Author Topic: Investing options for risk-adverse retirees?  (Read 379 times)

lifejoy

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Investing options for risk-adverse retirees?
« on: September 06, 2017, 05:14:25 AM »
My parents recently inherited some wealth.

They are in their late 50s, have been retired for five years and both have pensions.

Currently they are following the "random walk down Wall Street" philosophy and are heavily invested in ETFs. But now they have more money to contend with and they'd like to diversify - unless it makes zero sense to do so. My DH asserts that investing in the world market *is* diversifying.

Thoughts? Resources? Thanks in advance!

It is prudent to note that my parents are the sort that would lose sleep if the market crashed. They are risk-averse need some more stability at this point. Also, we are Canadian if that makes a difference for the advice offered.

Thank you!

MDM

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Re: Investing options for risk-adverse retirees?
« Reply #1 on: September 06, 2017, 06:13:19 AM »
Currently they are following the "random walk down Wall Street" philosophy and are heavily invested in ETFs. But now they have more money to contend with and they'd like to diversify - unless it makes zero sense to do so. My DH asserts that investing in the world market *is* diversifying.
Seems your DH is wise.

The "ETF" descriptor alone doesn't tell enough.  Which ETFs are they using?

See Three-fund portfolio - Bogleheads, noting the reference to Asset allocation - Bogleheads, for some thoughts, then Canadian versions of lazy portfolios for some specifics.

ooeei

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Re: Investing options for risk-adverse retirees?
« Reply #2 on: September 06, 2017, 06:27:24 AM »
Investing in the above recommended index fund ETFs is usually pretty damn diverse. People have this inherent instinct that only having 1-3 "things" means they're not diverse, what they're not taking into account is those 1-3 things were designed to be diverse. Don't think of it as owning one index fund, think of it as owning little bits of hundreds of stocks. I know a surprising number of people who invest in every single fund in their 401k to be "diverse" and have no idea what any of the funds are. They just figure more funds = more diverse.

Are they trying to diversify for a situation where Samsung, Exxon, 3M, Goldman Sachs, and the rest of the 100s of publicly traded companies in their portfolio all fail at the same time? If so, I'd suggest a large garden and a water well, with maybe a couple of guns and some ammo.

lifejoy

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Investing options for risk-adverse retirees?
« Reply #3 on: September 06, 2017, 07:11:38 AM »
You guys are pretty much backing up everything my (admittedly!) smart DH says :)

But for my folks, for them it still *feels* like they only have their eggs in one basket.

ooeei

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Re: Investing options for risk-adverse retirees?
« Reply #4 on: September 06, 2017, 07:38:14 AM »
You guys are pretty much backing up everything my (admittedly!) smart DH says :)

But for my folks, for them it still *feels* like they only have their eggs in one basket.

They already have pensions and ETFs. They're safe from stock market fluctuations with the pensions, and safe from that single company's failure with the ETFs. The only situation where both of those fail at the same time is either incredibly bad luck, or the end of the modern economy. If they really want to hedge their bets they can buy an annuity, although it'll cost them quite a bit in returns. Basically it's buying another pension from another source, in case their primary one fails.

In reality they can't be 100% safe, that's why I made the (admittedly sarcastic) guns and garden comment. I think probing them more to find out what they're worried about happening will tell you what direction to take. If their only answer is something like "it's just not diverse enough" you need to probe more, because that's not a good answer. It might just be they don't understand their investments. If they are legitimately worried about an entire collapse of the economy, I'd actually recommend the guns/garden to them. There's no normal investment that is safe during a complete economic collapse. They could buy gold, but that's pretty easy to steal and has a poor rate of return.
« Last Edit: September 06, 2017, 07:40:14 AM by ooeei »

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Re: Investing options for risk-adverse retirees?
« Reply #5 on: September 06, 2017, 07:55:52 AM »
Don't know if this would help or not, but I'd encourage someone trying to get a handle on their ability to bear risk to fool around with Portfolio Visualizer's backtest portfolio tool:

https://www.portfoliovisualizer.com/backtest-asset-class-allocation

Look at different portfolios, including something that resembles your parents', and see how they think about the fluctuations in portfolio values. (They'd want to focus on the portfolio growth chart, I think... making sure they understand that when the line drops by 20% some quarter that means their (say) $500,000 is now worth only $400,000.)
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lifejoy

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Re: Investing options for risk-adverse retirees?
« Reply #6 on: September 06, 2017, 08:00:48 AM »
I think my parents would be happy to put some money in an investment that has less return but more security. Bonds? High interest savings account? DH tried explaining how versatile and well/rounded ETFs actually are... but I think you're right - their understanding of what they have is not up to snuff just yet.

Also they don't have many friends investing this way. They say to me, "If this was such a smart way to do it, why isn't everyone doing it?"

>.< lol

lifejoy

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Re: Investing options for risk-adverse retirees?
« Reply #7 on: September 06, 2017, 08:02:17 AM »
You guys are pretty much backing up everything my (admittedly!) smart DH says :)

But for my folks, for them it still *feels* like they only have their eggs in one basket.

They already have pensions and ETFs. They're safe from stock market fluctuations with the pensions, and safe from that single company's failure with the ETFs. The only situation where both of those fail at the same time is either incredibly bad luck, or the end of the modern economy. If they really want to hedge their bets they can buy an annuity, although it'll cost them quite a bit in returns. Basically it's buying another pension from another source, in case their primary one fails.

In reality they can't be 100% safe, that's why I made the (admittedly sarcastic) guns and garden comment. I think probing them more to find out what they're worried about happening will tell you what direction to take. If their only answer is something like "it's just not diverse enough" you need to probe more, because that's not a good answer. It might just be they don't understand their investments. If they are legitimately worried about an entire collapse of the economy, I'd actually recommend the guns/garden to them. There's no normal investment that is safe during a complete economic collapse. They could buy gold, but that's pretty easy to steal and has a poor rate of return.

Would it surprise you to learn that they *do* have guns and gardens? ;)
And my dad is buying a generator...

They're not preppers but they are EXCEPTIONALLY careful people. And hey, it let them FIRE early, so power to them!

lifejoy

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Re: Investing options for risk-adverse retirees?
« Reply #8 on: September 06, 2017, 08:02:42 AM »
Don't know if this would help or not, but I'd encourage someone trying to get a handle on their ability to bear risk to fool around with Portfolio Visualizer's backtest portfolio tool:

https://www.portfoliovisualizer.com/backtest-asset-class-allocation

Look at different portfolios, including something that resembles your parents', and see how they think about the fluctuations in portfolio values. (They'd want to focus on the portfolio growth chart, I think... making sure they understand that when the line drops by 20% some quarter that means their (say) $500,000 is now worth only $400,000.)

Thanks! I'll check that out :)

ooeei

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Re: Investing options for risk-adverse retirees?
« Reply #9 on: September 06, 2017, 09:00:03 AM »
Would it surprise you to learn that they *do* have guns and gardens? ;)
And my dad is buying a generator...

They're not preppers but they are EXCEPTIONALLY careful people. And hey, it let them FIRE early, so power to them!

A bit surprising, but great! I think trying to educate them on what they can/can't expect out of various investments is a good idea. Maybe they'd like a bit of gold for peace of mind, and are willing to accept the little/no return on it to get a good night's sleep.

jlcollins stock series is a great starting point if they're readers.