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Living Longer, Living Better

Boosting returns in your retirement plan

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T ired of watching your portfolio poke along and want to nudge it forward?

While the last few years of investing have hardly been uneventful, the wild lurches in the stock market have left many investors barely ahead of where they were in 2006 or 2007 - if that. Many people approaching retirement age are now short of their savings goals and anxious to make up for lost time.

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And if you’re counting on the bond market to bail you out, think again: After a tremendous sustained rally, bonds are in for a cooling off; and investors who fail to position themselves for the eventual rise in interest rates may end up getting badly burned.

The trick then, as many investment professionals know all too well, is to find ways to boost returns here and there without taking on too much risk, while protecting against another epic downturn. This is hard stuff, and is best done in consultation with a professional, such as a certified financial planner or investment adviser.

The first consideration is a big picture kind of question: Is your overall allocation between stocks and bonds correct given these two assumptions: the bond market is in for tough times and investors need higher returns to cover lost ground? The conventional wisdom has been investors should move into bonds as they get closer to retiring and deeper into retirement.

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But now some advisers suggest those investors need to remain well invested in stocks, if for no other reason than people are living longer and the old, conservative models may not produce enough money to last people deep into old age.

So what’s the right mix? Maybe instead of, say 80 percent bonds, 20 percent stocks, you peel back to 75/25, or someone who was targeting a 60/40 split stays even between the two for the foreseeable future. The best answer though, won’t come from just moving numbers up and down a scale, but after working out your retirement goals, spending plans, and savings targets with a professional. Only then can an investor intelligently consider how much more risk to shoulder.

And keep this cardinal point in mind: Don’t think you will make your retirement easier simply by trying to earn more money in your investment accounts. “You’re not going to be able to invest your way out of this problem without taking on an obscene amount of risk,’’ cautioned David McPherson, a certified financial planner at Four Ponds Financial Planning in Falmouth.

But within the current investing sphere, bonds appear to be the more problematic to forecast. Interest rates right now are so low they have only one direction to go - up - and when they do bond returns will suffer.

Trouble is, it’s unclear how much longer the Federal Reserve will keep trying to juice the economy with low interest rates. Given that uncertainty, many professional advisers recommend playing it safe and favor shorter-term bonds, say one to three years, to minimize losses if rates suddenly do go up.

However, for the intrepid, there are categories within the bond world that may continue to throw off higher returns, but of course bring an increase in risk. High yield, or junk bonds have performed strongly over the past three years, and as the thinking goes, with the economy solidifying and growing again, the companies issuing this debt should be at less risk of defaulting.

But high yield debt will test your stomach for risk. The group got hammered during the financial crisis, and performed poorly again last year when the economy sputtered for a period and Wall Street wondered whether the country was slipping back into a recession.

As with most riskier classes, Jim O’Neil, chief executive of Cambridge Appleton Trust NA investment firm, counsels investors not to put too much of their bond holdings into high yield.

“You might be able to generate 7 percent on the yield side as the economy improves,’’ O’Neil said. But, “it only takes a couple of defaults to really blow up your portfolio.’’

Similar caution holds for another higher return bond class: emerging market debt, which are bonds from companies in developing nations. Over the past year, emerging market debt has bested the benchmark broad market index of bonds by a full 3 percentage points.

As with high yield, the idea here is as the economy improves, and particularly as Greece and other troubled European nations work through their financial problems, the risks associated with emerging market debt will lessen, providing a rallying spark for higher returns.

Just this past week several bond specialists on Wall Street increased their estimated returns for 2012 from both high yield and emerging market bonds.

Unlike more conservative long-term investment classes, which have a “set it and forget it’’ comfort to them, high yield and emerging market debt are so volatile they bear close watching, as they’re susceptible to economic cycles and events such as mini-financial crises.

By comparison, some stock classes look tame next to high yield and emerging market. And while overall, stocks have been trending steadily upward, shares of big companies have far outperformed those of small and midsize businesses in the last year.

Some pros argue the pendulum will swing again, as it has many times before, and small cap stocks will stage a prodigious rally.

One reason is that as the economy settles into a solid growth path, smaller companies will see business take off and that earnings power will push up share prices. Another reason is the peculiar psychology of Wall Street: As bond returns come back to earth, investors will come pouring out of them looking for new places to put their money and will fuel a buying spree that will send stock prices higher.

McPherson, the Falmouth financial planner, likes small cap value stocks for their potential. He also suggested considering stocks from emerging market countries, “which go through periods of terrific performance, but when things go south, you have to be prepared to live with it.’’

Meanwhile, Ray Jacques, founder of New England Schooner, an investment adviser in Peabody, suggested that investors try to match their riskier investments with defensive moves that will act as a cushion during bad times. He suggested so-called absolute return funds, which are growing in popularity because they strive not to lose money during market downturns.

Others to consider are funds that invest in conservative blue-chip companies that pay above average dividends, or extremely conservative bond funds paired against a more aggressive stock allocation.

Andrew Caffrey can be reached at caffrey@globe.com.
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