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Whenever the stock market starts to get jittery, retirees and other conservative investors start wondering if they should head for the sidelines. Yet if you put together the right portfolio, you don't have to be afraid of your stocks -- you just have to be ready and willing to ride out the inevitable downturns that you'll face at various times during your retirement.

The right retirement portfolio
In this month's brand-new issue of the Fool's Rule Your Retirement newsletter, which is available this afternoon at 4 ET, Foolish mutual fund expert and financial analyst Amanda Kish helps out lead advisor Robert Brokamp by taking a look at conventional wisdom on the right asset allocation for retirees. In general, as you get older, your shorter time horizon warrants taking less risk with your portfolio, decreasing your allocation to higher-risk assets like stocks in favor of safer assets like bonds and cash.

The question, though, is exactly how much you should reduce your exposure. A study from the Putnam Institute earlier this year noted that in order to have the best chance of making your money last throughout your retirement while still giving you dependable income, the best stock allocation was between 5% and 25%, with 10% being the most common optimal figure.

Most advisors, however, believe that you should have a lot more of your money in stocks. Here are some reasons why:

  • Low stock allocations work great if you already have enough money set aside to take care of most of your needs throughout your retirement years. For most people, though, retirement saving hasn't been a top priority, and so making what savings you do have work as hard as possible for you requires taking on somewhat higher levels of risk.
  • Market conditions lately have turned the usual notions of "risk" on their head. With low yields on traditional bonds and negative real yields on inflation-indexed bonds, bond investments such as iShares Barclays TIPS Bond (NYSE: TIP  ) or Vanguard Total Bond Market ETF aren't likely to give you the income you need to live off your portfolio. Meanwhile, more than half of the 30 stocks in the Dow Industrial Average (INDEX: ^DJI) have projected dividend yields of 3% or more for the coming year, with General Electric (NYSE: GE  ) and Merck (NYSE: MRK  ) topping the 4% mark.

Moreover, with costs in retirement on the rise, it's helpful to have some sort of hedge against them. For instance, investing in health-care-related companies like Medicare supplemental insurance provider UnitedHealth or hospital operator Tenet Healthcare (NYSE: THC  ) may not exactly match up with whatever expenses you end up having to pay for your own health care, but at least you'll get to share in their profits if you own their stocks. Similarly, if you're aghast at the high cost of heating your home this winter, then at least owning Chesapeake Energy (NYSE: CHK  ) or Marathon Petroleum (NYSE: MPC  ) will put you partially on the more profitable side of that fence.

Getting it just right
In her article in the new Rule Your Retirement issue, Amanda puts out her own advice on how investors should handle the asset allocation question. Although she gives very specific pointers on where to put your money at various points in your life, I think the most valuable thing Amanda advises is to take the money you need for living expenses over the next five years and hold it separately, apart from your longer-term investments. By doing that, you won't feel as vulnerable to short-term swings in the market, because you'll know you already have plenty of cash set aside to cover immediate needs until the market rebounds -- even if that ends up taking years.

You can see the rest of Amanda's analysis, along with full reports from Putnam Institute and Russell Investments on the debate, at our Rule Your Retirement service. It's a subscription site, but a 30-day free trial gets you full access to the article as well as everything else the service has to offer.

If your portfolio is keeping you up at night, don't wait another minute: Take the steps you need in order to build the right portfolio for you. A little effort could have you sleeping a whole lot better.

Click on this link to start your free trial of Rule Your Retirement today.

Fool contributor Dan Caplinger could always use more sleep. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of UnitedHealth Group. Motley Fool newsletter services have recommended buying shares of UnitedHealth Group and Chesapeake Energy, as well as creating a diagonal call position in UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy won't go to sleep on you.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

10/24/2014 4:30 PM
^DJI $16805.41 Up +127.51 +0.76%
DOW JONES INDUSTRI… CAPS Rating: No stars
CHK $21.60 Down -0.19 -0.87%
Chesapeake Energy CAPS Rating: ****
GE $25.64 Up +0.20 +0.79%
General Electric C… CAPS Rating: ****
MPC $85.79 Up +1.26 +1.49%
Marathon Petroleum CAPS Rating: ****
MRK $57.61 Up +0.98 +1.73%
Merck & Co., Inc. CAPS Rating: ****
THC $58.22 Up +0.13 +0.22%
Tenet Healthcare C… CAPS Rating: **

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