Curly’s Advice: The “One Thing”

“The one thing” is a reference to a line in the movie City Slickers. Curly, played by Jack Palance, asks Billy Crystal’s character if he knows the secret to life. As they continue to ride their horses along the big-sky Colorado backdrop, Billy says “no.”  Curly raises his index finger and says, “One thing,” meaning if you stay true to that “one thing,” you’ll have life figured out.

When Billy asks what the one thing is, Curly tells him he needs to discover that for himself.

While I don’t have any existential insights about your personal “one thing,” I can provide some help identifying that one thing when it comes to an effective investment portfolio for retirement income.

You need to identify the role your investment portfolio will have within the context of your overall retirement income framework. Investing for retirement income is about aligning your entire asset base with your financial goals, not just your investment portfolio. You can then identify what portion of your goals your portfolio will be responsible for. As a general rule, you want to align your discretionary and legacy goals with your diversified portfolio and essential expenses with more reliable sources of income.

This also provides insight to your asset allocation. Your retirement portfolio is an exercise in exposing your portfolio to the various dimensions of compensated risk factors across the investable universe. We’ll talk more about this down the road.

But as you begin to learn about risk, you’ll find that the “one thing” that will serve your portfolio well is your allocation of stocks and bonds. Again, to echo Curly’s advice, this is by far the most important decision you’ll make about your investments. Understanding this is your “one thing.”

Your stocks and bonds do different things in your portfolio. The purpose of bonds in your investment portfolio should be to mitigate the stock risk your exposing yourself to.

We frequently see many investors mismanage their investment allocation because they lack this foundation. For instance, they lose sight of the purpose of their bonds in their investment portfolio. They slowly begin taking on riskier bonds in hopes of getting that extra yield for more “retirement income.”

Over time, this will likely work against you during market downturns, because what you thought of as safe holdings, aren’t as safe as you thought. So, you’re stuck with bonds, which have lower returns, that don’t provide the security you were looking for after all. You’re hit with a double whammy.

We will discuss the importance of asset allocation further in future articles. Stay tuned.

 

Adapted from an article by Bob French, CFA at Retirement Researcher.