $24 billion of three-year notes and $20 billion of 10-year notes on Monday and $12 billion of 30-year bonds on Tuesday.

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