section 1 - The American College Online Learning Center

(2) Clients may not be able to “age in place” thus negating the effectivenessof this strategy.k. Alternatives that are similar to a reverse mortgage:7. Invest in equities.(1) The client might consider selling the home and downsizing.(2) The client might consider selling the home to a family member and leasingit back from them.(3) The client may consider a home equity loan.a. The traditional assets for investment are stocks, bonds, and cash.(1) Stocks may be purchased directly or through any of several different typesof investment company arrangements such as mutual funds, closed-endfunds, ETFs, hedge funds, etc.(2) Bonds are even more likely to be purchased via an investment companyarrangement because of trading problems associated with trying to buysmaller amounts (e.g., under $100,000 of a particular bond issue).(3) When we refer to cash, we are actually referring to money marketinstruments such as Treasury bills, negotiable CDs, commercial paper,and bankers’ acceptances. In this case, the investment of choice is almostalways a money market mutual fund, because direct investment in moneymarket investments is monetarily prohibitiveb. Research has consistently shown that large portfolios of stocks always providesubstantially higher returns over long time periods than do large portfolios ofbonds, and that the bonds substantially outperform cash over long time periods.However, the amount of risk implicit in these investments, as represented by thestandard deviations of the returns on these securities follows in the same orderwith stocks being substantially more risky than the other two.c. In terms of fighting longevity risk, it is clear that retirees are best served byacquiring those assets with the highest expected rates of return. Research hasconsistently shown that for distribution portfolios (i.e., ones in which the investor isregularly taking money out of the portfolio), equity allocations on the order of 50percent to 75 percent have a much better chance of lasting for the lifetime of theretiree than portfolios with lesser allocations.d. Planning Point: Even a 70-year-old client is investing part of his or her retirementfunds for use when he or she is 90 or 95. The 20-to-25-year time horizon is bestserved by equity investments.e. The traditional market investments do not do anything to eliminate excesswithdrawal risk because these investments are typically highly marketable. Thus,retirees with a sudden urge to buy an RV or a vacation home can easily accessthe traditional market investments.f. Alternative investments (e.g., real estate) make it more difficult to withdraw moneybecause many of them are not marketable. These type of investments providesome degree of security that the client will not consume assets too quickly. Thelength of time required to sell some of these assets, and the high costs of sellingsome of them, mean that a retiree will have to think for some time about theliquidation of these assets to raise funds for premature spending.g. The impact of investments on inflation risk is a mixed bag. There is some debatewhether inflation helps or hurts stock in the aggregate. It is certainly the casethat some companies benefit from inflation and others are worse off as a result5.10