

Portfolio Strategy
Kenneth L. Fisher, 10.30.00, 12:00 AM ET

READER JOSEPH STEHLING E-MAILS SAYING HE USED to agree with me about being fully invested in stocks. But now he wants "some advice on converting from stocks to other securities for money needed in retirement." Most retired guys, like Joe, confuse strategy with tactics in thinking they should invest for income. Most of them invest as if they hate their wives.

How so? Because their short-term approach regularly leaves a wife--and women tend to outlive men--poor after her husband's death.

Let's first review some basics of portfolio management. You start by picking an appropriate benchmark that is primarily based on time horizon. Perhaps the S&P 500 or the Morgan Stanley World, if your investing time horizon is long. If you don't need the money to last decades, you could put more into bonds and, as a benchmark, use a hybrid of the S&P and T bill rates. More on that in a minute.

No, you need not be 100% in equities at all times. Picture a young person who has an all-equity benchmark because she has an ultralong time horizon. Nevertheless, she may lighten up on stocks periodically should she become bearish--a temporary tactic to help her with her strategy of beating her benchmark.

But don't let retirement confuse you. Benchmark selection doesn't start with whether you're retired or not, nor even with your age. One 65-year-old is really old and doesn't have long on this earth. Another one has 30 years to go. The gut issue is: How long are you likely to live?

It's mostly genetics. Average your parents' ages at death and then add four years. Average all your grandparents and add eight years. Each generation lives longer on average. Only natural deaths count; if one of them died in an auto accident, skip that person. Find the average of these two sets of numbers and you'll know how long you likely have. Of course, you may die tomorrow in a plane crash, but you had better plan on living fully as long as your ancestors did. If you're married, remember that the money must last for two.

Never forget that bonds and cash have never done as well as stocks over ultralong periods like 30 years. For 20 years, aftertax, stocks return five times better. So anyone with time frames that long needs an all-equity benchmark like the S&P 500. Even in ten-year periods stocks beat bonds or cash 89% of history. Then your asset allocation might be 85% stocks and 15% cash. Construct a benchmark that is 85% the S&P, 15% Treasury bills. It requires very short horizons not to need a primarily stock-based benchmark.

Once you pick your benchmark, manage against it (see my May 1 column). Your goal is to maximize the likelihood each year of beating it--measured by total return, aftertax. Doing this optimizes your likely future wealth relative to your future needs. Then it doesn't matter where the income comes from: interest, dividends or capital gains.

So now you make a rational plan for how much of your assets you can afford to spend each year based on modest long-term total return assumptions, and for how much you still want sitting there when you and your spouse die. It is simple seventh-grade math. Anyone with a calculator can do it.

You simply take that amount out of your assets each year and spend it. This is what behavioral finance calls "homemade dividends." It is the most tax-efficient process known to man. (If you're among the 80% who can't do seventh-grade math, you shouldn't be doing your own investing.)

Take a normal fellow worth half a million at 70 who thinks he might live ten years and is mostly in bonds. Conservative? No, foolish. His wife is 63. She comes from a family like mine where few folks die before 90, meaning her longevity stretches past 30 years. Her husband must hate her severely, because bond-like returns on half a million, offset by withdrawals to live on, will leave her in poverty long before the 30 years are up. Aged poverty is brutally cruel.

A few foreign stocks I like, which may help you love your wife, include: the Dutch food retailer Ahold (28, AHO, www.ahold.com), France's globally operating transportation equipment maker Alstom (24, ALS, www.alstom.com) and Portugal's prime utility EDP-Electric (32, EDP, www.edp.pt). Then, too, KLM Royal Dutch Air (18, KLM, www.klm.nl) has fallen from the sky, down from 50, and is cheap. And Australia's News Corp. (49, NWS, www.newscorp.com) is building momentum. Buy them all.

Kenneth L. Fisher (kenfisher@fi.com) is a Woodside, Calif.-based money manager. Find past columns at www.forbes.com/fisher.

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