Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jason Stipp and Christine Benz | 08-21-2014 03:00 PM

3 Investments Retirees Don't Really Need

Retirees should think twice before adding foreign-currency-denominated bonds, dedicated emerging-markets funds, and alternatives to their portfolios, says Morningstar's Christine Benz.

Jason Stipp: I'm Jason Stipp for Morningstar. If you're a retired investor and you want to slim down the number of holdings in your portfolio, there are a few categories of investments you can probably take a pass on. Morningstar's Christine Benz, our director of personal finance, is here to explain more.

Thanks for joining me, Christine.

Christine Benz: Jason, it's great to be here.

Stipp: So, you say if you're a retired investor, you want to keep it simple. There are a few types of funds that you can say, "Thanks, but no thanks." Before we get to those, though, what are the advantages of not having a lot of excess baggage in a retirement portfolio?

Benz: There are a few. One of the key ones is that as you become retired you may not want to spend that much time on day-to-day portfolio oversight or, certainly in your later years, you may encounter some issue that will keep you away from your portfolio for a period of time--a disability, for example.

The other thing--and this is a big topic--I often hear from our retired users who are active hands-on investors themselves, but they say their spouses aren't highly engaged investors. So, as they are getting into retirement, they start thinking about, "How can I build a portfolio that my spouse could easily oversee if he or she needed to do that?" So, that's another key advantage to reducing the number of holdings.

And finally, I would say that if you are able to get rid of some of these more narrowly focused holdings, you're probably able to reduce the angst associated with your portfolio. So, if you don't have these holdings that have extreme highs and lows, you will just have less hand-wringing over that portfolio. You will maybe hold some of those investment types within more broadly diversified funds, but you're not holding them as standalone offerings. They'll just tend to provide you a little more peace of mind.

Stipp: You'll have a smoother ride, and you won't see all those bumps in those really niche type of holdings. So, what we're talking about here are in-retirement portfolios, suggestions for folks who are in the retirement years, not necessarily folks before retirement.

Benz: That's exactly right. These are people who are already in retirement, getting ready to spend their portfolios.

Stipp: The first investment type that you think investors should really think hard about before they get into is foreign-currency-denominated bonds. A lot of investors have looked beyond the typical bond fund as yields have been so low. But you say that you should really think twice if you're a retired investor before going into these foreign-currency-denominated bonds.

Benz: The key reason is volatility, Jason. Our colleagues here at Ibbotson Associates have looked hard at this question, and they are very much for that foreign-currency diversification for people who are in accumulation mode. But as people get closer to retirement, they think that they should back off the foreign-currency exposure. The reason is that you hold bonds to act differently than your equity portfolio--when, in fact, foreign-currency-denominated bonds tend to have a lot more volatility than, say, core U.S.-dollar-denominated bonds.

So, you want to be careful before adding foreign-currency-denominated bonds. I looked at PIMCO's hedged Foreign Bond Fund versus its unhedged product. The volatility on the hedged version is substantially lower. It has had a standard deviation of 4 over the past decade versus 9 for the unhedged version. So, that's a huge difference in volatility.

I think you might reasonably own some foreign-currency-denominated bonds in a broadly diversified fund. Maybe you might hold Loomis Sayles Bond or something like that. But I think that dedicated foreign-currency-denominated bond fund probably isn't a necessity for most retiree portfolios.

Read Full Transcript
{1}
{1}
{2}
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
{1}
{5}
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article
    Username: