How to Make Money from Inflation (WSJ)

WEEKEND INVESTOR
FEBRUARY 5, 2011.How to Profit From Inflation
The Scourge of Rising Prices Hasn't Hit Home Yet, but the Underlying Signs Point to Trouble Ahead. Here's What You Should Do Now.

By BEN LEVISOHN and JANE J. KIM

Inflation,long a sleeping giant, is finally awakening. And that could present problems—along with opportunities—for investors.

A quick glance at the overall inflation numbers might suggest there is little reason to worry. The most recent U.S. Consumer Price Index was up just 1.5% over the past year. Not only was that lower than the historical average of about 3%, but it was uncomfortably low for Federal Reserve Chairman Ben Bernanke, who prefers to see inflation at about 2%.

What to Do Now
Sell
Cash and Bonds: Treasurys, long-term bonds
Stocks: Financials, utilities and consumer staples
Hard Assets: Gold, real estate

Buy
Cash and Bonds: Floating-rate funds, inflation-linked CDs
Stocks: Small-company value stocks
Hard Assets: Commodities, real-return funds

Yet it is a much different situation overseas, particularly in the developing world. In South Korea, the CPI rose at a 4.1% clip in January from a year earlier, higher than the 3.8% estimate. In Brazil, analysts expect prices to rise 5.6% this year, exceeding the central-bank target of 4.5%. China, meanwhile, has been boosting interest rates and raising bank capital requirements to keep inflation, which rose to 4.6% in December, in check.

"Emerging market economies are overheating," says Julia Coronado, chief economist for North America at BNP Paribas in New York. "They need to slow growth or inflation will become destabilizing."

Even some developed economies are seeing rising prices. Inflation in the U.K. surged to 3.7% in December, while the euro zone's rate climbed to 2.4% in January, the fastest rise since 2008.

Much of the uptick has been driven by commodity prices. During the past six months, oil has jumped 9%, copper has gained 36% and silver has shot up 56%. Agricultural products have soared as well: Cotton, wheat and soybeans have risen 100%, 24% and 42%, respectively. That's a problem because rising input prices "work their way down the food chain to CPI," says Alan Ruskin, global head of G-10 foreign-exchange strategy at Deutsche Bank.

Of course, the main inflation driver is usually wages—and that isn't a factor in the U.S., where high unemployment has kept a lid on pay for three years.

Yet there isn't a historical blueprint for the inflation scenario that seems to be unfolding now. Not only has the global economy changed drastically since the last big inflationary run during the 1970s, but the lingering effects of the recent debt crisis remain a wild card.

For investors, that means traditional inflation busters such as real estate and gold might not work as expected, while other strategies might perform better.

So how should you position your portfolio? The best approach, say advisers, is to tweak asset allocations rather than overhaul them. That involves dialing back on some kinds of bonds, stocks and commodities and increasing holdings of others. Here's a guide:

What to Sell
• Bonds. The price of a bond moves in the opposite direction of its yield. When inflation kicks up, interest rates usually move higher, pressuring bond prices. Even buy-and-hold investors get hurt, because higher inflation erodes the real value of the interest payments you receive and the principal you get back when the bond matures.

'There is no historical blueprint for the inflation scenario that seems to be unfolding now.'.The drop is usually most extreme in longer-dated bonds, because low yields are locked in for a longer period of time. So inflation-wary investors should shorten the maturities of their bonds, say advisers.

The safest bonds, especially Treasurys, are usually hardest hit, because those are the most influenced by changes in rates—unlike corporate bonds, whose prices also move based on credit quality. From September 1986 through September 1987, for example, as inflation moved higher, Treasurys dropped 1.2%.

It might even make sense to dial back on Treasury inflation-protected securities, whose principal and interest payments grow alongside the CPI. That's because investors already have flooded into TIPS, driving up prices and driving down the real, inflation-adjusted yields. A typical 10-year TIPS, for example, yields just 1.1% after inflation, compared with an average of more than 2% in recent years.

With so little cushion, long-term TIPS carry a higher risk of loss for investors who are forced to sell before the bonds mature. "Even if inflation is rising, you can still lose money," says Joseph Shatz, interest-rate strategist at Bank of America Merrill Lynch.

• Hard assets. Real estate may be a classic inflation hedge, but it seems likely to disappoint investors this time around. Even though rising inflation should put upward pressure on home prices, the twin forces of record-high foreclosures and consumers reducing their debt loads are expected to mute price gains for several years, says Milton Ezrati, senior economist at asset manager Lord Abbett. That's a far cry from the 1970s, when the median home price rose 43%, according to U.S. Census data.

Gold is another traditional inflation hedge that might be less effective now. With prices already having more than quadrupled over the past nine years, many strategists see substantial inflation already factored into the price.

Hot Commodities
Commodities that are more closely tied to industrial or food production seem better positioned now than gold, say advisers.

Historically, gold has moved with the money supply. During the last 30 years, the correlation has been about 69%, according to FactSet data. (A correlation of 100% means two indexes move in lockstep all the time; a correlation of minus-100% means they move in perfect opposition.) Based on the money supply alone, gold is priced 25% above where it should be, says Russ Koesterich, chief investment strategist at BlackRock Inc.'s iShares.

• Stocks. Equities can be a decent hedge against creeping inflation, because companies are better able to pass off costs to customers. But when input costs suddenly jump, profit margins take a hit.

At the same time, the higher interest rates that accompany inflation prompt investors to demand more profits for each dollar invested. As a result, price/earnings ratios tend to shrivel. Over the past 55 years, the average trailing P/E ratio of a stock in the Standard & Poor's 500-stock index has fallen to 16.95 during periods with inflation running between 3% and 5%, from 19.24 during periods with inflation of 1% to 3%, the most common inflation range since 1955, Mr. Koesterich says.

Sectors that are sensitive to interest rates, including financials, utility stocks and consumer staples, are especially vulnerable, say advisers.

What to Buy
• Cash and bank products. Money-market mutual funds are more attractive in inflationary environments because the funds invest in short-term securities that mature every 30 to 40 days, and therefore can pass through higher rates quickly. In an extreme example, money funds posted yields over 15% during the inflation-ravaged 1970s and early 1980s, says Pete Crane of Crane Data, which tracks the funds.

A growing number of inflation-linked savings products are cropping up as well. Incapital LLC, a Chicago investment bank, says it has seen a pickup recently in issuances of certificates of deposit designed for a rising-rate environment. Savers, for example, can invest in a 12-year CD whose rate starts at 3% then gradually steps up to 4.25% starting in 2015, and peaks at 5.5% starting at 2019 until the CD's maturity in 2023.

A caveat: If inflation eases and rates fall, investors could get burned, since the issuer may call the CDs and investors would lose out on the higher rates at maturity.

• Bonds. One way to reduce the impact of rising inflation on bond holdings is to build a bond ladder—buying bonds that mature in, say, two, four, six, eight and 10 years. As the shorter-term bonds mature, investors can reinvest the proceeds into longer-term bonds at higher rates.

"A bond ladder is best for someone who doesn't mind holding them for up to 10 years," says Jeff Feldman, an adviser in Rochester, N.Y.

Highly cautious investors might prefer the I Bond, a U.S. savings bond that earns interest based on a twice-yearly CPI adjustment. Although the current yield on I Bonds is only 0.74%, that yield is likely to move higher on May 1, the next time the rate is adjusted. I Bonds aren't as volatile as TIPS and appeal to conservative, buy-and-hold investors. The interest may also be tax-free for some families for education expenses.

More adventurous types might consider the inflation-protected government debt of other nations, which carry higher yields along with greater risks. The SPDR DB International Government Inflation-Protected Bond Fund is an international inflation-protected bond exchange-traded fund designed to do well if inflation in overseas countries moves higher. The fund returned about 6.8% in 2010 and 18.5% in 2009, according to Morningstar Inc.

• Bank-loan funds. Another way to exploit rising inflation is through mutual funds that buy adjustable-rate bank loans, many of which are used to finance leveraged corporate buyouts. So-called floating-rate funds are structured so that if interest rates rise, they collect more money. During periods of rising rates, floating-rate funds usually outperform other bond-fund categories. In 2003, for example, as investors anticipated higher interest rates and a stronger economy, bank-loan funds gained 10.4% while short-term bond funds gained 2.5%.

Now, amid expectations of rising inflation, investors are once again flocking to these funds, pouring in about $7.6 billion into loan funds in the fourth quarter of last year, according to Lipper Inc.—more than double the previous quarterly record set in 2007. The pace has accelerated this year, with investors putting in about $3.4 billion thus far.

After gaining almost 10% last year, the funds shouldn't be counted on for much price appreciation, says Craig Russ, who co-manages $22.7 billion of floating-rate investments across three floating-rate funds and other accounts at Eaton Vance Corp., including the Eaton Vance Floating Rate Fund. But the funds generate plenty of income, yielding about 4% to 5% now, according to Morningstar.

Price Increases
From Aug. 2, 2010 through Feb. 4, 2011:

Cotton: +100%
Silver: +50%
Soybeans: + 42%
Copper: +36%
Wheat: +24%
.


Be warned: Floating-rate funds can get creamed when investors fear the underlying loans are too risky. In 2008, for example, bank-loan funds lost 29.7%, although they zoomed 41.8% in 2009, according to Morningstar. What's more, banks are beginning to make riskier "covenant-light" loans that carry fewer stipulations for corporate borrowers—a sign of frothier trends in the market.

Given the potential for volatility, floating-rate funds are best viewed as a complement to—not a replacement for—investors' core bond holdings. Among Morningstar's picks in this category is the Fidelity Floating Rate High-Income Fund, among the more conservative in the category.

• Commodities. Materials that are more closely tied to industrial or food production seem better positioned now than gold, say advisers. The trick is to find the best investment vehicle.

The easiest way for small investors to gain exposure to most commodities is through exchange-traded funds, many of which use futures contracts. But such funds can be dangerous because they often face "contango"—when the price for a future delivery is higher than the current price. The result: The ETFs lose money as they buy new contracts, even when prices are rising.

The losses can be extreme. In 2009, for instance, while the price of natural gas rose 3.4%, the United States Natural Gas Fund lost 56.5% as a result of rolling over futures contracts.

Some firms have rolled out ETFs that aim to address the problem. One of Morningstar's picks is the U.S. Commodity Index Fund, run by U.S. Commodity Funds LLC. The portfolio buys the seven commodities that are most "backwardated"—the opposite of "contango," so rolling contracts should result in a profit—along with the seven commodities with the most price momentum.

"USCI provides an outlet for investors who want broad commodities exposure but don't want to worry about the daily dynamics," says Tim Strauts, a Morningstar analyst.

Other funds play inflation by holding many different assets to protect against rising prices no matter where they show up. The IQ Real Return ETF, launched in 2009 by IndexIQ, aims to provide a return equal to the CPI plus 2% to 3% over a two- to three-year period. To get there, it invests across a dozen or so inflation-sensitive assets—including currencies and commodities.

• Stocks. One corner of the market tends to do better when prices rise suddenly: small-company value stocks. "Because value and small stocks tend to be fairly highly [indebted] companies, inflation reduces their liabilities," says William Bernstein of Efficient Frontier Advisors LLC, an investment-advisory firm in Eastford, Conn.

From January 1965 through December 1980, for example, inflation averaged 6.6% a year. The Ibbotson Small-Cap Value Index posted average annual returns of 14.4%, according to Morningstar's Ibbotson Associates, double the S&P 500's 7.1% gain.

Morningstar's picks in the small-cap value fund category include Allianz NFJ Small Cap Value, Diamond Hill Small Cap, Perkins Small Cap Value and Schneider Small Cap Value. Just be warned: Small value stocks have had a good run recently, returning 134%, on average, since March 6, 2009.

In the end, the particulars of any inflation-fighting plan may not be as important as developing a plan in the first place.

"The real problem you run into with any kind of inflation hedges," says Jay Hutchins, a financial adviser in Lebanon, N.H., "is that if you don't already have them when inflation is around the corner, you've missed the boat."

Write to Ben Levisohn at ben.levisohn@wsj.com and Jane J. Kim at jane.kim@wsj.com

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

The Sleep at Night Portfolio: Make Your Own Pension (WSJ)

New ways to create a gold-plated pensionBY ELEANOR LAISE,
The Wall Street Journal
The Wall Street Journal — 10/30/10
The financial crisis has given some investors a case of pension envy. In an era of volatile markets, the idea of steady, guaranteed payments for life holds obvious appeal.
The problem, of course, is that investors are less likely than ever to get that kind of deal from their employer. Companies tend to be freezing their pensions or closing them entirely, rather than beefing them up. About a third of today's Fortune 100 companies have frozen or closed a pension plan since 1998, according to consulting firm Towers Watson.

But that doesn't mean investors can't set up their own. New tools are emerging to help investors fashion portfolios that mimic the steady payments generated by the pension plans of yore.

The trick: to focus more on constructing a portfolio to cover future expenses—not just maximize returns—and to rethink old retirement-planning rules of thumb, such as a "safe" portfolio withdrawal rate of 4% annually.

Financial firms and advisers are catering to the demand for pension-like portfolios. New bond-based products can be tailored to produce income to pay living expenses for a period of, say, five or 10 years, leaving a significant chunk of the portfolio to invest in higher-growth assets with long-term potential. Some target-date mutual funds, meanwhile, are aiming to match their investments to the expenses investors face in retirement.

The new strategies often mean heftier helpings of bonds and inflation-fighting investments like real estate and commodities. While bigger bond holdings can mean lower returns, the approach also can give investors the confidence to stick with the more volatile stock investments in other parts of their portfolio, advisers say—reducing the chance they will sell shares at a market bottom.

When investors know that a few years' worth of basic expenses are covered by safe, high-quality bonds, "they can sit back and worry a whole heck of a lot less" about stocks' ups and downs, says Joe Chrisman, director at wealth-management firm Lourd Capital Management, which uses a pension-style approach with clients.

The most painful part of the process may be simply saving more. Since the financial crisis, "there's been a much greater recognition that the markets are not going to rescue everyone," says Timothy Noonan, managing director at Russell Investments. Building a secure retirement "is not a function of going and finding higher returns."

The pension approach seems to work: Over the long term, defined-benefit pension plans have outperformed 401(k) plans by roughly 1 percentage point annually, according to Towers Watson.

Small investors can't—and shouldn't—invest exactly like pension plans, though. For a pension plan acting on behalf of many beneficiaries, with people entering and retiring each year, the age of an individual worker makes little difference. But a person investing on his own must tone down portfolio risk—and generally accept lower returns—as he approaches retirement.

Pension plans also can buy into some investments that most small investors can't access, such as hedge funds and private equity, and get better deals on fees.

That isn't to say pension plans have some magic formula. Many suffered big losses in 2008, for example, though overall they held up better than 401(k)s, according to Towers Watson.

Neither type of retirement plan provides the perfect answer, says Zvi Bodie, a finance and economics professor at Boston University School of Management. "We need to combine the best of both."

Annuities may seem the simplest solution for investors seeking a steady income stream. One approach: Buy an immediate annuity that provides for basic expenses, leaving other parts of the portfolio to cover nonessentials. A number of firms now are working to marry funds with annuities within 401(k) plans.

Still, many advisers suggest investors first consider the greater flexibility, and often lower costs, that can come with a do-it-yourself approach.

A homemade pension plan starts by acknowledging that people, like companies, have a balance sheet with both assets and liabilities, advisers say. The liabilities include the money you will spend on food, shelter, travel and other expenses. Yet advisers and money managers traditionally have focused mostly on the assets, trying to maximize investment returns for a given level of risk.

Pensions, by contrast, are more likely to employ liability-driven investing, choosing particular investments to match their future expenses. Investors can do this, too—by buying long-term bonds, for example, to match payments to be made decades from now.New tools can help people size up future expenses. At goalgami.com, a free calculator launched earlier this year by financial-planning technology firm Advisor Software Inc., people can enter information on their income, assets, debt and long-term goals like real-estate purchases. Taking a lifetime view of the "household balance sheet," rather than a single snapshot, the tool analyzes whether future sources of cash will pay the bills and cover other retirement costs.

Most people want to maintain their standard of living in retirement. So if you have just retired and live comfortably on $100,000 a year, you want that income to keep up with inflation as long as you live, says Tom Idzorek, chief investment officer at Morningstar Inc.'s Ibbotson Associates.

A "laddered" portfolio of Treasury inflation-protected securities, or TIPS, can help. Investors who buy TIPS that mature in each year of retirement ensure a steady income stream that rises with inflation and matches spending, Mr. Idzorek says.

Ibbotson in recent years has been designing target-date fund strategies with retirement liabilities in mind. It has built two sample portfolios—one using traditional asset allocation and one with a liability-focused approach—that have roughly the same allocations to stocks and bonds. But the liability-focused portfolio allocates roughly 28% to assets that can act as inflation hedges, including commodities and real estate, versus about 16% in the traditional portfolio.

Since people are likely to spend their retirement money in U.S. dollars, they also can more closely match their assets with their liabilities by investing more in U.S. stocks and bonds as they approach retirement, Mr. Idzorek says. In the sample portfolios, the liability-focused approach devotes only about 8% to non-U.S. holdings, versus about 18% in the traditional portfolio.

The liability-focused portfolio's expected return, 5.9%, is only slightly less than the 6.4% expected in the traditional portfolio, according to Ibbotson.

Of course, given the recent bond rally, it can be pricey to match many years' worth of retirement expenses with TIPS and other bond investments. Asset Dedication LLC, a Mill Valley, Calif., money-management firm, aims to address that by building custom bond portfolios to produce precisely the income to cover client expenses for a given number of years, leaving plenty to invest in higher-growth assets.

The firm's Defined Income product, launched this year, invests in certificates of deposit, TIPS and other high-quality bonds and holds them to maturity. Bulking up on fixed-income might seem counterintuitive right now. But by holding bonds to maturity and then rolling them over, the strategy can capitalize on higher yields later.
If a client wants to spend $50,000 in each of the next five years but also wants to buy a vacation home in year three, the account can help plan for that, says Mr. Chrisman of Lourd Capital, which uses the Asset Dedication program and other liability-driven strategies with clients.

Mickey Patrick, 57 years old, says his do-it-yourself pension allows him to stop worrying about short-term stock-market swings. Mr. Patrick, a technology manager in Houston, earlier this year started investing most of his individual retirement account in TIPS, CDs and other high-quality bond holdings. Though several financial advisers had told him to keep most of the money in stocks, Mr. Patrick determined that the account needed to cover only about one-fourth of his retirement spending, since a pension and Social Security would provide the rest—and therefore he didn't need to take that much risk.

"They said I was crazy," Mr. Patrick says. But while he used to check market moves daily, now "I don't worry at all about it," he says.

People who are focused on matching investment assets with retirement "liabilities" challenge some conventional retirement-planning wisdom. One rule of thumb says investors should have a stock allocation equal to 100 minus their age. (A 40-year-old, for example, would keep 60% in stocks.) But Boston University's Mr. Bodie says risk-averse investors, even younger ones, might want to put most of their money in safer assets.
Bob Kirchner, 63, a retired economist in Fort Washington, Md., has found that a liability-matching strategy reverses the traditional planning process. Instead of first deciding to put, say, 50% in stocks, he says, it's "let's get all this safe stuff lined up first," leaving stock decisions for later. He now has more than half of his portfolio in TIPS.

Liability-driven investing also involves rethinking the "safe" portfolio-withdrawal rate. Many advisers say retirees can withdraw 4% of their initial retirement balance a year, adjusting annually for inflation. But while the 4% spending rule is rigid, the investments tend not to be. Someone might automatically spend a preset amount, disregarding the fact that his portfolio has gained or lost, say, 30% over the past year. With the 4% rule, "there's a chance you'll wind up with nothing, and there's a bigger chance you'll leave quite a bit," says William Sharpe, a professor of finance, emeritus, at Stanford Graduate School of Business.

A bill introduced in Congress last year would require 401(k)s to show participants a projected monthly retirement income based on their current account balance, instead of just a simple lump sum. Russell Investments is developing tools to help financial advisers look at similar metrics for clients' portfolios, says Russell's Mr. Noonan.

If investors can look at their progress in terms of their personal goals rather than market events, Mr. Noonan says, "it's easier for them to remain invested when the market is doing scary gyrating things."
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Copyright © 2010 Dow Jones & Company, Inc. All Rights Reserv

Safer Strategies for Retirement Portfolios (NY Times)

June 20, 2009
Your Money
For Older Investors, Old Rules May Not Apply
By TARA SIEGEL BERNARD
The stock market’s damage has already been done. And if you’re one of those people near or already in retirement, you already know you’re going to have to work longer, save more or spend less.

But what should you do right now with the money you have left? Should you wade back into the stock market, if you bailed out when the market was plunging? Or if you watched your investments drop and then recover a little in the last few months, should you just hold on? What happens if the market doesn’t fully recover for a long time? (That happened in Japan in the ’90s.)

This economic downturn has been steep enough and frightening enough to undermine the idea that the stock market, over time, will always deliver. So a lot of investors have retreated to a more conservative stance.

The wisdom of that move is debatable. The investment industry warns that becoming too defensive is costly in the long run. Its argument goes something like this: People are living longer, retirement may last 25 or 30 years and stocks are supposed to protect you from the ravages of inflation. And since stocks tend to outpace most investments over long periods of time, the industry says, your savings will do all right in the end.

But some people are no longer comfortable with that logic. There’s even a new study that contends holding stocks over long periods of time may be riskier than previously thought. Robert F. Stambaugh, a finance professor at the Wharton School at the University of Pennsylvania and a co-author of the report, said most investment research only accounted for the risk of short-term market swings around the stock market’s average gain over time. It doesn’t factor in the fact, he said, that the average itself is subject to change.

So what should retirees and pre-retirees make of all of this?

“If another decline in the market is going to bankrupt you or put you out of business or destroy your retirement account, you should not go back into the stock market,” said John C. Bogle, the founder of Vanguard and viewed by many as the father of index investing. “It’s not complicated. The stock market can go up and down a lot and nobody really knows how much and when.”

What’s worked for Mr. Bogle may not work for you, but his method isn’t a bad place to start. “I have this threadbare rule that has worked very well for me,” he said in an interview this week. “Your bond position should equal your age.” Mr. Bogle, by the way, is 80 years old.
That’s a rather conservative recommendation, by many financial planners’ standards. In fact, Vanguard itself offers products that are more aggressive. Its target-date funds — whose investment mix grows more conservative as retirement nears — recommend that people retiring in 2010 (generally, people who are 65) should split their savings evenly between stock and bonds.

Charles Schwab, by contrast, has recently reduced the risk for its target-date funds. The company’s 2010 fund will allocate about 40 percent to stock funds next year, down from 50 percent in the past. “It’s a reflection that our clients’ appetite for risk has changed,” said Peter Crawford, a senior vice president at Charles Schwab Investment Management.

But you shouldn’t simply view your investments through the lens of how much you allocate to different investments (though you will need to come up with a plan). Instead, you should work your way backward. First, consider how much you will need to live when you’re retired and then figure out how you’ll pay for it.
Nearing Retirement

Ideally, you should have started to slowly shrink your stock position over your working career. But some financial planners have become more conservative about that. Before the market’s sharp downturn, Warren McIntyre, a financial planner in Troy, Mich., typically reduced his clients’ stock allocations by about 1 percent each year. Now, for older investors, he ratchets down their stocks by 2 percent each year once they reach 60. So a 65-year-old’s investments would be evenly split between stocks and bonds.
Other planners are taking even more defensive positions. “We are still very concerned about the status of the economic recovery and remain quite defensive as a result,” said Chip Addis, a financial planner in Wayne, Pa., who invests his clients’ portfolios in only 40 percent stocks.

Of course, there’s no one formula. Milo Benningfield, a fee-only planner in San Francisco, for instance, said he put a 61-year-old client in a portfolio with 60 percent in diversified stocks and alternatives (like real estate) and 40 percent in fixed-income (largely split among high-quality, short-term and intermediate-term bonds and cash). But this client can afford to take that risk — the client owns a house, rental property and has other holdings outside the portfolio.
The picture may change for pre-retirees who are 61 and close to meeting their savings goals, but can’t afford to lose any money. “We would ask ourselves to what degree, if any, can you afford equities,” Mr. Benningfield said. If inflation was their only concern, he might invest their money across a ladder of Treasury Inflation-Protected Securities, or TIPS, which are backed by the government and keep pace with inflation.

But since retirees generally spend money on entertainment, health care and food — whose costs often exceed the general rate of inflation — he said he might invest 40 to 50 percent of their money in a portfolio of diversified stock funds (with at least 30 percent of that in international stock funds). But, he added, “Cash is risky, stocks and bonds are risky, life is risky.”

As to those investors who got out of stocks, Mr. Bogle said it might be time for some of them to get back in. “But I would take two years to do it,” he said. “Maybe average in over eight quarters, and do an eighth each quarter. I am just not in favor of doing things in a hurry or emotionally.”

And then? “Don’t touch it,” he said, emphatically. “One of my rules is don’t do something. Just stand there.”

Retirement

Several planners recommended different variations on a similar strategy for retirees. Set aside anywhere from eight to 15 years of your expected expenses — that includes food, utilities, housing, insurance — in bonds and cash. That way, you’ll never have to tap your stock holdings at the worst possible moment.
“Once you have that in place, you feel like you can weather any economic storm,” said Chip Simon, a financial planner in Poughkeepsie, N.Y.

When you have figured out how much it costs to live each year, the next step is to see how much Social Security will cover. Whatever is left needs to be financed by your retirement portfolio. And the general rule of thumb is that you shouldn’t withdraw more than 4 percent of your portfolio (adjusted for inflation) each year. There are different ways to invest your cash and bond holdings.

Rick Rodgers, a financial planner in Lancaster, Pa., invests 10 years of annual expenses in a bond ladder, with an equal amount coming due every six months. The ladder can include high-quality corporate bonds, Treasury notes, certificates of deposit or municipal bonds, depending on the retiree’s tax bracket. Mr. Simon takes a similar approach using a 15-year ladder of zero-coupon bonds. He says that investors can start building the ladder in their 50s, with the first rung coming due the year they retire.

Some advisers also say you can guarantee you’ll be able to cover your basic expenses by purchasing an immediate annuity from an insurance company. The annuity pays you a stream of income until you die. “You can buy four small ones from four insurers if you are worried about insolvency risk,” said Dallas L. Salisbury, president of the Employee Benefit Research Institute. “And if you are just worried about inflation protection, you can do TIPS.”

But you should probably delay any annuity purchases because payouts rise with interest rates. With current rates so low, and the possibility of inflation later, advisers said it’s best to wait a few years. You can also research inflation-adjusted annuities, but you’ll receive lower payouts in the beginning, Mr. Benningfield said, adding: “Less than most people can stomach.”