Your Retirement Package Has Arrived. What to Do?

Dan Roe: Don't Fixate on Yield

"Anyone who gets into building a portfolio based on yield alone can end up making a big mistake," cautions Dan Roe, a financial planner with Budros & Ruhlin in Columbus, Ohio. By focusing only on yield and current income rather than total return, you might load up on, say, Treasuries that won't be able to beat inflation over time. Then, a decade or two later, your actual spending power is diminished because your money hasn't really been growing for you.

"We see people who have 10 years until retirement and they build a portfolio based purely on yield. And 10 years later, they can't buy as much as they thought they'd be able to. And your portfolio will be way too interest-rate sensitive and isn't likely to generate enough return," Roe says.

You might also wind up betting on just one asset class, whether it's Treasuries or junk bonds. Then your portfolio's investments will all head in the same direction at the same time. And that's not being diversified.

"You have to think about your portfolio on a total return basis. The money you'll need in the next two years should be set aside in a cash reserve. But the rest should be invested for total return ... in a 60/40 stock and bond allocation," Roe adds.

Roe suggests keeping a mix of stocks and bonds from the U.S. and abroad, adding that you will have to keep replenishing your cash account over time. To do that, "you'll want to pull from what's done well. Don't sell willy-nilly from everything. And if you have a properly diversified portfolio, there should be something that's done reasonably well that you can trim."

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