Q. I'm risk averse, so I'm fully invested in the "F" Fund in the Federal Thrift Savings Plan. It is supposed to mirror the index for U.S. Bonds and has done okay. Recently, I saw John Bogle on CNBC. He said you should always have at least 30 percent in stocks. He also said there was an 85 percent chance of stocks outperforming bonds over the next 10 years.
So, could I do slightly better with a 30/70 split in my thrift plan? If I were following Bogle's theory would I put the full 30 percent in the S&P 500 index fund only? Or would I split it 15 percent in the S&P and 15 percent in the "S" fund, which reflects the Wilshire 4500? —W.N., Dallas, TX
A. Owning some amount of equities, even for the most conservative investor, is a good idea. While equity returns have been disappointing over the last 5 and 10 years relative to fixed-income, the past is seldom a good predictor of the future.
In the mid-1970s and late 1990s, for instance, many people were convinced stocks could only go up, but then faced miserable bear markets. Much the same may happen with bonds. While bonds have shown attractive returns over the last 5 and 10 years, their current yields are so low that they would be very vulnerable to any increase in interest rates.
Ibbotson research shows that the longer the holding period, the greater the probability stocks will return more than any type of fixed-income investment. The same research shows that small-company stocks will provide higher returns, more of the time, than large-company stocks.
Rather than deciding between a mix of large-company and small-company stocks, you could consider one of the Lifecycle fund options offered by the Thrift Savings Plan. The L Income Fund, for instance, is 80 percent fixed-income and 20 percent equities— but it mixes 12 percent large stocks, 3 percent small stocks and 5 percent international stocks. Similarly, the L 2020 Fund is about 45 percent fixed-income and 55 percent equities, with 29.45 percent in large stocks, 9.4 percent in small stocks and 16.4 percent in international stocks. If you chose to mix them equally, the resulting portfolio would be about 60 percent fixed-income and 40 percent equities.
Q. My wife’s investments are in Ameriprise and Franklin Funds. Mine are in four Vanguard funds plus money market and an IRA also with Vanguard and I have a company 401(k) plan. I am 75. She is 69. We are both in excellent health. We have a successful business and no immediate plans to retire. We recently sat down with a Certified Financial Planner at our bank (no fee) to look at our investments to see what makes sense going forward.
Our holdings total $750,000, including IRA’s. In addition, we own the building that houses our business. It has an appraised value of $1.2 million. The advisor is recommending a joint account of about $400,000.00 to be placed in the Allianz MasterDex X annuity and our IRA’s in the Pacific Index Choice a deferred, fixed indexed annuity both for 10-year periods. I have always been skeptical of annuities but the advisor has made a good case for these investments. I am intrigued, but not completely sold. Can you help us understand these options and give us your assessment of how they fit as an investment vehicle for our situation? —D.N., San Antonio, Texas
A. When someone has spent the time to earn a CFP designation you have to wonder about his integrity if the only product he suggests is an expensive, insurance-based one. It's a pretty good bet that your bank is an outlet for insurance products. They are not doing this as an exercise of fiduciary concern; They are doing it because it generates income for the bank.
Since you work, are employed in your own business, and already face compulsory rising income due to required minimum distributions, there is zero evidence that you should be seeking security and certainty of income. In addition, when you stop working you will sell your $1.2 million building as a separate transaction from selling your business. When that happens you will either have a major "liquidity event"— or you will be holding a mortgage that will bring a substantial monthly income. This suggests that you should be maintaining your current liquid financial investments rather than tying them up in insurance contracts.