17
Morningstar FundInvestor
May 2
013
Here’s the trade-off. The higher the amount of with-
drawals I want to take now, the more I have to
understand that that will lower the amount of growth
I can expect going forward in my portfolio. And I
really have to think about that.
Benz:
Let’s talk about what retiree fixed-income port-
folios should look like today.
Ameriks:
There is a lot more that is similar to the
process that you went through in accumulation than
is different. And as a retiree, when you’re building
a portfolio you’ve got to think about asset allocation
first: How much risk am I able to tolerate in the
context of the entire portfolio, and what rate of return
am I trying to target out of that and operate on
that axis.
We hear that interest rates are destined to go up.
Well, nobody knows that for sure. People have been
saying that for several years now, and it hasn’t
materialized. It may. That risk is real. But I would also
say, again, focusing on one dimension is almost
always a mistake.
Yes, there’s a risk that interest rates will rise. There’s
also a risk the stock market will fall. And bonds are
in your portfolio not because you expect them to
provide great market-beating returns but to provide
protection in exactly that scenario. So, for that
purpose, bonds still make as much sense even though
the rates right now are unprecedented in terms of
how low they are.
Benz:
Harold, would you say the complexion of your
clients’ fixed-income portfolios has evolved a little bit
as the prospect of rising rates has become a little
more significant?
Evensky:
We’ve been fairly defensive for years, as
John just said, in anticipation of rates going up,
and they didn’t. When I say defensive, in a normal
portfolio we would have an exposure in interest
rates measured by what’s called duration of around
five years, so sensitivity is fairly modest and we
would be in high-quality [assets rated] A or better.
We’ve [had a duration of] around
3
.
5
years and
been in
AA
[assets] for probably four or five years.
In hindsight, we gave up some return. So, that’s
one of the major ways of protecting against rates.
The other one is: We use funds, but we ladder. We
have roughly a third in short-term, one- to three-year
bonds, and a third in short/intermediate three- to
five-year bonds, and then a third in five- to
10
-year
bonds. The only change we’ve made there is we’re
concerned that rates will go up. We don’t know when.
But we think the short end may go up a lot faster
than the intermediate. So, we’ve slightly moved a
little bit out of the one- to three-years and increased
the three- to five-years and five- to
10
-years.
Benz:
One prescription that I hear from a lot of
investors is, ”Forget funds, I am going to invest in
individual bonds, hold them to maturity, and not
worry about this interest-rate problem.” John, you’re
laughing. Why is that not a good idea?
Ameriks:
Well, we’ve talked about this with clients
for a long, long time, and for most individuals, what
they end up with when they build a bond ladder looks
an awful lot like a bond fund, and usually they’re
doing it at expenses that are much, much higher than
what they would pay in a diversified fund or they’re
paying costs that they’re nowhere near as aware
of because of the lack of transparency that can exist
in the bond markets that are out there.
Evensky:
Basically, people fool themselves into
thinking somehow they’re eliminating risk by buying
and holding on to individual bonds. They are elimi-
nating one risk, and that’s if you give it to a manager,
to an active manager, they may do something wrong
and permanently lock in losses. Presumably, you’re
going to pick a manager that at least does as well as
a sort of buy-and-hold bond ladder. But if you’re
going to have a bond ladder and interest rates go up,
your portfolio value went down. It doesn’t matter
if you hold it to the end.
œ
Contact Christine Benz at
