If you are in your 80s, your investments need to reflect that reality. Often investors are reluctant to make changes in an investment portfolio to acknowledge advancing age, the likelihood of increased medical expenses and of approaching mortality. These are not comfortable subjects, but failure to address the need for a different investment portfolio in old age can leave you vulnerable to financial setbacks that undo years of investment gains with limited time to recover.
Your Portfolio and Your Age
The need for investments to reflect the specific circumstances of the investor is sufficiently great that FINRA, The Financial Industry Regulatory Authority, considers it a breach of fiduciary duty for an investment adviser to provide investors a "one size fits all" portfolio. The study documents for FINRA's exam for Certified Financial Advisors make a particular point of stressing the need for an investment portfolio that reflects the investor's age.
Investment diversification is accomplished by investing in more than one type of investment and holding many different equities of each type. If you are in your 80s, it's particularly important not to have all your eggs in a single basket. Holdings in real estate, stocks and bonds provide three weakly correlated areas -- meaning that the rise and fall of values in one area has a weak causal relationship with the rise and fall of values in the others. For an investor with less than $1 million to invest, REITS -- real estate investment trusts that are bought and sold on the stock market -- provide far more diversification than an investment in one or two rental properties.
Age and Risk
Managing risk in a stock portfolio is always relevant, but it becomes increasingly important as you age. The long-term average return on a stock portfolio is about 9 percent annually, but the market is cyclical -- in a bull market it may return as much as 30 percent in a single year, as it did in 2013. In a bad bear market year, it may lose even more, as it did in 2008. When you're in your eighties, you may not have time to recover from the 30 to 40 percent declines that characterize a bear market. The average length of a stock market secular cycle -- the long-term swing from a bull market to a bear market and back again -- is more than 190 months. In your 80s, it's prudent to manage your portfolio to reduce risk rather than to maximize returns.
A Model Portfolio
With diversification and low risk in mind, you might allocate your portfolio with as little as 5 percent of your portfolio or perhaps as much as 15 percent in REITS. Another portion -- 20 to 50 percent, depending upon your risk tolerance -- might be split between a medium-term government bond fund and a high-grade investment bond fund with low management fees. From 5 percent to 10 percent of your portfolio should remain in immediately accessible money market funds for medical expenses and unexpected needs. The remainder can be in widely diversified low-cost stock market pooled investments: Exchange Traded Funds -- ETFs -- and Index Funds, with a concentration on lower risk value funds. To increase diversification, some portion of these -- 10 or 15 percent -- can be in global equities.
I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.