Question and background:
What should I do with an IRA that is currently in cash?
I rolled over a 401(k) into an IRA at the end of 2015. Money was put into cash at time of rollover. With the significant losses in the stock and bond markets [earlier] in 2016, I have been reluctant to get the money invested and have just let the money sit in cash. I haven't lost any money, but I need to get this money working for me and provide income. I am recently retired and need income from my investments.
Unclear to me how to proceed--I have contacted several capital investment firms who have provided me with sample portfolios--mostly a mix of dividend stocks, a variety of bonds, REITs, etc, with varying degrees of risk. Should I dive in or keep in cash until market direction becomes a little clearer?
It feels like a quandary, doesn’t it? But having a healthy amount in cash (not allyour portfolio) might actually be one of the best positions for you at the moment, giving you "dry powder" to buy back into markets after they've taken a drubbing.
An advisor should give you specific investment recommendations only after they first learn a lot more about you: your specific financial needs, what’s important to you, investor profile, how you react to fluctuations in your portfolio, how your portfolio interfaces with other retirement resources, and so on.
But as you consider what to do with your portfolio and/or who to work with, it may be helpful to consider what investment approach is better for you: a strategic or tactical approach to portfolio management.
Strategic Portfolio Management
Most of the financial industry takes a strategic approach. In other words, they put you in an investment model that divvies-up your portfolio into a range of asset classes and sectors that, historically, may have been appropriate for your investor profile. But there’s no attempt to side-step market downturns, no attempt to take advantage of underpriced assets, and so on. You just ride the roller coaster of whatever the markets give you, with a periodic rebalance back to the original allocations.
Historically, this approach can work, but usually needs a longer time frame and, importantly, the investor must hold on through the market's roller coaster ride. But as behavioral finance shows us, all too often that’s exactly what investors fail to do...instead, they chase hot investment performance when it's too late, and then panic sell after the market pukes and the damage has already been done.
In my view, the strategic approach may not be as appropriate for folks in the retirement/distribution stage vs. younger investors in the accumulation stage, particularly since it can often take longer to recover from the inevitable downturns. If I were to guess, those investment firms you contacted most likely provided you with sample portfolios that use the strategic approach.
Tactical Portfolio Management
By way of contrast, some of us employ a tactical approach. That can run the gamut from short-term traders to market timers (all-in or all-out) to advisors like myself who don’t trade frequently but implement strategies designed to protect client assets from major losses. It might mean overweighting cash, temporarily avoiding asset classes that appear "frothy" and overpriced, using stop-loss sell orders to protect on the downside, using protective options strategies, and so on.
The tactical approach often gets bad-mouthed as "market timing," which is really kind of a red herring because nobody needs to precisely and consistently time the markets to do reasonably well. Most important is a risk management focus on avoiding catastrophic losses. During the 2007-2009 Great Recession, the S&P500 declined over 56%. Did you know that you'd have to earn about 127% from that low point just to get back to where the market was? (And if not for the artificial goosing of asset prices by central bank monetary policy on steroids, what's the likelihood that the market prices would be at current levels?)
The tactical approach may help you avoid catastrophic losses...and in that case, you don’t have to knock the ball out of the park just to get back to even.
So my general advice is to think about which of those two approaches sounds more like you and where you are at this stage in life. And then find a good fee-only advisor who will work with you to implement it in a way that harmonizes with the rest of your financial picture.
[Edited April 24, 2016]