Asset Allocation and Annuities

investment allocation

Asset Allocation

Knowing which direction to move toward is a key component of adequate financial planning.

I would like to take a break from the Learning Checklists and talk about my latest research.  Asset allocation recommendations and annuities have been my latest focus.

I don’t like relying on the first thing that I read, for two reasons.  One, I don’t always agree with the adviser and two, it can be too rigid.  Because my nose is in a financial book almost every day of the week, I like to combine all my resources and find the common denominators.  Here are several models:

20% Small-cap stocks

20% Large cap stocks

20% Long-term Treasury bonds

20% Gold

20% Cash


25% Stocks

25% Gold

25% Real estate

25% Cash and bonds

20% US stocks

20% Foreign stocks

20% Commodities

20% Real estate

20% Bonds


30% Stocks

40% Long-term Treasury bonds

15% Intermediate Treasury bonds

7.5% Gold

7.5% Commodities

30% US stocks

10% Emerging markets stocks

15% Foreign stocks

15% REITs

15% Treasury bonds

15% TIPS (Treasury Inflation-Protected Securities)

The next suggestion from Tony Robbins’ Money: Master The Game is based on the economic cycle.  This method centers on four general economic conditions:


Prosperity – Stocks

Recession – Cash

Inflation – Gold

Deflation – US Treasuries


Economic growth rising:


Corporate bonds


Inflation rising:



Economic growth falling:

TIPS (Treasury Inflation-Protected Securities)

Inflation falling:

Treasury Bonds



I matched my portfolio to each of the scenarios and found that I’m deficient in the gold/commodities and TIPS categories.  The T-bond category is represented but not in the long-term bucket.  There’s my new direction and it’s meant to shield against an inevitable turning tide.  While my stocks have been doing really well lately and I’ve spent the last three years investing in stocks religiously, I can’t fool myself into thinking that the good times will last forever.


After losing a large sum in the 2008 financial meltdown, I am apprehensive of a repeat performance.  Bankers can be reckless.  Last time it was home loans, this time it’s car loans.

Back then I had a strategy with great intentions.  I was chasing dividends to boost my IRA balance.  After reading many articles on REITs and drooling over the dividends, I set up a heavy REIT ownership and waited for the dividends to pour in to reinvest them into more shares.  Everything was great until it wasn’t.

I really should have known better at the time.  Like driving in the rain, I went past a few caution signs that I didn’t take notice of.  In the summer of 2007, before Lehman went bankrupt and the real crash occurred, two Bear Stearns hedge funds went bankrupt.  Most people don’t take this as a point of reference, but to me, that was the beginning of the financial market collapse.  What followed could not be good.  As a former Bear Stearns employee, I should have heeded that warning.  But I was naïve and not educated in asset allocation, thinking that the worst could not come to pass.  That’s right, I held on to everything.  My REITs crashed and burned before I sold out.  To this day, my $23 – $27 REIT stocks are still below $10 a share.

I am heavy in stocks, which works for me now.  But if those stocks crash, my portfolio balance will suffer.  My retirement days are getting closer, thank heavens, and I would rather use these years to beef up those thin areas and round out my portfolio.

Because I am emotionally attached to what I own now, I will be using new money, not re-allocating what I have.  Fault me if you feel differently, but that’s my direction.


I’ve done a considerable amount of reading on annuities.  Very simply, it’s an insurance policy for your retirement income.  Here’s the holy grail, the guarantee of a lifetime monthly income.  Throw down a chunk of change and you’re covered for the rest of your life.  Nothing could be more uncertain, given that we don’t know how long we’ll live.

I have mixed feelings on this arrangement.  If you can forecast your life expectancy, it might be a good deal, but the amount of money to secure a decent payout is hefty.  Once you put the money down, you can’t touch it and surrender charges eat away at the investment.

They’re incredibly complicated, if you read the tome of stipulations. There are many types of annuities and a menu of riders can be added to the basic policies.  These are not plain vanilla instruments.  I think they’re meant to be confusing, all the more reason to be skeptical.

My initial impression of annuities was that they are high-fee investments that basically work well for the insurance company, but not for the policy holder.  The part about it that truly bothers me is that once the contract is entered into, the owner can’t touch the money without big withdrawal penalties or surrender fees.

Another caveat of purchasing an annuity is that the policy owner must live long enough to come out on the benefit side of the equation.  What good is it to drop $100,000 for $500 a month if you only live 8 years after the payments start?  I read one sad story of a widow that was persuaded to enter into an annuity after her husband died and left her some money.  She died two months later.  When her children requested a withdrawal, they only received 68% of the amount of the policy.  The salesman was enthusiastic upon purchase but his enthusiasm flickered out when the children wanted to terminate the contract.  Of course, he earned his commission once the contract was signed.  Suze Orman has a great annuity information page that I recommend:

On the flip side, I’ve read that the certain expectation of a known sum of money each month provides mental satisfaction for annuity owners.  They don’t have to worry about interest rates or the stock market.   Personal satisfaction is priceless, kind of like my job security as a government employee, so personal preference may factor in.  In The Big Retirement Risk, author Erin Botsford recommends allocating a portion of retirement savings to an annuity.  It’s like having your income partially insured.  An annuity’s income lifeline should at least provide for minimum income needs especially in the absence of a pension.  If there’s any apprehension about future Social Security payments, an annuity should serve as a supplement.


One reassuring fact I picked up was that annuities can be purchased from Vanguard and T. Rowe Price with reputable insurance companies and low fees.  You don’t have to go to a shifty insurance salesman where they see potential policy buyers with dollar signs in their eyes, counting their commission while pushing the contract under your pen.


I am expecting a pension from my government job and am not sure if an annuity is right for me.  I like self-managing my money, not having it held hostage.  Maybe one of these days I’ll decide that an annuity is necessary, but there’s no need to rush.  My monthly pension amount is already a respectable amount and will continue to grow with my remaining working years.  I will also have my personal savings plus Social Security.

See the following website for thorough information.

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