vive a recession . Coming into 2024 , he would have prepared for six Fed rate cuts .
“ Both of those were wrong . And if we had built a portfolio that was dependent upon macroeconomics and what the economists thought was going to happen , our portfolios would look very different ,” he says . “ We would be doing a lot of shifting around in order to grab and capture yield .”
Go With The ( Cash ) Flow
Retirees depending on income streams might not feel better hearing an advisor say , “ Don ’ t worry about the Fed ,” since they ’ re looking at their portfolio through a broader lens , says Kara Duckworth , a Newport Beach , Calif ., managing director and CFP at Mercer Advisors , a firm with $ 60 billion in assets under management .
After all , accumulation is fairly straightforward , while decumulation can be quite complicated , she says . “ People think you need to do all this financial planning until you get to retirement , and then everything ’ s great . Everything ’ s easy . No . You actually need more financial planning when you ’ re retired to optimize that distribution strategy so that you get as much cash flow as you can , pay as little in taxes as you can and have that growth in your portfolio , all with as little risk as possible .”
And it all starts with cash flow , advisors agree .
“ We don ’ t do age-based investing whatsoever . Our firm ’ s overall asset allocation approach starts with defining our clients ’ ability to take risk by focusing on what their five-year cash need is from their investments ,” says Ryan Johnson , a CFA , CPA and managing director of investments at Buckingham Advisors in Dayton , Ohio . “ Whatever they might need in the next five years , we want it to be in cash and fixed income . And then whatever they don ’ t need in five years can be in equities .”
Jack Gunn , a CFP licensee and wealth advisor at Ullmann Wealth Partners in Jacksonville Beach , Fla ., says he takes the same approach , but instead of a five-year window for cash flow , he builds his client plans around a 10-year window .
“ We set aside enough money , just like a pension or an insurance company , to
In Pursuit Of Dividends
While fixed-income investing will reflect rate cuts , that may not be true on the dividend side of income investing . According to Duckworth , the time for a company to adjust its dividend was when interest rates were rising , not falling , and even then dividends remained fairly stable . “ We didn ’ t see a dramatic reduction in dividends related to interest rates ,” she says .
In fact , when it comes to income investing , many advisors don ’ t focus on dividends at all . Abugideiri , for example , says his firm doesn ’ t pursue dividends intentionally . “ We appreciate that our clients are going to own stocks that proprefund those cash flows . We take a look at the current interest rate environment , and we put enough in bonds or some kind of fixed-income investment today to cover the next 10 years of cash flows ,” he says . “ So regardless of what happens with interest rates today or next year , our clients know that there ’ s enough money set aside to cover all their outflows .”
The Stability Of Fixed Income
For that fixed-income piece , advisors interviewed by Financial Advisor were unusually consistent in their recommendations . While asking six financial advisors for tips often can yield six different strategies , these advisors all say that they recently extended fixed-income investment durations to lock in higher rates .
“ How we think about income is not just dependent upon what happens with the Fed . We ’ re looking for multiple income levers to pull , so that not one area of the portfolio is doing the heavy lifting .” — Tonny Navarro , The Erdmann Group
“ I think it ’ s really important that investors match their cash needs with the maturities out there . Before , investors could have gotten away with just putting all their cash for the next couple of years in a money market fund . It was absolutely good enough ,” Johnson says .
While he does continue to use money market funds for a client ’ s six-month cash needs , the rest of the five-year cash / fixed-income blend goes to bonds where durations are a little shorter than the bond market average of six years . “ We ’ re closer to four at the moment , but we ’ re evaluating pushing it out further .” And currently his greatest exposure is to investment-grade corporate bonds , primarily through ETFs , though a year ago he did add in some Treasurys as their rates became attractive , he says .
Abugideiri agrees that if rates in the near term come down , that would make longer-term Treasurys more attractive , with “ longer-term ” in the current context meaning intermediate duration . He says he ’ s putting retired clients in two bond mutual funds — one is a one-year fixed income fund , and the other is a five-year dynamic bond fund . And clients who are taking income but still accumulating also have access to a 10- to 20-year bond fund .
Jonathan Finkler , head of fixed income at Bartlett Wealth Management in Cincinnati , says his fixed-income approach is very agnostic . It includes both Treasurys and corporate bonds as long as they ’ re in the one to 10-year duration and of high quality so the firm can derisk portfolios .
Jeff Fishman , founder of JSF Financial in Los Angeles , has also been beating the intermediate duration drum with his clients to get them ahead of the rate cuts . “ We ’ ve been coaching a lot of clients through this , and it ’ s hard because most people sit there and say , ‘ We ’ re getting 5 % state-income-tax-free in a T-bill that ’ s riskless , why would we go anywhere else ?’” he says . “ But that ’ s been the message we ’ ve been trying to send clients over the last several months .”
SEPTEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 37