Making the Most of Your Client's Money | November 2001 Making the Transition

Making the Transition: Making the Most of Your Client's Money

Back \| E-mail to a Friend \| Print

The stock market and real estate are the best equity investments.

By Donald Ray Haas, CLU, ChFC, CFP, MSFS

"Asset allocation" is industry jargon for spreading money around in your client's savings and investment portfolio. A diversified portfolio is key to potential growth and must provide some safety of capital. Proper diversification is just as important for both pre-retirement wealth accumulation as it is for post-retirement growth.
"Be a long-term investor" has become almost trite financial advice. However, it is the key to wealth accumulation.

After your client has accepted this general concept, the natural course of action is to allocate a greater amount of his money to investments that offer the greatest growth potential. Equity investments are the place to be. I view the stock market and real estate as the two best equity investments-even in this volatile market.

Most stockbrokers recommend a 60/40 ratio of stocks to bonds for a client's portfolio. This standard ratio is prudent only when your client is much older-about age 90-and thus will spend a short time in retirement. For Baby Boomers, many of whom have turned 50, it will probably be closer to age 100 before a 60/40 ratio makes sense.

A missed investment opportunity is simply a waste.

For the past 25 years, I have recommended that my clients have a 90/10 percent pre-retirement asset allocation-90 percent in a combination of stocks and real estate (both commercial and personal use) and 10 percent in fixed-dollar investments like bonds, CDs and money markets.

Remember that at age 65, the average life expectancy is 22 years (age 87), and for at least one member of a couple aged 65, we are looking at an average life expectancy of 93. Also in this case, average means that half of the survivor is still "alive."

Get your clients to think long term-even on their retirement dates. In the 1930s, when the average life expectancy was 63 and half of those 63 years were deflationary, a 60/40 ratio made some sense, but it does not today.

On a client's retirement date, I recommend a change to an 85/15 ratio because a little more liquidity provides an increased comfort level. Throughout the remainder of your client's life, the fixed-dollar portion should slowly increase. Each client's situation is different, which includes risk tolerance. The amount of wealth may also vary, but the ratios illustrated in Table 1 generally provide for allocation that is designed to produce growth and flexibility.

In the future, for Baby Boomers, this reallocation from equity to fixed dollars should proceed at an even slower pace because their life expectancy will probably increase and living to age 110 could become more common.

Fixed-dollar investments satisfy the need for emergency cash reserves and provide money for investment opportunities. It is a terrible thing when the right investment presents itself and capital is not available. A missed investment opportunity is simply a waste.

Stock market investments might be in the form of individual stocks, mutual funds, variable annuities or variable (universal) life insurance. I believe the majority of clients are much better off by not trying to manage an individual stock portfolio. Therefore, I almost always recommend the other vehicles.

Real estate is a feasible form of equity investing for most people. In this category, I include a client's equity in his home, vacation home and vacant lots, as well as commercial real estate, regardless of the form of ownership, such as REITS, partnerships or direct ownership.

Next month we will discuss the future's largest financial market: asset allocation for individual retirement accounts.

Donald Ray Haas, CLU, ChFC, CFP, MSFS, of Southfield, Mich., has been an insurance agent and financial consultant for 45 years. He can be reached at 248-213-0101 or at Donaldhaas@aol.com.

Top | Back | E-mail to a Friend | Print

If you are not receiving your magazine or need to change your address,
please contact membersupport@naifa.org.

For comments on articles on this website contact mleyes@naifa.org.