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A Common-Sense Approach to Retirement Planning

Harold Evensky discusses his thoughts on retirement planning in Part II of our conversation with the financial-planning guru.

Christine Benz, 07/09/2010

Today's retirees and pre-retirees face multiple challenges, including still-shrunken principal values following the 2008-09 bear market and rock-bottom interest rates. Here are Harold Evensky's thoughts.

Question: There's a lot of concern about the prospect of higher interest rates and what that could mean for fixed-income portfolios. How are you thinking about that issue?

Answer: With a fair amount of concern. We do expect higher interest rates. Our concern is that they could peak in a very short period of time. In terms of fixed income, we invest in fixed income to preserve principal. We invest in equities to make money.

So we've always had a focus on preservation of principal in the fixed-income portion of our clients' portfolios. Our average standard in a normalized world is a credit quality of A and a duration exposure of about five years. Now, we ladder our portfolios, and even if we use funds we ladder by using funds of different duration exposures.

But for quite a few years we've been more defensive so that our average quality has been AA and our duration exposure has been around four years or so. And we've moved that down to about three and a half years. So that's the primary positioning in fixed income in anticipation of higher rates. Now, there's a cost, and we've been defensive for a fairly long time and given up some extra yield because we've stayed high quality and short term.

The other concern is if rates go a lot higher and they pick up quickly, that's also going to have a negative impact on the equity market, too. There's only so much you can do in terms of trying to predict the future. But that's the reason we're such big believers in diversification and so skeptical about any significant tactical strategies. If you're right with a tactical move, you look brilliant. But there's way too much risk. I would say there's a guarantee that the timing of some these brilliant tactical moves is going to be wrong.

Question: What are your thoughts on bank-loan funds? I've been hearing from a lot of readers who are looking to them as insulation against rising interest rates, but it's hard to forget how badly some of them performed in the bear market.

Answer: It's something that we've looked at, and intellectually, bank-loan funds make sense. But given what's happened in the last few years, our lack of confidence in being able to understand or evaluate the underlying quality has made us very hesitant to go into any investments of that type.

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