SINCE PEOPLE LIVE LONGER TODAY THAN IN PREVIOUS GENERATIONS, OUR MONEY WILL NEED MORE GROWTH IN ORDER TO LAST AS LONG! (Part Two)

This is the second part of yesterday’s discussion.  Since life expectancy has gradually lengthened over the past decades, retirees, or those soon to be, should not be too conservative with their investments. Forty years ago, the rule of thumb was that the bond portion of your portfolio should approximate your age. But, that’s no longer the case;  because, people live longer, and they must retain their purchasing power.

Today, if a person lives to be 65 years old, thy have a reasonable chance of living past 80, on average.  That means that you will have to stretch the money you have set aside, to supplement Social Security and pension, if any, over a greater length of time.  Also, as all seniors know, Health Care Inflation is a good bit higher than the normal Consumer Price Index.  Besides investing more in stocks, consider those industries where the growth has been more consistent.

As you can see in the Break-down of the S & P. Index by industry, the three largest “industrial sectors” are: Information Technology; Financials and Health Care.  Also, as noted in Part One, five of the ten largest companies in the index are in the IT/Technology Industry, with only two—Apple and Microsoft—being just over 40 years old.  All the others are much younger.

Now, let’s assume that your current portfolio is nicely balanced, between stocks and bonds, and the percentage invested in the various industries matches the S & P reasonably well.  Now, consider how your life has changed from some years ago: less trips to the bank, since you use an ATM at the supermarket and on-line banking; keep up with friends and family by Email; order prescriptions and other things on-line; changed a doctor’s appointment on their web site; greater use of cable network or shows on-demand, etc.  In that sentence, I specifically cited IT/Technology and Health Care products.  And, that’s just the beginning!

Medical science and the overall Health Care industry have made strides in developing new medicines, hospital equipment and other health care needs.  Sure, they’re expensive, and Congress hasn’t been helping with the cost; but, so what if it keeps you around longer?  Do you have any other options?

IT/Technology and Health Care seem to have been consistently good performers over the years. (I will show you an interactive chart on this.)  The Financial Industry, the second largest industry, has not been as consistent. Besides being somewhat volatile, it has to deal with the booms and busts of both the domestic and global marketplace, and it rightfully must he heavily regulated.  And, don’t forget its role in The Great Recession (4Q07-1Q09).

A certain portion of the other seven industries do belong in your portfolio, and how much depends upon your risk tolerance.  Consumer discretionary, and the like (retail), are being sucked dry by Amazon.  Boeing comes out with a new jumbo jet every fifteen years, or so.  Coke and Kellogg’s haven’t transformed, other than new marketing jingles.  And the last four display their relative importance to the economy by their place at the bottom of the list.

Index Break-down by Industry Size
Information Technology 22.26%
Financials 14.55

Health Care 14.49
Consumer Discretionary 12.27
Industrials 10.27
Consumer Staples 9.05
Energy 6.04
Utilities 3.15
Real Estate 2.91
Materials 2.84

Now, suppose that you wanted to enliven your portfolio—adding a bit more growth to match your longevity—exchange-traded funds (ETFs) are securities that duplicate a particular stock or bond index.  Sector SPDRs are the oldest brand of ETFs, and the company offers one that would only:  include those companies in the S & P 500 Index, or those that are in any of the individual industries.  For instance, add a slice of IT/Technology (SYMBOL: XLK) and/or Health Care (XLV). Or, someone else might prefer Financials (XLF), or one or more of the others.

On the Sector Tracker interactive site, you can check the performance of the various Sector SPDRs over various time frames (small white boxes toward the top).  On the Sector SPDR web site, you can select any of the sectors by just clicking on the blue box, in the upper left. From there, you can down load the Prospectus, the Fact Sheet—which I find quite helpful—and other literature on each ETF.  I have attached Fact Sheets for the IT/Technology and Health Care SPDRs.

Be sure to do your homework, consult with whomever you generally ask for investment advice, and give some serious consideration before adding these, or other, ETFs, and by how much.  Leave a Comment if I can be of any help.  Check your portfolio regularly, if you can, to monitor whether it still meets you needs, as structured!

NOTE:  This recent article, from the NY Times, provides more information on ETFs; however, the focus is on the BlackRock Funds’ iShares (ETFs).  BlackRock is the world’s  largest money manager.

 

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