Penny Marlin likes to quote Mark Twain to her retirement clients: “I am more concerned about the return of my money than the return on my money,” she tells them, citing the classic American author and humorist.
From that conservative vantage point, Marlin, a fee-only planner based in Delray Beach, Fla., has her clients consider several alternative investment vehicles that can help protect their principal and boost their returns.
The list has grown shorter over time. She used to recommend some exposure to commodities, which although risky and volatile, supposedly raise the overall return on a stock and bond portfolio. In 2008, however, they didn’t help. “Everything went down,” she says, “and it turned out there was a greater correlation between commodities and the rest of the market than there was supposed to be.”
Gold is also out of favor with Marlin. She says she used to be a big proponent of the yellow metal, but not anymore. “Gold is possibly a hedge against international disasters,” she acknowledges, “but it’s too volatile--especially for retirement portfolios—and it doesn’t give you any income. It’s lost its glitter for me.”
Another category that Marlin dissuades her retirement clients from investing in is managed futures, including long-short funds. These are marketed as a way to add diversification and protect clients in a down market. And while she acknowledges that many of these types of funds fall less sharply than other alternatives in a downturn, for Marlin that’s not good enough. Instead, when the market is receding, she prefers to move her clients to cash to protect their principal.
A safer harbor that can boost income is equipment leasing companies, which are a type of limited partnership. The caveat, Marlin says, is that these tend to be illiquid in the short-term and the client has to be prepared to hold them for at least three years. But she says these can be very useful in a retirement account when the client is still several years away from having to make withdrawals.
Master Limited Partnerships are also attractive vehicles because of the income they generate. But since the income is treated as a return of principal, there are some tax issues, she warns, when it comes time to sell them.
A bond category that Marlin currently recommends to her clients is floating rate bonds, which adjust their payout to reflect interest rates. On the other hand, she isn’t recommending TIPS right now, “because inflation hasn’t been a big issue—at least not the way it’s measured by the government.”
The rate on TIPS reflects the Consumer Price Index, which doesn’t include food, energy or housing.