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Investing can be tough for those retiring in five years or less. Markets are volatile, it’s uncertain when a recession will happen or how deep it will be, and there’s no knowing for sure the direction of the U.S. Federal Reserve’s monetary policy. So how should one invest, bearing in mind a shorter investing horizon for retirees and their need to have some savings? CNBC Pro asks the experts for their views. Go for short-term bonds Short-duration Treasurys still offer attractive yields, according to Austin Graff, chief investment officer at Opal Invest. “Investors who have a short timeframe should remain in shorter duration fixed income assets as the risk of higher rates is not off the table,” he told CNBC Pro. Investors flocked to short-term Treasurys late last year amid higher rates, and yields jumped. Investors can also go for high-quality, dividend-paying stocks as they tend to be less volatile and are an ongoing source of income, he added. Victor Kuoch, director at Natixis IM Solutions for Asia-Pacific, also recommended short-term bonds, saying that investors retiring in five years would not want to take on too much risk right now. “As the yield curve is still currently inverted, short term papers are actually rewarding investors better than medium to long term,” he added. Stocks versus bonds Experts usually recommend that investors further away from retirement allocate more of their portfolio to stocks, as they would have more opportunity to grow their capital, since stocks offer more of a growth component. But if you’re only five years away from retirement, having a smaller position in stocks — and a bigger one in bonds — could be more prudent, according to them. “Generally, equities should outperform over the long term, but an investor needs the ability to wait out [the] bear market without dipping into principal to benefit from the long-term outperformance,” Graff said. He recommends allocating anything between 20% and 50% of one’s portfolio to high-quality, dividend paying stocks, and between 50% and 80% to bonds, with a majority in short-duration Treasurys that are “risk-free.” Kuoch of Natixis advised allocating half of one’s portfolio to bonds, and only a third to stocks. When it comes to bonds, he said, investors could put half into a mix of cash and short-term Treasurys of up to two years, and the other half into longer-term duration bonds of up to five years. As for stocks, he recommends that investors go for “vanilla stocks” in developed markets to avoid any geopolitical risks associated with emerging markets. “U.S. stocks remain a relatively strong bet, despite the recent turmoil associated with mid-sized banks. High inflation shouldn’t hopefully last too long as the Fed is on the path to stabilizing it (and as such, rates can be expected to remain higher for longer),” Kuoch told CNBC Pro. “The idea of allocation a third of the investors’ portfolio in equity is to benefit from higher capital growth.” However, Thomas Poullaouec of T. Rowe Price said retirement is not the “end point” of an investment horizon, pointing out that decades of spending may need to be planned for. It’s also important to build a cushion for unexpected spending needs during retirement, according to the head of multi-asset solutions for APAC. “In many cases, this lengthy time horizon leads to a growth allocation that is typically higher than many may initially think is needed,” he said, adding that a “meaningful level of equity” is still needed during retirement. “To that end, the level of equity in the 5 years before retirement can help to continue to grow an individuals’ wealth, and we’d recommend gradually decreasing the level of equity as an individual is close to and in retirement to reflect the shortening time horizon they face.” Make room for ‘diversifiers’ Kuoch said that aside from stocks and bonds, he would make room for alternative investments in assets such as gold and energy. “Gold in particular is a suitable asset to include, given its historical safe haven status but also the fact that it’s becoming an alternative asset for economies trying to cut ties with the dollar which should push its price further,” he said. Gold prices and the greenback have an inverse relationship. As the dollar gets weaker against other currencies, gold prices will rise as it becomes cheaper in other currencies, driving up demand. Veronica Willis, global investment strategist at Wells Fargo Investment Institute, said adding “diversifiers” such as commodities and alternative investments like hedge funds would mitigate risk when stocks or bonds are losing value. “This type of diversification helps to smooth returns over time, even over a 5 year period, to provide some stability as an investor approaches retirement. These types of investments can also provide those same benefits throughout the long-term retirement time horizon,” she said. — CNBC’s Michael Bloom contributed to this report.
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