The 'Most Important' Strategy for Retirees Now

As McCormick points out, confronting sequence risk and dialing back market risk overall does not imply a 100% pivot away from equities, but it does raise the question of whether a traditional 60/40 portfolio of stocks and bonds is the most sensible approach.

“Even as a bond guy, I would be hesitant to say many retirees should pivot to a portfolio that is all bonds,” McCormick says. “That kind of thinking has evolved, especially as people benefit from greater longevity. Some proportion of equities, and especially dividend-paying equities, are likely going to be useful.”

The key to success, both agree, is to avoid a greedy or reckless perspective — and to set realistic expectations for lifestyle and income needs that prevent the need to stretch for yield.

Prepare Now for Stress Later

According to McCormick and Wander, many investors in 2023 are focused too much on the narrow question of whether the U.S. and global economies are heading into a recession.

“We are constantly asked this question about whether we are entering a recession or not, and if so, when?” Wander says. “In my opinion, that’s too narrow a question. I think it’s wiser for long-term investors to not view this as a binary thing. It’s wiser to think in terms of a range of possible outcomes in terms of economic growth or depreciation.”

While McCormick and Wander agree the U.S. and global economies are clearly slowing, it’s tough to say today whether a recession will occur or whether a soft landing is possible. A shallow recession could occur, or there could be a surprise turnaround that sees growth reinvigorated in the months ahead, though that outcome is less likely.

“The more important thing for retirement investors to do, rather than focus on the technical occurrence of recession, is to prepare their portfolios for ongoing stressors,” McCormick advises. “It takes poise and often a great deal of patience to invest in a moment like this, but there are attractive opportunities, especially in the Treasury markets.”

Don’t Forgo Duration

During the webinar, the two bond market experts echoed calls from other investment professionals for retired investors to consider locking in higher yields for longer — even as the yield curve remains slightly inverted.

“Another question I often get is why people would want to buy longer duration Treasurys while yields on the two-year are higher today,” McCormick says. “They assume it’s better to get the higher rate on the shorter bond, and then they will just buy more bonds later once the short-duration bonds mature.”

According to McCormick and Wander, there are a few mistakes in this style of thinking. First, there is no guarantee at all that rates will remain this high in two years’ time, and second, investors who shun duration are ignoring the potential price appreciation of long-dated bonds that comes about if and when yields start to come down.

“To put it simply, if you are only on the short part of the yield curve today, you are actually missing a lot of return opportunity,” McCormick says. “So, advisors and their retiree clients should also keep a focus on longer-term maturities, even if the yields are a bit lower.”

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