Retirees need to “get comfortable” with less cash and less fixed income: Michael Crook
“Safety first is the first step” for retirees with a large chunk of fixed income and cash in their portfolios today, Michael Crook, chief investment officer of Mill Creek Capital Advisors, told ThinkAdvisor in an interview.
“It is a reasonable expectation that [such investors] will lose purchasing power over their cash and fixed income positions over the next five years, if not the next 10.
“Holding fewer fixed income securities because it won’t do much from a return standpoint,” recommends Crook, newly promoted to Deputy CIO, effective Dec. 31, 2021.
Mill Creek, an RIA based in Conshohocken, Pa., Manages $ 9 billion in assets for retail and institutional investors.
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Portfolios rich in fixed income “are not going to grow in value on an inflation-adjusted basis since inflation is quite high, but interest rates are very low,” says Crook, who has built an impressive career as an investment strategist.
He strongly recommends that retirees hold “safe assets to provide the stability they can count on when they need to spend.”
“They need to see if they can feel comfortable holding less than 40% cash and fixed income,” says Crook, who joined Mill Creek in 2020 after working at UBS Wealth Management, where he led the investment strategy team.
In the interview, he reveals his strategy of using a “buffer,” based on how much fixed-income retirees calculate they’ll need to spend each year, against a potential market downturn and recession.
Crook, previously an investment strategist at Lehman Brothers and Barclays, then discusses portfolio reallocation and the critical importance of a globally diversified equity portfolio to “help smooth the flow of returns over time,” emphasizes he does.
He also talks about the private debt portfolio Mill Creek opened this year to counter inflation and bond yields, which he describes as “extraordinarily low.”
Private debt portfolios, aka private credit portfolios, “seem to be kind of on the uptrend,” he notes.
ThinkAdvisor recently interviewed Crook, speaking by phone from Conshohocken.
By offering “personalized descent paths” for target-date fund investors, he argues that richer retirees with excess assets should start taking more risk in a separate “legacy portfolio” once they are over. they have passed the “danger period”.
That’s about 10 years into retirement without experiencing a “catastrophic result from a market perspective,” he explains.
Here are excerpts from our interview:
THINKADVISOR: How do you feel about rising inflation?
MICHAEL CROOK: We are not in a wage-price spiral. Overall, the US economy is essentially operating at full capacity.
So all of this excess demand has to show up in the form of inflation because there is no other place to go. But over time, it will work out on its own.
When do you think it will start to decrease?
We expect it to likely decrease over the next two to three years. If we look at five years, inflation will be much closer to what the Fed expects in the longer term.
What does this mean for retirement planning now?
For most people, this means that they really need to think about the right amount of cash and fixed income they have and make sure they don’t have too much.
It’s reasonable to expect them to have negative inflation-adjusted returns – they’re going to lose money.
They will lose purchasing power over their cash flow and fixed income position for at least the next five years, if not the next 10.
So this is a struggle for retirees because for many of them a large part of their portfolio is simply not going to grow in value on an inflation-adjusted basis since inflation is a bit high but the rates interest rates are very low.
How to position yourself then?
Safety first is the first step. Retirees need to have safe assets, something in their wallet that provides stability they can count on when they need to spend.
They need to see if they can feel comfortable holding less than 40% cash and fixed income.
Can you be more specific on how they can offset potentially negative inflation-adjusted returns?
Take some time to think about how much money – the fixed income securities – they are going to spend each year. That is, determine how much fixed income they need to have.
In my opinion, should be about five times how much money they spend in a year.
That way they will have a buffer if the market goes down and we go through a recession. They will know they will have five years of spending they can count on.
It creates a buffer that is needed to offset some of the headwinds – to have that safety margin built in and know that they might have to spend it if we go through a recession.
Please provide a hypothetical scenario.
If someone spends 5% of their portfolio per year, they could own 25%, a reasonable number. If they’re a little careful, it could be more than that.
But this is the right place to start.
This will be the most important thing they will do: just hold less fixed income, because it won’t do much from a return standpoint.
What is the next step ?
Reallocate assets. For most investors, this will be a portfolio of stocks of public companies.
I reinforce the importance of having a globally diversified equity portfolio because it is a risk consideration.
With this portfolio, retirees can reduce the risk of [investing in] individual countries and markets that [can] go through a period of decades without producing any returns.
It doesn’t have to be half American and half international. But having, say, 25 or 30% of their equity portfolio outside of the United States will go a long way in smoothing the flow of returns over time.
So the reallocation is basically having less money in fixed income and more in stocks? Are there any “side effects” to this prescription?
By moving some from fixed income to stocks, they will have a more volatile portfolio, but at the same time more likely to generate a return. [needs] during retirement.
Is a globally diversified portfolio a hedge?