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Retirement Investors are finally getting good returns from the "safest assets in the world" For a long time, cash had so little returns that baby boomers had no choice but to invest more in riskier stocks as they approached retirement to get the yields they needed. But since the Federal Reserve started jacking up its benchmark interest rate , that’s shifting and cash investments are seeing some of the largest yields in more than decade. The average online savings account return is now 4.39%, according to DepositAccounts.com . The average yield on an online, one-year certificate of deposit, or CD , is now 5.10%, while the one-year Treasury bill is yielding 5.46%. Financial advisers are taking that into consideration as they help manage the portfolios of their retired clients and those closing in on retirement. But while many expressed enthusiasm for the new options that cash investments offer, these advisers also cautioned that stocks still play an integral part in an investor’s retirement portfolio. "While short-term investment products, like money markets and CDs, can play a role in portfolios, it may be difficult to build a longer-term portfolio allocation around them as short-term interest rates can fluctuate as monetary policy changes," said Adam Reinert, chief investment officer and COO at Marshall Financial Group. "Though with higher interest rates on intermediate-term debt, investors may not have to be as dependent on equity allocations to do as much of the heavy lifting for portfolios as they did from 2010-2019." What are they buying and for whom? Jordan Benold, a financial planner from Benold Financial Planning, said his firm previously advised clients who were in retirement or near it to invest in "riskier income assets like preferred stock, corporate bonds, and REITs to increase their income. "Now, he is recommending six-month Treasury bills "simply because they pay the most.""There is no reason to take that risk when one of the safest assets in the world is paying 5.5%," he said. "Also, I am having my younger clients invest a small portion into T-bills for their bond allocation. This is not a large percentage, but once again, it will provide the insurance they need if the stock market decreases and will pay a high coupon. "Certificates of deposit, in particular, can benefit near-retirees and current retirees alike. Malcolm Ethridge, executive vice president at CIC Wealth, noted that CDs with six- to 12-month maturities are a strong investment for retirees who have already begun drawing income from their portfolio. Pre-retirees, concerned that they might be retiring into a recession, can "de-risk their portfolio" by moving a couple years' worth of expenses into cash via a brokered CD, he said, allowing them "to weather any potential storm while entering retirement."We have been buying more brokered CDs on behalf of our clients in the last seven or eight months than at any other period in my career," Ethridge said. In the last year and a half, Holzberg Wealth Management has been shifting client portfolios to CD ladders with minimal risk. CD ladders are when financial planners use multiple CDs with different maturity dates. If interest rates continue to rise, the firm plans to reinvest the near-term CD funds into ones with longer maturities, which increases the overall yield, said Marcus Holzberg, a certified financial planner at the firm. "If interest rates fall, the same strategy can continue or be redeployed to other market opportunities," he said. "In other words, it's a win-win." What about stocks? Stocks, though, still play an important role in portfolios. For roughly the last 40 years, net growth from cash was reduced to zero after subtracting inflation and taxes, founder and principal at Daniel J. Galli & Associates, said. "In order to have real buying power growth, dollars need to earn more than what they can in cash," he said. "Historically stocks have delivered this ...The price we pay is volatility. But over long periods of time stocks have generally delivered real buying power growth." Jon Ulin, CEO of Ulin & Co. Wealth Management, also pointed out that the Federal Reserve will eventually cut rates — though maybe not for a few years given this week’s Fed meeting — bringing them back to where they began last year. "While it may be sensible to position a couple years of cash reserves in low-risk, high-yield cash instruments and buckets," he said, "investors will better benefit over time by staying diversified, rebalancing, and buying low into stocks and bonds for their long-term retirement accounts and not give up potential gains around the turnover of the next bull market." Risk-free can still be risky Cash also offers fewer benefits in the long term. "Time is a crucial factor when considering long-term investing, whether you are in or nearing retirement," Ulin said. "The longer your investment horizon, the more you can benefit from the market's historical tendency to recover from declines and deliver substantial returns over the long haul." Folks can also underestimate the length of their retirement and subsequently the need for the historically bigger returns stocks deliver over cash. "The time horizon for a retiree is still 20-30-plus years. In today’s interest rate environment, if you were to construct a 20/80 portfolio in fear of equity risk, then any gains you’d have in the fixed-income portion would just be eroded by inflation," said Nate Creviston, Manager at Capital Advisors Ltd. "You still need to have a balanced approach to your asset allocation through retirement." Stocks are also up year to date. The S&P 500 index (^GSPC) is up 12.5%, while the Nasdaq (^IXIC) has increased 26.2% since the beginning of the year. Consequently, folks should weigh the risks and benefits of cash, said Constantine Tsantes, a financial planner at Cetera Advisor Networks LLC. "In the long run, you are only going to miss out on the upside, like what we have seen in equities this year," Tsantes said. "If retirement is around the bend, sure we can allocate to more fixed-income investments, but there is really no need to keep more than two to five years of expenses set aside in those investments."

Pay down your mortgage. Keep a 60/40 stock-bond portfolio. Some money rules are meant to be broken. Published: May 26, 2023 at 7:25 a.m. ET Morey Stettner

How Model Portfolios Work in The Real World: Advisors' Advice Written by: Dinah Wisenberg Brin Model portfolios continue to gain ground with financial advisors, who can select from a growing number of models to help manage their clients’ investments. Almost $350 billion in assets sat in model portfolios as of March 2022, a 22% increase over the prior nine months, Morningstar reported in June. The research firm’s database covered more than 2,500 models as of November 2022, more than double the amount two years earlier. ThinkAdvisor recently asked advisors to tell us how model portfolios fit, or don’t fit, into their businesses. We asked: How and why do you use model portfolios in your business? Do you employ one family/one product group/one series with different asset allocations? Or a wide variety of them? What are the pros and cons of model portfolio use? Clearly, there’s no one answer or approach that covers all practitioners. Here’s what five advisors told us about their work with (or without) model portfolios. Erik Nero, founder and president, First Step Wealth Planning LLC: I use them for pretty much all of the implementation for the investment management for my clients. I say almost all simply because for client portfolios that need a little more customization specifically for non-IRA or retirement type accounts, I’m going to work on that a little more closely with the client to take a little bit more action between the client and myself to get that implemented. But for portfolios that are typically retirement-based and are for a longer-term time horizon, models work perfectly. They are scalable, they have the opportunity to leverage tremendous resources on behalf of whatever firm is offering them, and then the trading resources are second to none. So for small firms such as mine I’m able to leverage tools and resources that I ordinarily would not be able to gain access to with respect to the trading and implementation of these portfolios, and it gets done seamlessly. So it saves me time to help my clients on what really matters to them, which is how that money’s going to support their goals, dreams and aspirations, and I use a number of different types of providers. I’ve narrowed it down to three. There’s so many out there and at the end of the day it really comes down to asset allocation, and that’s going to drive the vast majority of the performance, and I like to have low-cost exchange-traded fund types of portfolios that are put in place. So I believe more passively but strategically indexing to the various aspects of the market so that my clients can participate rather than anticipate the market. The pros obviously are the scalability, access to the resources and the brain trusts of the firms that are putting them together so I can really leverage my time and resources. The cons are it may come down to one size fits all. I use a number of different types of allocations based upon time horizon and tummy tolerance that each client has, but it’s hard to use half sizes, if you will, with these types of portfolios. So it takes a little bit of creativity with respect to what types of models are going to be employed in which types of accounts to get to an allocation that’s going to be perfect for that client. Kyle Simmons, lead financial planner, Simmons Investment Management: I do use a model portfolio in my business. Many advisors outsource model portfolio creation to a TAMP (turnkey asset management program) or use one from a model marketplace provided by their custodian. I personally have my own model portfolio that I review monthly and make changes to maybe once or twice a year. Having a model portfolio allows me to actualize my investment philosophy and best investment ideas into a single cohesive portfolio and implement it across my entire client base. It’s important that advisors don’t get too attached to their model, as clients will come in with legacy holdings and you want to be able to make investment decisions with tax consequences in mind. For every incoming holding, I evaluate the cost basis and assign an equivalent holding in my model. Sometimes that legacy holding will be a highly appreciated individual stock that selling would have serious tax consequences. Other times the holding will be a low-cost ETF that’s equivalent to a position in my model and it could make sense to continue to hold that fund going forward. Another common deviation from the model is for clients with 401(k)s that have limited investment options. In these cases, advisors need to determine how they can implement their models within that limited subset of options. My model does tend to use ETFs from a single family (Vanguard), but it also contains funds from other families such as from iShares and SPDR. I think it’s important to be open to the best options for the sectors you want to target, but also understand that certain families tend to provide more value. The number one pro is the ability to implement your best ideas across an entire client base. For those that outsource, I’m sure they appreciate taking part of the investment management piece off their plate in terms of the amount of research that is needed to do a good job as a fiduciary. The con is simply the potential to be over-reliant on a model and selling client assets just to move them into it. If this happens, the client’s investments could be jerked around and result in significant taxes and trading costs, which reduce their overall performance. Jan Pevzner, principal, Gotham Block LLC: A model portfolio is a good starting point for a "generic" client. If you don't have an in-house investment management team, starting with a model portfolio will save you a lot of time. Once you have a model, you can customize it by adjusting the specific exposures built into the model to the household you are working with. Suppose your client is in tech and has a significant employer equity grant . It could be options, RSUs (restricted stock units) or other forms of equity. In that case, reducing the portfolio's allocation to technology might make sense to balance off the overall exposure. I work with several models from the same provider, Vanguard, which offers different series that each can be adjusted for a client's risk tolerance to produce a custom model. The model's choice depends on the portfolio's size, the degree of customization required, and the location of the assets. A simple model with fewer components is best for clients with simple portfolios. Other clients might need more complex allocations with finer control over the factors they are exposed to. For example, two separate ETFs for value and growth instead of single equity ETF will let you increase your exposure to value stocks. The pros are that they save time and allow you to deliver quality products to your clients. The cons are that those model portfolios are generic and inflexible and don't consider a specific client's financial situation. Jon Ulin, CEO of Ulin & Co. Wealth Management: For the past two decades, our independent advisory firm has provided clients with a fee-based, model-driven approach to asset management with a fiduciary focus. Our clients pay for and expect us to deliver management of their portfolios in addition to comprehensive planning, both not typically provided by advisors outsourcing management to Robo-advisors, back-office wirehouse offerings or third-party managers. Do you employ one family or series? It is prudent to research, screen and utilize investments across different companies as there are over 10,000 different mutual funds, ETFs and index funds across a vast array of asset classes, sectors, styles, countries and factors. In the active management space, it can be difficult to find companies where every manager in their provided line up meets or exceeds their benchmarks. ... In the passive index and ETF space, different firms may offer variations of various benchmarks, sectors or styles that may include unique strategies such as smart-beta, low-vol, equally weighted and socially responsible funds that may additionally involve a combination of human or quant overlays. Pros and cons of model portfolio use? Strategic model portfolios provide a structure for asset allocation and diversification like building a foundation for a house based on each individual clients' specific risk tolerances and financial goals to help minimize volatility and provide a smoother, more consistent ride over time. It is a more pragmatic, efficient and scalable tactic for advisors to utilize model portfolios with active and passive fund strategies for long-term investors rather than taking the time or having the know-how to research and trade individual securities while attempting to create customized portfolios for each client. Caveat emptor when investing on your own, or when partnering with an advisor utilizing robo-platforms, “back office” wirehouse model offerings or third-party model portfolio managers. Many of these programs have been incepted just over the past 5-10 years and may not have a long track record or really been tested through major crashes recessions like the dot-com or Great Recession crash. At the same time, many of these new programs may provide a better approach than doing it yourself or in some cases, a less experienced advisor. Nate Creviston, Manager, Wealth Management and Portfolio Analysis, Capital Advisors Ltd.: We do not use model portfolios so hopefully this can offer some insight to the other side of the question. We believe that each client deserves a completely customized portfolio that is unique to their needs, goals, risk tolerance and risk capacity. A limitation to this practice is that this is a much more time-intensive portfolio management style as we can’t complete large block trades, or have the portfolio managed by a robo-advisor, but we believe that the client deserves a unique portfolio. A downside to the model portfolio is the lack of tax awareness. Over the past couple of years we were able to tactically tax-loss harvest in our accounts without initiating large block trades that might adversely affect a subsection of our client base. For example, if you have two clients who own the same stock, but one bought it at $50 and the other bought it at $100, and the stock is currently trading at $75, then the same tax loss harvesting trade cannot be done in both accounts. In most model portfolios, you would need to decide whether to execute the trade for both clients or for neither client; typically, these choices are mutually exclusive. It often occurs where you have a client with a large real estate portfolio outside of their investment accounts for example. We believe that needs to be taken into consideration when constructing that client's portfolio. In a model portfolio, you still might allocate 2%-5% into REITs due to their risk tolerance and time horizon without considering the overexposure to real estate both the private and public sector. In that circumstance, we would tactically under allocate their real estate exposure in their investment accounts.

Stocks are falling amid tensions between Russia and Ukraine. Experts say stay the course. PUBLISHED TUE, FEB 22 202212:17 PM ESTUPDATED TUE, FEB 22 20222:23 PM EST Carmen Reinicke @CSREINICKE U.S. stocks are slipping as investors watch tensions between Russia and Ukraine rise. The Dow Jones Industrial Average fell more than 270 points Tuesday as traders weighed how the situation will impact the global economy. The S&P 500 Index fell about 0.6%, and the tech-heavy Nasdaq Composite traded down nearly 1% around midday. The Russia-Ukraine conflict has been a source of major market pressure recently, spurring back-to-back losing weeks on the major averages. While this kind of stock price action can be nerve-wracking for investors, especially those near or in retirement, financial advisors generally recommend staying the course through market volatility. Volatility is normal All investors should accept market volatility — which is relatively common — as a normal part of the process of investing and the best way to outrun inflation, said certified financial planner Brad Lineberger, president of Seaside Wealth Management in Carlsbad, California. “Embrace the volatility, because it’s why investors are getting paid to own stocks,” he said. This means investors should stay calm even through extreme movements. While stocks always move up and down, long-term market returns are still based on the same things: dividend yields, earnings growth and change in valuation, according to Zach Abrams, a CFP and manager of wealth management at Capital Advisors Ltd. in Shaker Heights, Ohio. Movements up and down can also be a good time to review your asset allocation. If you’re worried about a big drop, you could rotate part of your portfolio into some less-risky stocks to protect from a potential market correction, which is a drop of more than 10%. Opportunities arise when stocks fall When stocks fall, it can also be an opportunity to buy more and set yourself up for future gains. This is because when stocks decline from recent highs, they’re trading at a discount and will likely recoup losses at some point. Continuing to put money in the market when it’s down as opposed to selling is a great way to make sure you don’t miss out on a reversal. Data shows that selling when the market falls can take you out of the game for some of the strongest rebounds. For example, if you missed the best 20 days in the S&P 500 over the last 20 years, your average annual return would shrink to 0.1% from the 6% you’d have earned if you’d stayed the course. Be prepared for emergencies Of course, even if you know that stock market volatility can benefit you in the long run, financial advisors still recommend having a cash emergency fund on hand so that you can make it through a market meltdown without selling. This is especially important for retirees. If the stock market falls, it’s better to spend the money in your emergency fund than sell assets at a loss that can’t be recouped, according to Tony Zabiegala, chief operations officer and senior wealth advisor at Strategic Wealth Partners, an Independence, Ohio-based firm. This also keeps stock investments in the game for big turnarounds, which generally come shortly after market corrections or even smaller dips. For example, an investor would have needed only three to six months of living expenses in an emergency fund to avoid taking losses during the March 2020 meltdown, Lineberger said. This approach would also have kept investments in the market for the record-breaking rally stocks enjoyed after the pandemic slump.

In the immediate wake of the worst year for balanced portfolios since 2008 and the worst year ever for bonds, and against the backdrop of a looming recession, investors are once again weighing their options regarding allocations to cash. Despite wide-ranging bullish outlooks for the 2023 that cite slowing inflation and likely just one more interest rate hike, the reality of economic uncertainty combined with money market yields reaching 4% at some online banks has made cash a tempting alternative to risk assets. “The chaos of the last 12 months has clients asking whether or not they should move to cash or into more conservative investments,” said Eric Amzalag, founder of Peak Financial Planning. Amzalag said the growing talk of recession has not helped his efforts to keep clients focused on longer-term investment goals. “In response to the chaos of the last 12 months, I have taken a more active management position within clients’ accounts,” he said, with “more proactive harvesting of gains in clients’ winning positions and redistributing that periodically to opportunities that have gotten cheaper over the past 12 months.” Amzalag has also embraced a more conservative allocation strategy that is “heavily positioned in cash and short-duration U.S. government bonds.” “We are very underweight equities and plan to redistribute profits from our longer-duration bond positions into equities as bonds go up in value and equities go down in value,” he said. For Dennis Nolte, vice president of Seacoast Investment Services, loading up on cash is not new to 2023. “We’ve been 35% to 50% in cash most of the last two quarters,” he said. “Clients are absolutely not committing new capital to equities or bonds, but certainly are paying attention to what is happening with their cash.” Nolte cited clients recently asking about getting a 5% yield for a 15-month certificate of deposit or wanting to be invested only in short-term Treasuries. “People are yield-shopping for their cash and feeling no pressure to add risk right now,” he said. “We agree with them.” But even as cash finished 2022 as the second-best performing asset class behind commodities, some advisors are pushing back on the temptation to seek shelter. “It is reasonable for clients to hold cash for expected expenses over the next couple years given how close money market rates are to short-term bonds,” said Seth Mullikin, founder of Lattice Financial. “However, it does not make sense to hold cash with the intention of timing the market.” Nicole Wirick, founder of Prosperity Wealth Strategies, isn’t buying into the instinct to rush to cash and the philosophy that investors “need to do something to fix the situation.” “It’s our human nature to want to solve problems, however, this basic human tendency can be destructive when it comes to investing,” she said. “I use this opportunity to pause and remind clients that volatility is a normal and expected part of the investing. I then refocus the conversation on long-term goals and illustrate how short-term, emotion-driven reactions to the market can derail a disciplined long-term plan.” Nate Creviston, Manager at Capital Advisors Ltd., takes the approach of trying to keep clients looking forward instead of back, but keeps an eye out for cash management opportunities if that’s the only place clients feel comfortable in this market. “Our clients are not moving to cash; if anything, now could be an advantageous time to buy stocks,” he said, citing the stock market’s history of strong rebounds. “The returns after 25% market corrections average to be up 27% after one year, up 45% after three years, up 93% after five years, and up 238% after 10 years.” Of course, for those clients who have shorter time horizons or just can’t stomach the current market volatility, Creviston said he would be allocating to Treasury bills. “If a client is set on moving to cash, we would currently be purchasing Treasury bills that are yielding between 4.3% and 4.5% for a two- and three-month maturity,” he said. “This is far more yield than you’ll find in a traditional bank account or most online high-yield savings accounts.” https://www.investmentnews.com/with-yields-on-cash-climbing-advisors-struggle-to-keep-some-clients-in-stocks-232968