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How to Invest $100,000 if You’re 45

Retirement Plan
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Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Friday’s query is being posted today since it was bumped by the Democratic convention. It comes from a reader at Next Avenue. The NewsHour has partnered with Next Avenue, a new PBS website that offers articles, blogs and other critical information for adults over 50.

What would you suggest an IRA portfolio consist of
for a 45 year old with about $100,000 to invest? Are you at liberty to say
what organizations give better returns with fewer fees? We are very green at
this and any advice would be helpful.

Without knowing you, yours is an impossible question to answer, Denise. I’ve long since adopted the chief investment criterion of the late great economist Paul Samuelson: sleeping well at night. And I just don’t know how much risk it takes to keep you awake.


The first principle of investing is completely straightforward: risk = reward. Practically speaking, the greater the reward or “return” an investment offers, the greater the risk it entails. For example, last I looked, you could lend money to Egypt for ten years by purchasing a 10-year Egyptian bond. The promised interest rate: 16+ percent. By vivid contrast, buy a US 10-year bond or “note,” and you’ll get one tenth the return: a measly 1.6 percent or so. Why? You tell me. Lending money to Egypt is way riskier, right? The risk that Egypt won’t pay back the money (default). The risk that Egypt will begin printing pounds as if there’s no tomorrow (inflation).

So, how much risk before you hit the Ambien? There are numerous investment calculators online that give a general idea of your risk tolerance. I rather like this one from Rutgers.
Once you have a sense of your risk tolerance, the next decision is “asset allocation”: the percentage of your assets to put into stocks (risky) and bonds (safer). A hoary rule-of-thumb is that the percentage of bonds in your investment portfolio should equal your age. My wife and I, in our late 60s, are pretty close to being on target. (Here’s our asset allocation as of a year ago. The only change is the orange slice: the Europe situation made me too nervous, and I traded in the foreign bond fund for more TIPS — inflation-protected securities, about which I’ve written often, most recently here.)

All our investments — whether stocks or bonds — are in mutual funds. Moreover, we never look at past performance as our guide but to the lowest possible management fees. That’s because past performance turns out be a remarkably unreliable guide to anything that will happen in the future, just like the warning says. Indeed, one of my favorite economists, Richard Thaler, runs or advises a number of investment funds, one of which, the Undiscovered Managers Behavioral Value Fund, “selects stocks based on recent underperformance relative to the market.” In other words, it buys the opposite of “performance” — underperformance — on the theory that divergence from long term trends is often a function of temporary bursts of under- or overenthusiasm. (Thaler, for those who don’t know him, is perhaps today’s most famous practicing “behavioral economist.” Those wishing to meet him explaining his field — in a baseball park, as it happens — should click here.)

Another decision to make is the type of IRA to choose: Roth or regular? With a Roth, you pay taxes today and the money grows tax-free forever. With a regular IRA, you only pay taxes when you begin to withdraw the money. The key consideration here is based on a guess: will your tax rate be higher when you’re older than it is today? That depends on what happens to your income and, of course, what happens to tax rates. On tax rates, your guess is as good as mine. As to your income, your guess is better. But an important reminder in either case: if your assets are growing tax-free, you don’t benefit from tax-exempt investments like municipal bonds.

As for names of investment organizations, I have had good experiences with all I’ve used. For reasons of work history, they include Vanguard, TIAA-CREF, Fidelity and Principal. Vanguard seems to have the lowest management fees and consequently, most of our money.

The only investment guide I ever felt I needed was Andrew Tobias’ “The Only Investment Guide You’ll Ever Need.” But unless Amazon is misinforming me, Andy last updated it in 1999. Still, it’s a good place to start and prices for a used copy seem to begin at one penny. Plus shipping, of course.

Another more recent book that speaks to your question is “Risk Less and Prosper: Your Guide to Safer Investing,” by my TIPS guru, Boston University finance professor Zvi Bodie, and financial advisor Rachelle Taqqu. They also wrote an article for the Wall Street Journal recently called “Why Stocks Are Riskier Than You Think” And next Monday, they will respond, in the Journal, to comments provoked by that piece, including one from a self-described “50-something-year-old” who doubts the wisdom of advising young investors to play it safe. The essence of their answer echoes something Bodie has said for years: “human capital” is the largest asset most Americans have. So if you’re an internationally known tenured professor like he is, you can take plenty of risk, regardless of age. But even if you’re only in your 20’s or 30’s, if your job future is hazy – and thus your ability to trade on your human capital, iffy – you may want to “risk less and prosper,” to the extent you can.

This entry is cross-posted on the Rundown– NewsHour’s blog of news and insight.

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